Brexit is the withdrawal of the United Kingdom (UK)
from the European Union (EU), it refers to the June 23, 2016 referendum by
British voters to exit the European Union. The referendum quivered global
markets, including currencies, causing the British Pound to fall to its lowest
level in decades against a basket of other global currencies. The supporters of
Brexit had based their opinion on a large number of factors ranging from the
global competitiveness of British Businesses to concerns about immigration.
Popular support of Brexit had varied over time, but the 23rd June vote
demonstrated that UK citizens believed that Great Britain can survive without
being part of the EU and the related benefits that arose for the UK out of
being a member of the EU.
the advent of globalization there is more correlation seen between the
countries. If there is a disturbance in one country, it will have an impact on
the world economy as a whole and especially when the country is one of the
developed economies that has the major control over the trade and other
economic functioning. Thus it can be seen that the Brexit will have an impact
on the global growth. It is all together a big blow when one can see that more
countries are moving towards the multilateral trade agreements. It will also
estrange the investors and the capital which will move from risky markets to
to the 2016 referendum, the UK treasury estimated that being in the EU has a
strong positive effect on trade and as a result the UK’s trade would be worse
off if it left the EU. The Brexit impact is not only limited to Britain, but
also European countries. London has always been financial hub, which gave
access to capital markets of the world to Europe. But with Brexit, European
Union may have restricted access to the London Financial Market. In all
likelihood, access to this market will form a key part of trade negotiations. It
will then take two years or more to work through exit modalities, a time in
which a lot of things can be brought back to normal, including trade relations.
major exporting countries such as China and India may get affected as EU is one
of the major export market. The referendum rode on many components – anti
immigration, increasing protectionism etc. and it is expected that these
sentiments will increase in other parts as well.
Impact on India
has always been the gateway for Indian Companies to access the European
companies due to its access to financial markets in London and ease of doing
business with Europe, from UK. India has shown a positive trend towards trade
surplus of $3.64 billion in terms of bilateral trade with Britain. The total
trade stood at $14.02 billion in FY16, out of which $8.83 billion was in
exports and $5.19 was in imports.
the month of April 2016 the exports to Britain stood at 17.66%(USA 17.80%) of
the total exports. In terms of imports, India imports only 1.45% of its net
imports from UK. If we look at exports from India to UK, the major exports are
textiles and clothing, followed by machinery and auto ancillaries. India’s
major exports in terms of pharma are US, UK followed by Europe.
is unlikely to have a notable impact on India GDP Growth in fiscal 2017 and it
is forecasted a growth of 7.9% due to the agriculture sector as swing factor.
It’s the spatial and temporal distribution of rains in July and August that
will matter more to the domestic growth. It is also observed that there shall
be not much downside to India’s Exports. UK basically accounts for 3% of
merchandise exports from India. Further, India’s total trade (exports and
imports) with UK is 2% of its external trade.
can be seen that the rupee may weaken at per dollar by the end of the fiscal
year. Changes in the value of rupee with regard to the pound won’t be the only
factor determining India’s trade competitiveness with Britain. The currency
movements of India’s trade competitors with respect to the pound, along with
changes in domestic costs and productivity, will be another factor. Also
expected that there will be intermittent mini fights as Brexit negotiations
proceed as the same shall be treated as a process instead of negotiations which
will take some time, and Article 50 which makes the provisions for countries
that want to leave the European Union (EU), has not been invoked by Britain
shall see a notable impact of Brexit which shall be related to trade, capital
flows, immigration and free border access to the Indian Companies to operate in
is the third largest source of FDI in UK with Britain having more than 800
Indian Companies. With Brexit, the business of these companies may be affected
and due to the exchange rate fluctuations the bottom line of these companies may
India considers Britain as a gateway to EU, now with Britain opting out, India
loses the advantage. Hence the need for free border access arises. The free
trade agreements (FTA) that India was negotiating with EU will not have the
same impact as the same was happening since 2007, India will have to work out
with Britain separately another bilateral trade agreement. UK holds almost 17%
of India’s IT Export and with Brexit the overhead costs are going to increase.
is predicted that due to Brexit the India IT Exports will have all together
negative influence. Also the pound will depreciate and will have an effect on
the returns of these companies.
immigration will also become tough for the Indians as one of the reason for
Brexit was the immigration of people from other EU Countries, thus this will
impact the immigration to UK for Indians.
is seen that UK and EU together accounts for 23.7% of rupee’s effective
exchange rate. Brexit would lead to outflow of foreign portfolio investments
and this may further weaken the rupee. The RBI on the other hand may have to
step in to try and maintain a balance in order to not let the fear of an
interest hike spike the markets.
Acquisory News Chronicle - July 2016