What does Brexit mean for India?

Pic courtesy: PTI

Britain on Thursday holding a crucial referendum vote to decide whether the country should remain with the European Union (EU) or part ways. Ahead of the final verdict, experts are worried about its likely impact on the Indian economy and the world if it opts to leave.

What experts said on:

1.Currency and Markets

If Brexit happens, stock markets in UK and the US would take a hit and it will have a snowball effect in India. That’s because foreign investors would try to hedge their losses by sell-offs in emerging markets, including India.

In the event of Brexit, stocks in the UK are estimated to fall between 10% and 20% while those in the US could take a hit of more than 7%, estimates from various brokerages show.

-“For India, it would be more of a reaction to global news, which does not affect it directly to a large extent, except possibly some of the corporates which have large exposure to UK. Post the knee-jerk reaction, we may again get on track due to benign domestic factors,” Ambareesh Baliga, an independent equity markets analyst, told Quartz.

-“Indian markets remain uncertain over the UK’s referendum and, hence, (are) mirroring global sentiment,” Anand James, chief market analyst at Geojit BNP Paribas Financial Services, told Reuters.

-“In the run up to the referendum in the United Kingdom on its continuing in the European Union, uncertainty about the poll outcome has resulted in some amount of turbulence in global financial markets, including in India. The RBI is maintaining a close vigil on developments, and will take all necessary steps, including liquidity support, to ensure orderly conditions in financial markets,” the RBI said in a statement on June 22.

-RBI Governor Raghuram Rajan said, “the central bank will infuse whatever liquidity is needed into the Indian market to keep it "well behaved".”

-"We expect the RBI intervention to smooth any INR volatility. In case of BREXIT later this week, it would likely allow any US Dollar strength to play out. Our Asia FX strategists expect the INR to depreciate to Rs 68.5/USD in September from Rs67.3/USD today," Bank of America Merill Lynch said on Monday.

2.Trade

In the 2016 financial year, India-UK bilateral trade was worth $14.02 billion. India exported goods and services worth $8.83 billion while imports from the UK were at $5.19 billion. In the last five years, the trade has been quite stable.

- “Britain’s exit from the EU probably won’t have any significant impact on this”, said Biswajit Dhar, a professor of economics at the Jawaharlal Nehru University (JNU).

Dhar, a former consultant to the Indian government’s planning commission explained that “two-way trade between India and the UK has been fairly stable since the end of the last decade. This sharply contrasts with India’s total trade with EU members, which has been declining during the same period.”

“It may, thus, be argued that the historical relationship between the two countries still plays itself out in the realm of trade,” he added.

-“A Brexit-UK will have far greater latitude to negotiate with India as it will be free from the vast set of rules that come with EU membership,” Soumya Kanti Ghosh, chief economic adviser to the State Bank of India, the country’s biggest lender, said in a report in May. “UK’s investment and expertise in cyber security, its military technology are still competitive, and can become the point of convergence under Make in India.”

-Nonetheless, there will be roadblocks that will need to be sorted out, as Swati Dhingra, an assistant professor of economics at the London School of Economics, explained in a recent post,“Today tariffs are already quite low and trade agreements are much more about harmonising policies, such as food safety regulations, so that businesses can easily trade across borders. It’s unlikely that Britain would harmonise its regulations with that of China or India, so it is questionable as to whether any new deals would have significant benefits.”

-Lord Meghnad Desai, an India-born economist and a UK Labour politician, argued that the impact of Brexit on the India-UK trade will be “hardly at all.” Asked whether Brexit will make it easy for UK to increase its ties with India, Desai said,“the EU is not preventing UK from making inroads into India if it wants to even now.”

3.Companies

India Inc. could also take a hit if the UK votes to leave.

Indian companies have traditionally had substantial operations in the UK. Currently over 800 of them function in that country, employing more than 100,000 people in all. The UK has also been an entry-pointfor Indian businesses to the rest of Europe.

-“Indian companies will have to rework their existing strategies both for UK domestic market as well as UK as manufacturing base for exports,” said Abdul Majeed, a partner at PwC, a consultancy. “The overall impact depends on how the UK moves after the exit in the long run with respect to free trade agreements with EU countries or WTO-based arrangements.”

-“Brexit will have significant impact on the UK automotive industry since over 75% of vehicles assembled in the UK are exported and around 50% vehicles are exported to other EU countries. JLR exports around 80% vehicles to other countries and around 20% goes to other EU countries,” PwC’s Majeed said.

-Deepesh Rathore, co-founder of Emerging Markets Automotive Advisors, a global automobile forecasting company, said that with Brexit, the vehicles JLR sells in Europe “may end up attracting high duties, making them uncompetitive to rivals BMW, Mercedes, and Audi.”.