Brexit could not have come at a worse time for the world. Coming amid a global economic slump, the British decision to leave European Union will likely prolong revival of the world economy. The global recession that began late 2008 with the bust-up of Lehman Brothers seemed to have turned its back on its worst patch when it encountered fresh hurdles from the Middle Kingdom early last year. The latest blow to the revival has come in the form of Brexit.
For India, it offers a mixed bag. Emerging markets such as ours will see a collective sell-off from investors as investments will seek a flight to safety. Immediately after the Brexit result, the BSE bellwether Sensex had lost 700 points last Friday, wiping out a whopping Rs4 lakh crore of investors’ wealth at one go. It was a reflex action and most global indices crashed. Nevertheless, the dust seems to be settling down now. Even though it will still take time for the markets to come to terms with reality, things are getting back into shape. Indian markets appear to be finding their feet again.
Sensex Thursday surged 259 points to close at 27,000 while Nifty climbed 84 points to close at 8,288. Good recoveries in that.
Having said that, Brexit will slow the global economy down, considering that Britain is a major trading partner of many countries within and outside Europe. Although it will still take two years before the final divorce happens, its forebodings have already begun to show. India’s exposure to fallout of Brexit is less as it does not have significant trading partnerships with Britain or the EU.
If we look at the actual numbers, exports from India to Europe as a percentage of GDP is around 2.1 per cent. India has a favourable balance of trade with England with the latter still accounting for a chunk of our exports among European countries. The India-UK bilateral trade is worth $14.02 billion with India exporting $8.83 billion and importing $5.2 billion worth of goods. The UK accounts for less than 5 per cent of the country’s goods and services exports, inward remittances and annual foreign direct investment flows. Experts believe that if UK and India are able to negotiate a better trade pact, India could eventually benefit from it.
On the contrary, the divorce will have a cascading effect on British economy what with the pound having been badly hammered. Brexit volatility will affect foreign investments given the slowdown in global growth and limited financing prospects. Over the short term, the rupee could even touch Rs70 vis-à-vis US dollar. Indian companies operating in the UK could face a lot of headwind from now on. There are more than 800 Indian companies in the UK contributing over $ 4 billion to the British economy.
These firms will have a tough time going forward as they will be directly hit by the slump in the British economy. Any Indian manufacturing company having a base in the UK will face tariffs in EU depending upon how the new regulatory regime pans out. IT companies in particular will have difficulties in serving their financial clients as unlike in the past they would now have to pay a lot of tariff in the 27 member countries of EU — 30 per cent of their $100 billion revenues come from the European market. Even the automobile sector will face a rough terrain as exports will be negatively impacted.
That apart, migration norms are likely to be made tighter, potentially imposing quotas on Indian applicants. This will dry up IT jobs in the country. Though India is largely focused on domestic economy, it is not immune to global economic upheavals. Demand weakness, volatility in commodity prices, currency fluctuations and balance sheet impact on account of exposure to unhedged overseas borrowings will take a toll on Indian companies. IT, automobile, textiles, pharmaceuticals, leather and metals look the most vulnerable.