Simply put: What Brexit could mean for Indian businesshttps://indianexpress.com/article/explained/simply-put-what-britain-european-union-brexit-could-mean-for-indian-business-2865405/

Simply put: What Brexit could mean for Indian business

Some UK-based factories, IT firms may be hit but the overall impact will be largely muted,

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A supporter of the ‘Britain stronger IN Europe’, or Remain, campaign, hands out leaflets in the rain in London on Monday. (Source: Reuters)

With the first set of opinion polls on Britain’s upcoming referendum after the killing of MP Jo Cox indicating that the Remain campaign is rebounding into the lead, global stocks rallied on Monday while safe havens such as gold and the Japanese Yen skidded. Indian policymakers, though, are gearing up with evasive action focussed on the most immediate impact of a Brexit — that of trying to ensure sufficient liquidity in the domestic market as Britain gears up for the crucial referendum three days from now on whether or not to remain in the European Union (EU).

If a Brexit vote on June 23 does indeed go through, it will compound worries for policymakers days after the RBI Governor, Raghuram Rajan, announced his decision to not seek a second term.

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What can be the impact?

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The overall impact in real terms is likely to be broadly muted — as the flows of trade and investment would likely continue in the regular course. Two potential casualties, if a Brexit were to happen, could be manufacturing companies that have set up base in the UK while having a substantial exposure to mainland Europe, and firms in the services sector, especially information technology firms.

According to a Bank of America Merrill Lynch analysis, a Brexit may create recession risks that could dent IT demand further, hurting the 10-14% revenue growth forecast for the UK businesses of the Indian IT companies in FY ’17. Worse is the fact that the five large Indian IT companies have an 8-15% revenue exposure to the British Pound, the bulk of which is unhedged, according to Bank of America Merrill Lynch.

The top five Indian firms operating in the UK are Bharti Airtel, HCL Technologies, Emcure Pharma, Apollo Tyres and Wockhardt. Apart from HCL, India’s other top five IT firms too have a presence in the UK. A senior analyst with a brokerage house said that the biggest fear is that Britain’s leaving the Union could have a cascading effect, including more pullouts.

There is also the potential currency impact, with a fall in the Euro likely to have a cascade impact on currencies such as the Chinese Renminbi, which could potentially appreciate and force an intervention by authorities in China, something that could trigger an adjustment in the broader currency markets. While the Rupee has the Dollar as the primary anchor, some element of volatility in these markets can be expected, according to Care Ratings.

Volatility in global markets

“Should the vote swing towards the Leave camp and trigger a broader risk-off reaction, India will feel the heat through heightened volatility in the global financial markets,” according to an analyst with the Development Bank of Singapore (DBS).

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Most stakeholders, though, would prefer to wait for a clearer picture on the broad direction of the British vote. “The EU Delegation is not commenting on the referendum of June 23. It is an internal matter of the UK,” a spokesperson for the Delegation of the European Union in India said in response to a query by The Indian Express, adding that “the EU is and will remain fully committed to its Strategic Partnership with India in all fields of mutual interest, including in trade and economic cooperation”.

The UK is the third largest inward investor into India, after Mauritius and Singapore, with cumulative FDI equity investments of $ 22.7 billion from April 2000 to December 2015 — accounting for 8% of the total FDI inflows into the country. India, on the other hand, is the third largest investor in terms of number of projects into the UK. The number of Indian companies in the UK, growing at more than 10%, has nearly doubled from 36 to 62 firms in a year. The combined turnover of these businesses has increased from £ 22 billion in 2014 to £ 26 billion in 2015, according to Grant Thornton UK LLP-Confederation of Indian Industry (CII) estimates.

While the UK accounted for 15% of India’s total merchandise trade last year, its share has been declining. Trade in services has also eased, with UK service imports from India slowing and making up only about 2% of the total, much lower than with the US and Asia. In this context, a Brexit could potentially open up new trading opportunities with Britain.

“Admittedly, it is difficult to draw an empirical impact on India’s real economy. But if the Leave camp wins, it is likely that the UK will seek trade agreements with non-EU partners, including India,” DBS said in a report, India: Monitoring External Fault Lines. But this will require the UK to sort out its post-exit arrangement with its main trading partner, i.e. the EU, first. Thereafter, for India, a bilateral trade agreement with the UK might become viable as an alternate to the tough and drawn-out negotiations on the EU Free Trade Agreement.

Some companies may be hit

From a companies’ perspective, if the Brexit vote goes through, Indian businesses that are focused on purely tapping the UK’s domestic markets are unlikely to face many challenges. But those intending to leverage the UK as a base to gain access into European markets might have to rethink plans. A looming risk is that of an imposition of trade barriers, scrapping of preferential rates, and higher taxes between the UK and rest of the EU, which might pose a hurdle for foreign companies to invest in the UK.

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Of the 62 Indian firms in the UK tracked by the Grant Thornton UK-CII study, 30 are small and medium-sized enterprises with a turnover between £ 5 million and £ 25 million, 27 are mid-sized (turnover between £ 25 million and £ 250 million), and five are large corporates (turnover of over £ 250 million).

 

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