Brexit won't impact India. Neither economy nor business
All is well, India! Widespread panic over Brexit is unfounded and our stock market’s reaction a bit over the top. Brexit will neither blow a hole in our economy, nor paralyse Indian companies in the European Union or United Kingdom.
For, even though Britons have outrightly voted to exit, the real separation is not immediate but probably two years away, once the two sides conclude the painful negotiations to part ways. With British prime minister David Cameron deciding to step down, the negotiations will now have to be done under a new prime minister.
Sure, the pound has fallen 10 per cent vis-a-vis the US dollar but an equally drastic impact on the rupee is unlikely. For one, India enjoys a $3 billion trade surplus in the $14 billion India-British trade.
The euro won’t hurt the rupee directly either. The euro 77 billion India-EU trade is practically in the balance, with just a $1.27 billion trade surplus in favour of the EU. The impact on the rupee will be limited to the global turmoil that will be caused by the pound-dollar wrestle, rather than anything else.
In case the rupee does fall because of a global currency turmoil, it will only benefit Indian exporters such as IT firms, auto and agri exporters as they earn more rupees for every dollar worth of goods sold.
A fall in the rupee does, however, hurt imports of all kinds, including that of raw materials (which could make domestic manufacturing slightly more expensive), not to mention crude oil imports since India meets three fourths of its crude requirement from abroad.
By all accounts, any such unrest will only last a short while, before settling down, rather than leaving a lasting impact. On Friday (June 24), the rupee fell 1.4 per cent to Rs 68.21 per dollar before recovering to 67.90. And Sensex fell 1,090 points during the day, only to recover and close 604 points lower. Clearly, sanity is beginning to prevail.
As for the 800-odd Indian companies and their one lakh-plus employees in the UK, quite a lot of them are IT firms which are adept at dealing in hundreds of geographies, including the EU. They are unlikely to be flustered by Brexit.
In fact, Morgan Stanley predicts the Eicher stock may gain nearly 25 per cent, Infosys 11 per cent, HCL Tech 11 per cent, HUL eight per cent, Sun Pharma seven per cent and Larsen & Toubro 6.5 per cent. It also predicts a fall in stocks of TCS (ten per cent), Wipro (eight per cent) and Tata Motors (two per cent).
On the other hand, the India-EU business remains unaffected. Rather, India’s trade with the EU has been on a slow decline since 2011 (between 0.5-1.5 per cent year-on-year).
But wait out the outcome of the new trade pact between Britain and the EU.
The EU’s biggest economies Germany and France will clearly oppose it. After all, the UK would be seeking all the trade advantages of being in the EU, without bearing the responsibility of being within. Hard negotiations are in the offing but the EU and Britain will have to agree on a common ground.
Boycotting Britain is not an option for the EU either. It’s too well integrated with the British economy. Many MNCs operating in the EU have their headquarters in London. They will exert enough pressure on their politicians.
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| Britain may appear weaker in the short run. |
Brexit could leave a big impact on the UK-based auto makers since nearly three-fourths of their production is exported.
But then we have to wait out for the real impact since the new Britain-EU trade pact will be neogotiated precisely to anesthetise such pain.
The Tata group-owned Jaguar Land Rover is among those affected, but only 20 per cent of its production goes to the EU. It may end up paying higher duties to sell to EU clients. But car import duties in the EU even today are ten per cent, hardly enough to deter a JLR customer. Moreover, can the EU risk annoying Britain on this front and invite a retaliation? After all, EU-based BMW, Mercedes, Audi, Renault and Volkswagen, among others, have customers in Britain too?
A new trade pact between Britain and EU treading the middle path - however difficult - is inevitable. EU politicians will have to agree to it, kicking and screaming. Only, Britain would drive a hard bargain to make it difficult for the EU, while the latter would try to make it as punishing as possible.
Rules of exit, mentioned in Article 50 of the Treaty of Lisbon, are not elaborate. Rightly so, since the EU hasn’t yet faced such a situation.
Martin Schulz, the president of the European Parliament is planning to invoke Article 50 right away to eliminate any uncertainty. But a separation is not easy. The terms of exit have to be ratified by every member of the 18-member union and their parliaments. Each has a veto over the terms of exit.
Britain may appear weaker in the short run but it will eventually emerge stronger both financially and politically in the medium-to-long run. Remember, it will save nearly 18 billion pound (or 350 million pound a week) from its contribution to the EU budget.
That will go into improving its own economy. Politically, it will now be free to take an independent view of European migrants (a constant point of dispute with EU members) who have doubled in the past eight-ten years, straining its public welfare systems, schools and hospitals.
As for India, the impact on the economy and business would be more about weathering the waves of the global economic volatility caused by Brexit than anything direct. If at all, we have a lot to gain.
By the time the dust settles on Brexit, near the two-year deadline — or before — Indian firms will see greater opportunities from the vacuum created by Brexit in both the economies. Not that other countries such as China won’t eye those. But Indian companies’ skill will lie in exploiting them to our advantage.