- An introduction to BREXIT
BREXIT refers to the withdrawal of the United Kingdom from the European Union. The European Union is an economic and political union of 28 European countries. It was established in January 1958 and at that time it was known as the European Economic Community. It was started with only 6 countries and the UK became its member in 1973 along with Denmark and Ireland. A majority of 67.2% of the British citizens had voted in favour of joining the EEC when the UK held its first referendum in 1975. In 1986, UK assumed the presidency of the EEC. In 1992, the EEC was renamed as the European Union. In 1999, 19 out of the 28 countries decided to use a common currency, the Euro. The UK was among the remaining 9 countries which stayed with its own currency, the Sterling Pound. EU represented around 24% of the global nominal GDP ($16.220 trillion) for the year 2015. Among other benefits which a country gets by becoming a member of the EU, free movement of capital, goods, services, and labour between the member nations in the Eurozone is the most prominent one.
In 2013, while many other countries were vying to join the EU, the UK citizens were protesting to get out of the EU. Honouring his election promise, PM David Cameron issued a referendum to decide whether it wants to continue membership under EU or not. The results of the referendum came out on 23rd June 2016and surprised everyone in which 52% people voted for BREXIT whereas 48% voted for remaining within the EU. Although the result of the referendum was not binding on Britain’s parliament, the government decided that it will honour the will of the people. Britain is scheduled to formally leave the EU in March 2019.
Among other political and economic implications, the Brexit event set an example of participatory democracy where citizens took a decision which was impacting them despite the presence of politicians. Any major event in history has had both positives and negatives. Brexit is surely one of them.
- Pre Brexit-Relations with the UK
The UK is the largest G20 investor and employer in India and has played a substantial role in the growth and development of India. British companies in India have generated around 790,000 jobs and around 32% of the 1.96 million jobs created by FDI are in the services sector – the UK’s strong point (since services make up around 80% of the British economy). The UK services sector would be the main beneficiary of a future free trade agreement (FTA) with India.
British successes like HSBC, Standard Chartered and G4S have played a significant part in driving business growth in India. British Banking and Financial services firm, HSBC, was one of the first firms to bring electronic banking and financial technology to India. It is one of the leaders in the financial services sector of India and employs more than 32,000 people. Similarly, the leading security solutions group in India, G4S, a British firm, has more than 160 branches in India and employs more than 1,30,000 employees throughout India.
There are collaborations between the two countries such as the Joint Economic and Trade Committee, the Joint Trade Review, the UK India Education and Research Initiative, the Newton Bhabha fund, the UK-India Tech Partnership etc. The 2 countries also entered into an agreement in 2017 to set a corpus of 240 million pounds, both contributing 120 million, to fund clean energy projects in India.
In 2017, India sent more immigrants to the UK for work, than the rest of the world put together. In 2017, out of the total work visas issued by the UK, India received 58% of the total. Number of Indians going to the UK for study also grown by 27% in 2017.
There are some areas of rift also. Despite the huge number of immigrants, as per the UK statistics, there are some 1,00,000 illegal Indian immigrants living in the UK, again the largest from any single nation in the world. Britain has made numerous attempts to enter into a bilateral agreement with India to deport these 1,00,000 immigrants from Britain, but India refuses to enter into any such agreement. The reason for this refusal by India is the exclusion of India by the UK Home Office from the list of countries with relaxed visa rules because these countries are considered as low-risk countries with regard to immigration. This has upset India because being outside this list means eye-watering expenses to obtain visas followed by hostile rules to get them. So, India insists that it should be included in the list of low-risk countries and only then will it consider the bilateral agreement on the departure of illegal immigrants in Britain.
India imposes 31% tariff on vehicle imports from the UK, 82.5% on the coffee imports and 113% on alcohol imports. All these, however, can come down to 0% under the long pending FTA.
- Relations with the EU:
EU is the largest trading partner of India and contributes the maximum to the overall exports of India. Out of the total exports to the world in all categories, EU accounts for 17% and India’s imports from the EU is 11% of the total imports.
The EU has shown interest in strengthening its ties with India. In November 2018, it came with a policy document seeking to strengthen ties in the areas like trade, investment, infrastructure, defence, security, and counter-terrorism.
- Impact of BREXIT on the Indian Companies in the UK
The impact on a Nation depends on whether that nation has its companies doing a lot of their business in the UK and the Eurozone. India is the third largest source of FDI for Britain and there are over 800 Indian companies in the UK, employing over 1,10,000 people. These companies have their subsidiaries set up in the UK to get access to the benefits of free trade between the member countries of the EU. To get a sense of the impact, consider the case of Tata Motors. Tata Motors, an Indian company, has its largest subsidiary, Jaguar Land Rover, in the UK. Jaguar land Rover contributes to 90% of Tata Motors’ operational profits and that 25% of its sales come from Europe. If Britain and the EU establish huge trade barriers for each other post Brexit, JLR might then need to move out from the UK to some other EU member country since it cannot afford to compromise with 25% of its sale.
- Impact of BREXIT on Immigration
As per the rules of the EU, any member country of the EU shall not invite immigrants from countries outside the EU unless there is a significant shortfall of talent within the EU. Doctors, IT professionals and researchers were denied job opportunities in the UK for this law. Brexit provides a fresh opportunity for the highly skilled workforce of India to gain employment in the UK.
- Impact on India’s IT sector
India’s total IT exports to the world stood at $110 million for the year 2017-2018. Of this, the UK accounted for 18% of the exports while other nations in the EU accounted for 11.4% of the exports. For large IT companies, a fourth of their revenues come from these exports to the EU. With pound depreciating sharply after the Brexit announcement, the dollar revenues of the Indian IT companies came under pressure.
- Impact on major Economic Indicators:
Trade Balance: India has a trade surplus of 3.64 billion US dollars with Britain. As a result of Brexit, the value of the pound in terms of the dollar will fall. This fall in the value of the pound will make our exports costlier for them hence, India may witness a weaker demand for its goods. Our trade surplus, as a result, might come into danger. But the significance may not be much. The UK accounts for only 3% of India’s merchandise exports and 2% of total trade. In fact, the fall in the value of Pound will make it less expensive to travel and study in the UK for Indian students.
GDP: India’s exports to the UK as a percentage of the GDP was 0.4% while exports to the EU as a percentage of GDP was 1.7%. Therefore, Brexit’s impact on Indian GDP seems to be very small. According to domestic rating CRISIL, Brexit is unlikely to have a notable impact on India’s GDP growth, though it will impact sectors like automobile (a fourth of India’s auto parts exports are to Europe) and information technology (the UK alone accounts for 17% of India’s IT exports while Europe accounts for 29%).
Sensex and NIFTY: Following Britain’s decision to pull out of the EU, on 23 June 2016, Sensex came down with 605 points or lost 2.24% of its value. The broader NIFTY also fell by 2.2%. Indian investors lost Rs. 2 lakh crores of their wealth on that date. However, economists including former RBI governor Raghuram Rajan said that this fear in the market is just a temporary phenomenon and that the market will soon stabilise. In fact, as per some analysts, the financial uncertainty in the EU’s stock market will make the Indian stock market a more attractive destination. Hence, we might end up gaining more.
INR: After the Brexit announcement, Rupee lost its value on both 26 June 2016 and 23 June 2016 and ended the week with a loss of 89 paise against the US dollar. Among the global currencies, only the Japanese yen and the US dollar appreciated since they were considered as safe currencies by the market. This change, however, was temporary. The performance of GBP in the longer term against INR depends on the performance of the UK and Indian economies.
Foreign Portfolio Investment: Inflow from foreign portfolio investors (FPIs) took a dip. For the immediate week after Brexit announcement, FPI stood at Rs 539 crore which was lesser than the expected. Amidst the uncertainties and fear, global investors went on a hunt for safe assets which caused to the value of gold to jump to $ 1,358.54 an ounce approximately 8.1 per cent increase in the value an ounce increase, the highest one day jump since 2008.
- Opportunities Post Brexit
- After losing free access to the huge market of EU, Britain will want to develop favourable trade relations with other countries. India, home to 1.3 billion people, having a huge domestic market with the tag of world’s fastest growing economy, will be of special interest for the UK.
- India’s chances of entering into a Free Trade Agreement with the UK will increase now as the UK will now (post-Brexit) try to develop trade relations with other countries and, as stated above, India will be of special interest for it.
- The slowdown in the global consumption, which BREXIT is expected to cause, will lead to falling in the prices of commodities especially crude oil which could help India save a lot on its import bill. It is estimated that every dollar of change in the price of crude oil impacts India’s import bill by Rs. 823 crores.
India has always been considered as a lucrative market in the globe and is likely to be significantly impacted by major changes across the globe, be it political or economical. There have been many speculations in favour and against the positive impacts of BREXIT on Indian economy. It is clear from this report that on some fronts, India will gain while in others it will suffer. The long-term implications will, however, transpire depending on the post BREXIT trade relations which the UK develops with the EU as well as India and the performance of the economies of India and Britain in the long run.
One thought on “Impact of Brexit on Indian Economy”
Very well summarized. Nicely evaluated the impact of Brexit from almost all angles.
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