Brexit: How Brexit impacts on Indian Economy & Relations with Britain?

The world has been taken by surprise with Britain’s exit from the European Union. This event has been described as an unprecedented one, which will drastically affect economies all over the globe in the upcoming years, especially Europe. Like every other economy, India will suffer as well. Let’s take a deeper look into the matter of Brexit.

What is Brexit?

Brexit is an abbreviation for “British exit”. So, Brexit is basically a portmanteau of the words Britain and exit. It refers to the United Kingdom’s decision of leaving the European Union. Britain will also be changing its relationship to the EU bloc on trade, security, and migration.

 Why is Brexit happening?

Britain had been arguing on the pros and cons of membership in the European community of nations since long. The first referendum on membership was held in 1975, in the then called European Economic Community. Back then, 67% of voters were in favor of staying in the bloc. However, that was certainly not the end of the debate. Prime Minister David Cameron had promised a national referendum on the issue of the EU membership, back in 2013, with the motive of settling the question. Mr. Cameron had presumed that majority would vote in favor of remaining in the EU but that turned out to be a serious miscalculation.

On Thursday 23^rd June, 2016, a public vote or referendum was held. The purpose of this was to decide whether the UK should remain or be leaving. The leave won by 52% to 48% (only 48% voted in favor of remaining). The turnout of the referendum was quite high at 72% and had more than 30 million people voting. Out of the 30 million people, 17.4 million opted for Brexit. This happened largely due to a refugee crisis which made migration a matter of political rage all across Europe. Additionally, the Leave campaign was accused of relying on lies and that it had broken certain election laws.

Brexit Referendum Vote Breakdown

Most of the voters across England and Wales were in favor of Brexit, more so in the rural areas and the smaller cities. This came to overrun majority support for Remaining in the EU amongst voters in London, Scotland and Northern Ireland. It is noteworthy that there was an overwhelming response from the young people who voted against leaving. On the other hand, the older group voted for Brexit.

Here is a table showing a detailed vote breakdown based on location:

Why the Brexit delay?

The June 23, 2016 referendum vote’s result caused the British pound to fall to its lowest level against the dollar in a long period of 30 years. Prime Minister David Cameron, announced his resignation the following day. He was replaced by Theresa May, as the leader of the Conservative party and also the Prime Minister. She triggered Article 50, which is the formal process to leave and started negotiations. However, the deadline was delayed twice after the MPs rejected her deal regarding Brexit and eventually, the deadline was pushed to 31^st October, 2019. Mrs. May too resigned from the post of PM after her deal was rejected for a third time.

Mr Boris Johnson replaced Mrs. May as PM and he too required a third extension of the deadline for Brexit, as the MPs failed to pass a revised Brexit deal into law. The main point of difference from May’s deal is the Irish backdrop. Many MPs were critical about the Irish backstop, stating that if it was used then UK could stay trapped in it for years and wouldn’t be able to strike trade deals with other countries. So, the Irish clause has been replaced with a new arrangement which will allow UK to sign as well as implement its own trade agreements with any country. Now, the new deadline has been set for 31^st January 2020, three and a half years after the vote for the referendum was held.

Brexit Impact on India

Brexit has created fear amongst investors and businessmen across the globe. The impact would fall largely not only on the global market but also on the Indian stock market. The emerging markets cannot be left insulated from this ordeal mainly due to the high volatility in the pound.

Britain is the largest export market for India, so investors are concerned that Brexit might have a dramatic effect on India as India invests more in the UK than the rest of Europe combined together. UK and EU, both are responsible for 23.7% of Indian rupee’s effective exchange rate. After Brexit, the foreign portfolio investments would outflow and the rupee’s value will decrease.

The companies and sectors which have invested in Britain are devoid of sound sleep as they are believe that with Brexit, the movement of investors into the UK would be affected and that would directly take a toll on their investment. There would be considerable hesitation amongst Indian companies while investing in UK.

In addition to all these, UK accounts for 17% of India’s IT exports. Brexit would directly cause the overhead costs to surge. All in all, all sectors including IT, auto components, oil, pharmaceuticals, metals etc. would be affected. However, RBI is trying its best to check the monetary policy so as to reduce the market volatility.

Brexit impact on Indian economy

India has been a very lucrative market for foreign investors. Any major changes across the globe, either political or economic, shall have its effects on the Indian economy as well. Brexit is bound to cause major changes. While some of them would be beneficial, others would have a negative impact on the Indian economy.

Pros:

1. Better trade: After Brexit, UK would lose access to the single market of EU, so the UK would intend to develop trade relations with the emerging markets around the world. India has pretty strong economic fundamentals and also a huge domestic market. Hence, India stands in a better position in this regard.
2. Market Access: Many Indian firms have used the Foreign Direct Investment (FDI) source as a gateway to the EU single market. So, India becomes an important FDI source for the UK. After taking an exit from the EU, the UK would initially not be able to afford missing Indian investment. The UK is sure to try and attract Indian firms by offering many more incentives like a tax break, relaxed regulations and also opportunities of opening markets.

Cons:

1. After Brexit, Indian firms might have to face a short term distress situation. The UK has so long provided a gateway for Indian firms for entering the EU single market.
2. There would be apparent currency volatility. Devolution of Pound and Euro would be an immediate effect of Brexit and hence, Indian companies having sizable presence will have to bear the burden.
3. A considerable hike in the price of food, imports and plenty of other everyday commodities, will affect the Indian firms after Brexit.
4. Indian flagship IT market sector could be affected by Brexit since EU accounts for 17% of the global market and out of that, UK accounts for 3%. The fall in the value of pound would take a toll on Indian exports to the UK.. It is noteworthy that India exports more than what it imports from Britain. The overhead cost would be increased and perhaps, new headquarters would be set up in both EU and UK, separately.
5. The prices of gold, electronic goods, etc. might undergo a hike. Needless to say, petrol and diesel prices may increase to some extent.
6. Sensex and Nifty could become volatile for a while.
7. The automobile industry and the Pharmaceutical industry will also be affected. Brexit could lead to a decrease in sales in the automobile industry. Besides, the companies which derive good profits from Britain could suffer drastically.