Impact of Brexit on India


Spurred by the wave of nationalism and concern over immigration the UK decided to withdraw itself from the European Union. The rigid and bureaucratic trade policies of the European Union to safeguard their needs failed to do any good for the UK and its trade. The world waits to see the negotiations between the European Union and the United Kingdom. As rightly stated by Raghuram Rajan, “When elephants fight grasses suffer”. India is the UK's 17th largest trading partner. The divorce between the UK and the EU is likely to have far-reaching effects on the Indian economy.


The UK has served as a gateway for Indian Companies to the rest of Europe i.e. access to the single European market. UK based Indian companies also had an advantage of the tariff-free barriers. Uncertainty in the financial and investment market has led to free-fall in the value of GBP, as the threat of excessive tariffs and trade barriers looms large in the light of the no-deal situation. With the fall in the value of sterling due to high volatility, these Indian companies are likely to lose on their revenues. The movement of the labour force from other European countries to the UK is also likely to be hindered. After the change in the economic environment, everything depends on the terms agreed upon between the EU and UK with each other and new agreements with other nations. The UK may decide to enter into the Custom Union with the EU which provides a tariff-free trading area for products and services thus the logistics chain might remain unhindered. However, the UK might also enter into bilateral trade agreements with the EU thereby creating uncertainties in sectors.


Not only will Brexit destabilize the market base for these companies but also cause insecurity in investments. Investments have slowed down as investors wait for the end of the transition period. Britain due to the huge GDP of combined countries has always been a hotspot for Indian investments. The Tata Group has invested a huge amount in the UK in sectors like automobile, steel, and tourism. The change in the European environment therefore likely to have a counter effect. Soon after the referendum was passed Tata Motors witnessed a fall in the share indices in the motor segment.


With all these challenges Brexit also brings with it a lot of new opportunities. Post-Brexit the UK might decide on liberalizing its economy. India being its oldest trading partner might thus enjoy the advantages of free trade. To compete with the EU bloc and attract FDI the UK is likely to strengthen its ties and form strong alliances with India. Indian companies will thus be enjoying lucrative incentives. The Indian IT sector will serve as an attractive destination. The UK can adopt enticing tax structures benefiting their own needs. The UK is the third-largest exporter of India. The fall in the value of sterling will boost Indian exports from the UK.UK and EU were leading trading partners with expected severed relations between them India can tap newer markets. India can maintain direct trading relations with the EU and thus provide much wider access to its market. To increase its competitiveness, India needs to maintain strong alliances and trade agreements with other nations. This will help Indian companies fill gaps and protect their interests.


Once the dust settles, it will surely prove beneficial to the Indian economy with inflows of cash navigating its way towards the Indian shores. Brexit might serve as an opportunity for India to integrate with the rest of the continent. While economics is static, assumptions are varied. Amidst such uncertainty, everyone holds their own opinion on how things will turn out.


Reference:


https://www.ssrn.com/abstract=3317669