UK is dominating the news these days and for all the wrong reasons. Brexit, short for “British Exit” from the European Union is today’s most controversial and a high octane global issues for a while now. A public vote called a referendum was held on June 23, 2016 resulting in 52% of the voters opting for an exit. UK served notice about its intention to withdraw in March 2017 and since then frenetic negotiations have been going in the UK and in EU on the terms of withdrawal. There are several vexing issues like the Back Stop and the Northern Ireland’s border.
Prime Minister Teresa May is caught in a vortex of disagreements. Getting her deal through the British Parliament is leading to considerable uncertainty about Brexit and a sense of bewilderment in Westminster as the deadline looms uncomfortably close. Twice the Prime Minister has been unable to get parliamentary approval for the terms of exit from the European Union. Leaving without a deal is theoretically possible, however, on March 14, the UK Parliament approved a vote against leaving the EU without a deal, thus authorising the Prime Minister to seek an extension for the date of withdrawal. This provides additional time to work out a deal, though the EU’s stated position is against any renegotiation. It also requires its 27 members to unanimously agree to it. Whatever may be the outcome, it has also been proposed that the extension cannot stretch endlessly and must have a concrete roadmap.
Impact on India
India has strong historical ties with the UK and currently it is one of India’s most important trading partners. Besides UK is home to a strong South Asian community, with many having moved from India to the UK in recent times.
The UK has been an attractive centre of business and international finance due to its strong legal system and contract enforcement practice. India is one of the top investors with UK on account of UK being part of the European Union. With its strong investment climate and relationship with EU, it was considered the gateway to do business in Europe.
With Britain exiting the European Union, it is likely that many Indian companies with a base in UK may not enjoy the same free access to the continent as it did until now. This means they may face higher logistic costs and customs duties and other regulations.
Many Indian companies like Rolta, Tata Steel, Bharti Airtel Ltd (UK) have set up operations in the UK and derive revenue from European operations. A no-deal Brexit is likely to cause some disruption in the operations and may also cost a few jobs. Jaguar Land Rover plc, owned by Tata Motors ltd. plans to eliminate 4,500 jobs in response to sales slowdown caused by Brexit and slowing Chinese demand. Indian companies would need to recalibrate European operations, like setting up an additional operating company within European Union. This means short term disruptions will have a financial impact, as also take up management time. Similarly, Indian companies who have used London as their base to raise capital abroad may face issues and may need to work harder on the process. Given that this risk has been around for a while, Indian investments in 2017were at the highest level since 2008. This is partly driven by the depreciation of GBP against the rupee post the Brexit vote. Indian companies will need to focus on their M&A deal efforts across Europe while tackling the British market.
The Eurozone is a large trading partner for India. In 2017, India exported 85 billion Euros worth of goods. Therefore, post Brexit, the Indian government needs to rework its strategy and renegotiate the Free Trade Agreement with the EU.
India would also need to negotiate a free trade deal with the UK as it proposes to retain the same goods and services schedules post Brexit. The concessions agreed by WTO members’ pre Brexit may not hold the same value once Brexit happens. All the additional costs and tariffs agreed upon may need to be rescheduled. India exports around USD 9.6 billion to UK. Though there may be other factors looming, Brexit may be another reason why the trade surplus of USD 4.6 billion in 2017 almost dropped by half to USD 2.5 billion in 2018.
The UK has been a magnet for immigrants; free access of EU workers to the UK was a major reason for the vote in favour of an exit. Because of the large number of immigrants from EU, UK has restricted immigrants from other parts of the world, which had an impact on Indians. However, post Brexit, immigration into UK of Indians may not become easier as the UK wants to place quantitative restrictions on total number of immigrants, and only a few Indians with special skills may find it easier to work in the UK.
UK has attracted a number of students from India in the past. In a hard Brexit scenario, visa procedures for students travelling between EU and UK may become stringent and the processing fee is likely to be raised. At the same time, Indian students travelling to UK or EU exclusively may not have much of an impact specially those pursuing higher studies. .
However, in order to attract investments, UK may ease visa procedures for business travellers as well as for tourists, and since the GBP may face depreciation post Brexit, UK may be a cheaper destination for vacationers.
It is also believed by experts that this entire Brexit drama is taking its toll and would certainly affect the GDP of Britain in the immediate aftermath of its exit from the European Union.
The author is the CEO of Karvy Stock Broking