Brexit, An Opportunity for India- The Dynamics at work

Post Brexit – the Emerging Scenario

Since my last essay, the initial dust over the Brexit storm has settled. While analysts are still divided over what Brexit’s impact on the world might be, the doomsayers have somewhat mellowed down. The new world political and economic landscape will not get redefined overnight.  Having voted themselves out, the UK wishes to take their time to eject from the EU, not considered a simple task. With no member country having triggered Article 50 till date, it remains an unchartered territory. Meanwhile some European leaders are unable to come to an agreement on how quickly the UK should trigger this Article.

Over the last four weeks, while I was travelling to UK, I had the opportunity to join a meeting of the Indian delegation with the Members of both, the House of Commons and the House of Lords of the UK.  At the meetings co-hosted by Confederation of Indian Industry and the UK India Business Council (UKIBC) as well as those of the Commonwealth Enterprise and Investment Council (CWEIC) the discussions naturally included Brexit and the way forward. From Keith Brown, Cabinet Secretary of Economy to Desmond Swayne, Minister of State, International Development to Deodutt Maharaj, Deputy Secretary General of the Commonwealth, the thinking was unanimous – “while the country will take some time to start looking at itself in a new frame, Brexit is a reality that we are ready to address.”

united kingdom exit from europe relative image

While UK focuses on figuring out the modalities of their exit, the world continues to deal with sluggish trade. From the EU’s perspective, Germany is perhaps the only country capable of leading the European bloc out of the slowdown.  The uncertainties surrounding Britain’s exit and the shifting global landscape in no way mean that the country has lost its status as the fifth largest economy of the world. That perhaps is the reason for initial shocks, the global interest and the continued discussions around Brexit. Recently, US made a statement that mentioned the country’s openness to bringing UK into the TTP trade bloc. Amongst the Asian majors, Japan, China and India have already begun reworking their relationships with EU as well as Britain – China is working on a 16+1 grouping and Japan has entered into a strategic defense agreement with the UK. Political and economic impacts apart, United Kingdom, EU, and other partners, significantly the US, will also have to redefine their security and intelligence relationships.

Brexit’s Impact on India – A Mixed Bag

How will India’s relationship with Britain and the EU change after Brexit? In the new world order that is emerging, will India be adversely impacted? Will India’s strides towards becoming a major economic power be curtailed? These are some questions that analysts are trying to answer today.

I believe that for India, Brexit is likely to have a mixed impact – some positive and some not so positive. Mark Mobius, Executive Chairman, Emerging Markets Group, Franklin Templeton Investments recently said “There will be an impact on emerging markets, and some of the Indian companies that have significant exposure to the United Kingdom may get affected.  If you take India, there is also no reason why it cannot become an important global financial market, if the government allows free exchange of currency and general liberalisation of the market. Hence, you can see there is both opportunity and danger in these tough times.”

What emerged during my meetings in the UK earlier this month was that both, political and business circles, are beginning to lean towards the Commonwealth countries. Forming a Commonwealth Bloc with a focus on large, English speaking member countries is what they are looking at. Given our trade and investment relationship with UK, India tops this list of countries which also includes Canada, South Africa, Australia and New Zealand. Some of India’s largest investments are in the UK with the total investments being more than the combined investments in the rest of EU. Amongst the G 20 countries, UK is the largest investor in India. In 2015~16, India’s exports to the EU stood at USD 35.35 billion. In comparison India’s exports to Britain stood at a USD 9.35 billion.

Very recently when the U.K. Business Secretary Sajid Javid was visiting India, Smt Nirmala Sitharaman, India’s Minister of State for Commerce and Industry as well as Mr Javid emphasized the importance of defining the future trade relationship between the two countries. With Britain exiting the EU, informal discussions for a bilateral trade agreement between India and UK have already begun. Both nations want to be in a state of preparedness to sign the bilateral agreement as soon as UK formally exits the EU.

For India, EU is an important trade partner and the proposed India-EU Free Trade Agreement (FTA) is likely to see equal attention. The EU envoy to India, Tomasz Kozlowski has also expressed the EU’s commitment to strengthening the bloc’s partnership with India and to pursuing the strategic partnership agreed upon in the last summit.  For Britain too EU will continue to remain an important trade partner as is evident from the recent remarks of Mr Boris Johnson, Foreign Secretary, who led the Brexit campaign. He recently said “While we have to give effect to the will of the people, Brexit in no sense means we are leaving Europe. We are not going to be in any way abandoning our leading role in European participation and co-operation of all kinds.”

As the Governments take their first steps towards giving shape to Brexit, one of the fears nagging Indian investors is the possible requirement of separate headquarters for Europe and Britain leading to increased costs for investor companies. With no clarity on the trade passport clauses, those channeling exports to the EU through UK are at crossroads. They are considering setting up other warehousing facilities to de-risk their businesses till the Brexit dust settles. The Financial Sector is equally in a state of flux, not knowing what the future holds for them.

In an intertwined and highly connected world, Brexit’s impact on India will not be limited to linear relationships. At the UKIBC meetings, some businessmen echoed the sentiment that investments will be on the slow burner for some time. On the exports front, a weakening global economy and an overvalued exchange rate have already meant that India’s exports have seen a decline for a straight 18 months. Our company’s exports to some of the UK customers have also been negatively impacted with a softening of the Pound.

In my analysis, in the near term the headwinds for India’s trade could get stronger, depending on the reactions of other Eurozone economies to Brexit.  Many Central Banks are expected to ensure that they have sufficient funds to see them through tough times. This could mean a cut in lending activities and funding to companies getting tightened. Even though India today is the most attractive investment destination, this tightening could impact Indian companies as well.

My belief is that in the longer term, Brexit may not turn out to be as bleak for England as the initial reactions made it seem. I also believe that once the Brexit modalities are in place, Indian companies are likely to see many more opportunities open up and much higher investments coming in from the U.K.

It’s No Longer Business As Usual

In an already sluggish global trade scenario combined with a WTO making limited progress on the Doha agenda, countries have been prompted to sign several regional and bilateral trade agreements. The increasing protectionist measures by various countries, the stalled TFA and an absence of standard international investment rules only make the international trade landscape complicated. The result – companies with international trade operations are left to unravel a spaghetti bowl of trade regulations. Brexit has further created uncertainties for the global business community. In this light the international business community is facing numerous challenges.

I am expected to join the deliberations at the upcoming B20 Summit scheduled to be held in September this year. Given the business community’s challenges this Summit will make a concerted effort to continue to strengthen the multilateral trading system. On the agenda are encouraging trade growth and stopping the imposition of new protectionist measures while rolling back existing ones.  A G20 forum to express common views from the international business community on the current issues impacting businesses, the B20 coalition continues to affirm the importance of a multilateral trading system.

The views expressed are personal.

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