BREXIT: Lower growth and weaker currency to impact businesses in India

The report titled 'BREXIT – Trigger for larger things to come?' analyses four possible scenarios that UK could adopt and the impact of each of those scenarios for business in general.

“Effects will vary with the kind of negotiations the UK government has with the rest of the EU. So, while Britain has decided to exit the EU, the question of how that plays out both politically and economically assumes significance. Indian companies can expect some hit to their UK businesses as overall growth in the country slows in the immediate short run. A weaker currency would also mean that any repatriation of profits from the UK region is likely to result in losses as compared to the pre-BREXIT era”, said Anis Chakravarty, Lead Economist & Partner, Deloitte India.

According to the report, UK used to be India's third biggest trading partner 15 years ago. Today, Britain ranks 12th in terms of bilateral trade and is one of seven countries with which India has a trade surplus. While the bilateral trade relationship between UK and India is dominated by goods, services also form an important part of the equation.

“At this juncture it is almost futile to say that BREXIT implies uncertainty, but that is an aspect most economies and corporates would have to deal with. However, in the mid to long run, if the forces of globalisation play itself out well, an event such as BREXIT may turn out to be a positive for India bringing it closer both to the EU and UK”, said Anis Chakravarty.

Consequential scenario analysis with a focus on India:

According to the Deloitte study, in the scenario that the UK decides to become a member of the European Economic Area (EEA), could possibly be advantageous for India in terms of trade. In particular, UK would have the liberty to set their own external tariff and independently negotiate their own trade deals with countries outside of the EU. As such, trade deals negotiated between the UK and India could provide for huge potential for improvement and closer collaboration in terms of trade.

In the event that UK’s trade is governed by the World Trade Organisation (WTO), the British government can change existing trade policies with India and further liberalize it by reducing tariffs. Further, if the UK and India manage to finalize an FTA, this would give UK-India trade a huge boost.

However, India would not be able to use the UK as a gateway to the European Union in terms of trade as easily as before. Further, goods exported through the UK to the EU are obligated to meet various EU standards, which is another factor making it difficult to trade with the EU through the UK. Consequently, trade between India and the EU through the UK may be hampered, and existing trade channels and supply chains involving the UK and the EU may be disturbed.

Sectoral effects:

In terms of specific industries, there could be certain effects on businesses operating in sectors including Industrial and Consumer Products, Retail, Financial Services, Life Sciences and Health Care and Information Technology.

o   Companies that have manufacturing units in the UK, the access to single markets is important as their products can get artificially noncompetitive if they had to pay import duties.

o   Indian garment exporters have already witnessed a 5% drop in demand in the last year.

o   Bilateral trade of precious metals and stones between the UK and India amounted to over USD 2 billion in FY16, and is India’s largest import from the UK.

o   India’s pharmaceutical sector has significant exposure to the UK, and a hit to demand in UK and the EU is likely to show effects on profits and sales.

o   Many IT companies also have their EU headquarters in the UK and use the country as a gateway for business across the EU.

The report concludes by saying that at this juncture, it is almost futile to say that BREXIT implies uncertainty, but that is an aspect most economies and corporates would have to deal with. The way forward will be volatile and can possibly be subject to changing political equations in the EU and UK itself.

While it will be beneficial for both the parties to resolve the situation as fast as possible, the reality may be different, according to the report.