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.

Economic Effects

With 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 safer havens.

Prior 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.

The 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

UK 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.

For 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.

Macroeconomic Impact

Brexit 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.

It 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 yet.

“India 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 UK.”

India 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 suffer.

As 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.

It 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.

The 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.

It 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.

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Acquisory News Chronicle - July 2016