Brexit and India

Brexit and India

A new dawn has broken, and scarcely a person in the UK – in favour of Leave or Remain – can believe it has happened. The UK has decided to leave the EU by 52% to 48%. Despite the verdict the country is split, virtually down the middle, and it’s not clear how that will play out in the weeks and months ahead.

The markets have reacted as expected: Sterling has fallen to its lowest level against the dollar since 1985 and the FTSE opened down 5%. Banking stocks are seeing heavy losses in early trading in Europe. Credit rating agency Moody’s downgraded the UK to negative and Standard & Poor’s has said the UK is likely to lose its AAA rating, while German bund yields have fallen into negative territory as investors look for safe havens.

Bank of England Governor Mark Carney has also made a statement, saying that the Bank of England has contingency plans for the result and that there is £250 billion of extra funds available and they will be monitoring the markets ready to deal with short term volatility.

Before October the next Conservative leader who will automatically assume the role of Prime Minister will be selected. The new PM will negotiate the terms of exit from the EU that could take up to two years. Until then UK and the world will face plenty of political and economic uncertainty. The UK is now in uncharted waters.

The outcome of the referendum raises profound questions for the integrity of the UK itself, with Scotland and Northern Ireland both strongly backing Remain. Scotland’s First Minister Nicola Sturgeon has said that the EU vote “makes clear that the people of Scotland see their future as part of the European Union” and there could be a fresh referendum on Scotland’s independence from the UK.

Interestingly, there was a demographic divide in the way the country voted. Most young people voted to remain in the EU while people in 50s and above largely voted to exit. Economic uncertainty, rising immigration and total disgruntlement with the “loss” of decision-making powers to civil servants in Brussels, EU headquarters, has bothered many for years and it reached a tipping point in the run-up to the referendum.

The process of unravelling the UK from the EU will take years. In practice that means freedom of movement and labour and the ability to trade with the rest of the EU will not change for now. But this vote will send shockwaves across the other countries in the EU, particularly those, like France and Germany, facing elections in the coming year. A wave of underlying Eurosceptic sentiment could now be unleashed as the EU wrestles with its future.

Impact on India

As the third largest investor in UK with $2.75 billion, India is naturally concerned by the earthquake caused by the referendum result. The political upheaval will lead to a long period of uncertainty for Indian businesses in UK as London negotiates the terms of the exit.

Indian companies saw UK as “gateway” into the European Union and 800 companies employing over 100,000 people are present in the island nation.

Both opportunities and losses will come India’s way. While in the short term India might take a hit as analysts predict a drop in India’s growth rate due to Brexit, many like finance minister Arun Jaitley see “opportunities” in the long run.

Trade wise UK is only number 18 in terms of total trade in the last 15 years, number five as an export market accounting for only 3.4 percent of India’s exports, and not even in the top 10 as an import market.

The volatility in pound sterling will impact Indian businesses in that country. While cheaper pound may see Indian investments rise in the property market, travel from India to UK would become cheaper so would education expenses.

Currently London is the banking capital and major banks are likely to move to the European continent. Many Indian companies are listed on the London Stock Exchange and have their European headquarters in UK. An exit from the single market might force Indian companies to set up new offices in the continent raising their overhead costs.

India’s IT Sector might take some hit with 17 per cent of total global exports of around $100 billion destined for the UK. Nasscom, in a statement though noted that Brexit would have a short-term impact and it sees more opportunities for IT companies in the coming years as UK renegotiates separate trade agreement with India.

Leaving the EU single market would lead to slowdown in movement of people from the continent to UK and that would create new opportunities for high skilled labour from countries like India.

Finally, loss of preferential access for UK goods into the EU would lead London to negotiate new trade agreements with individual countries like India and thereby, throw up new opportunities.

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