Mayday for India yet? Understanding the repercussions in an Indian context

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Mayday for India yet? Understanding the repercussions in an Indian context

Rajiv Ranjan Singh

Britain’s parliament rejected PM Theresa May’s deal to quit the European Union for a second time last week, deepening the country’s worst political crisis for generations.

There is considerable uncertainty about Brexit as the Prime Minister has only 17 days before the planned departure date. Leaving without a deal is theoretically possible, however, on March 14, the UK Parliament approved a vote against leaving the EU without a Brexit 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.

Whatever may be the outcome, it has also been proposed that the extension cannot stretch beyond the end of May 2019 when elections for the European Parliament are due.

Impact on India:

Historically, India has had strong ties with the UK with the current ones being both on the trade and investment front.

The UK is home to a strong South Asian community and has been an attractive center of business due to its strong legal system and contract enforcement regime.

India is one of the top investors with the UK; on account of the UK being part of the European Union. With its strong investment climate and relationship with the 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 the UK may not have the same free access to the continent they did before, which means they may face higher logistic costs via customs duty and other charges.

Additionally, there may be a possibility of free movement of goods, capital, services, and labour between UK and EU getting hindered.

Indian companies like Rolta, Tata Steel, Bharti Airtel Ltd (UK) among others have set up operations in the UK which is a major source of 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 plans to eliminate 4,500 jobs as a response to sales slowdown caused by Brexit.

Indian companies would need to reconfigure European operations, like setting up an additional operating company within the European Union. This means that a short term disruption will not only have a huge financial impact but also take up management time and translate into long-run effects.

Similarly, Indian companies looking to raise capital abroad that have used London as their base may face issues and may need to work harder on the process, but this would be a comparatively minor challenge.

Although this risk has been around for a while, Indian investments witnessed a peak in 2017 at the highest level since 2008.

In our opinion, they were partly driven by pound depreciation against the rupee post the Brexit vote. In the same year, India exported 85 Euro billion worth of goods as the Eurozone has been a large trading partner for India.

Going forward, Indian companies will possibly focus on their M&A deal efforts across Europe while tackling the British market and rework the under negotiation Free Trade agreement with the EU.

India would also need to negotiate a free trade deal with the UK as it proposed retaining 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 $9.6 billion to the UK.

Though there may be other factors, looming Brexit may have been a factor why the trade surplus of $4.6 billion in 2017 almost dropped by half to $2.5 billion in 2018.

Last but not least, let’s talk about the immigrant situation – be it students or workers. 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.

Owing to the large number of immigrants from the EU, and the UK has restricted immigrants from other parts of the world, which had an impact on Indians.

However, post-Brexit, immigration into the UK of Indians may not become easier as the UK wants to place quantitative restrictions on a total number of immigrants.

The UK has also 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 the UK or EU exclusively may not have much of an impact (may not be the same for EU students wanting to study in the UK).

Post studies, Indian students may still find it hard to find jobs in the UK for the reasons outlined above.

However, in order to sustain tourism based inflow of investments, the UK may ease visa procedures for business travellers as well as for tourists. Besides, since the GBP may face depreciation post Brexit, the UK may turn out to be a cheaper destination for vacationers.

The author is CEO of Stock Broking, Karvy.

Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are his own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Images are for reference only.Images gathered automatic from google.All rights on the images are with their original owners.

2019-03-19 10:34:02

Images are for reference only.Images gathered automatic from google.All rights on the images are with their original owners.

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