The Big Picture: UK begins Brexit process: Implications for India
Prime Minister Theresa May formally began Britain’s divorce from European Union recently declaring that there was no turning back. In one of the most significant steps by British leader since World War II, May notified EU Council President in a hand delivered letter that Britain would quit the blockade joined in 1973. Unlike last year however when in a referendum, UK voted to exit the EU which created a panic in the Indian markets, Theresa May triggering Article 50 did not worry the India much. While it is still early days to gauge its real effects, Indian companies and sectors such as auto, metal, IT, tours and travels and education that have a notable exposure to the region are likely to see some impact in the days to come.
There are companies which are looking at hedging their bets because Britain was a financial centre for important activities. An easy access to European market was definitely a reason that enabled London to emerge as a flourishing centre for trade and investment. Many companies from India have also invested in UK such as the Tatas both in steel and automobile sector.
How will be the trade relation among EU nations and UK is also important. If there is a free flow of goods and services through FTA, then there might not be much problem for Indian exporters. But if there is hard Brexit and UK is unable to export to EU countries on the same terms, then the picture might be different. For example- At the moment, Bangladesh has significant advantage over India in textiles because of the tariff preferences which it receives from the EU. After Brexit, there will be an open question whether UK would continue to grant Bangladesh those tariff concessions or not. If UK reverses this policy, it would be advantageous for India.
Implications on India:
- Due to volatility of pound, it is expected that Indian stock exchange might be affected and Indian businesses in Europe might be at risk.
- This might have an adverse impact on investment and movement of professionals to the UK.
- It might affect India’s flagship IT sector. Indian IT companies will have to establish separate offices and hire different people for the UK and the EU which will put heavy expenditure burden on IT companies in the near-term if there is hard Brexit.
- Indian firms have base in the UK because they got border-free access to the rest of Europe. It was one of the main reasons for Indian companies to go to the UK. There might be less attractiveness towards UK and this may have a bearing on future investment decisions of Indian companies.
- It may also lead to greater investments by the British companies into India, which will increase the overall outflows of the domestic market.
- Britain might try to convince Indian companies to invest there by providing much bigger incentives in terms of tax breaks, lesser regulation and other financial incentives because India is also a significant investor in Britain.
- India might have some opportunities in the pharma sector of UK market due to rising health concerns there and larger government procurement of generic medicines from India if it positions itself properly.
The move does weaken the EU at one level. It also reflects anti- immigrant or anti-foreigner sentiment which is sweeping across Europe and America. Much will depend on the terms that are negotiated under Brexit because this notification for now has just kicked off the process which is likely to take at least 2 years.