BREXIT – Impact On Indian Economy

BREXIT – Impact On Indian Economy

  INTRODUCTION

There is buzz around the world about the  referendum took place in Britain deciding  its position as a member of a  long held relationship with European Union and which got trend all over the world by slang “Brexit”. To understand what actually Brexit means one need to understand what EU (European Union) means is. . The story starts from the Treaty of Paris (1952) which was signed by six European nations Belgium, France, Italy, Luxembourg, the Netherlands, and West Germany to minimize the effect of Second World War on industries specifically related to coal and steel and which led to formation of European coal and steel community.

And after understanding the long term benefit of uniting other European nations also join the union under different treaties and agreement thus Britain also join the union in the year 1973. And the last treaty was Maastricht Treaty (formally known as the Treaty on European Union), which was signed on February 7, 1992, created the European Union.

Thus a referendum moved to decide whether Britain want to remain a part of the European Union or not and on 23rd June referendum to leave passed by citizen of Britain which gash long held union of Britain with EU and as a result of Britain exit from EU the term Brexit developed.

Some people are saying that this referendum is leap in the dark but how will it affect India which is one of the emerging global player in world’s economy and third largest foreign investor in UK, so how Indian economy will remain untouched therefore we will like to discuss the effect of Brexit on Indian economy. The sectors and business which may be affected by referendum are needed to be discussed.

What made Britain to exit EU?

There are several reasons which led the Britain to leave the Union but one of the major was euro currency itself and poor performance of European central bank in response of the downturn in European economy due to recession 2008 in United States. . In contrast, the ECB decided to raise interest rated which result in double dip recession and Country like Greece hit by economic disaster. Though currency of UK do not suffer as it uses pound instead of euro but a fear arises in mind of UK economist that  due to downturn in European Union’s countries its economy may also suffer one day and why we pay for the sins of other.

Some other reason summed up below:-

  1. More integration: If Britain stay in EU that will result in more integration and UK lost its presence as separate nation. The nation which rule over the world in past cannot face such situation where it loses its presence.
  2. More bailouts: UK becomes the source of funding for bailout of other EU members countries which will have bad consequence on UK treasure.
  3. EU court: The judiciary of Britain will nearly paralyse as the EU court start increasing its power to adjudicate.
  4. GDP: when UK joined EU members make 36% of world economy but now it falls to 17%.

Brexit Impact on Indian Economy

As we know India and Britain are major trade partners and India is the third largest foreign investor to UK economy then it will be wrong to say that Indian economy will not have any effect of referendum to leave EU held on 23rd of June 2016.

Some of the consequences of Brexit on various aspect of Indian economy are discussed hereunder:-

  1. Money :-

 On the very day when result of referendum is out Indian rupee fall to 68 v. US dollar  this because of  the reason that EU is one of the major trade partner of  India and fall in euro and pound leads to fall in Indian Currency. But this sudden fall in value of rupee is far less than the fall in value of currency of other emerging economies of the world this is due to intervention made by RBI to control rupee volatility.

  1. Stock Market: –  

 Indian Stock market also crashes just like other stock exchange on the D-Day but this sudden fall does not sustain for long thus it is more of a reaction to global news as pre measure by Indian market regulators are far better than any other countries. Figures says everything:- Indian stock markets like other Asian counterparts, too, started on a choppy note, with benchmark Sensex crashing 1,091 points to hit an intra-day low of 25,911.33 as investors pressed the panic button following the Brexit news. However, as the trading progressed and entered the last lap of the session, the Sensex had recovered nearly 500 points from the day’s low on short-covering and ended 604.51 points, or 2.2 percent at 26,397.7[1].

  1. Gold Market :-

 Worlds and Indian Gold market emerge as heaven to invest for investor who plunge out the money from UK as price of Gold are sharply going up due to Brexit. Gold prices in India shot up as much as 6% on Friday and 4.2% versus the US dollar. At one point, it was up as much as 8.1%, the biggest rally since 2008. Even the pre exist uncertainty on result of referendum also encourage investor to invest their values in yellow metal.

  1. Companies:-

 Companies which have major operation of business in UK are likely to affect most by the Brexit. Currently over 800 of Indian companies have major function in UK employing more than 100,000 people. Prime Minister Narendra Modi said on his visit to UK that ‘‘UK is the entry point Indian investor for European market’’.

It has been pointed out by several economists that Indian companies need to work on restructuring their UK based business and UK based exports.

  • Automobile Industry :-

 The industry which most terribly affected due to Brexit is automobile industry. Before the referendum company form their manufacturing unit in Britain as it is the part EU and help them to market their good in whole of the Europe accordingly they expand their scale of production year by year as no cross border tax is their but with referendum in place automobile company has to pay the tax for exporting their cars for sell. Let’s take a look of figure of major automobile industry player:-

Tata Motors Ltd suffers the most, losing 8% as 90% of its annual profit comes from the subsidiary Jaguar Land Rover Plc., which sells about a third of its cars in the UK and Europe.

Maruti Suzuki India Ltd’s shares fell by 2.25%, as it will suffer the indirect impact of Brexit. The 10% appreciation of the Japanese yen, could lead to a 8-9% downgrade in fiscal year 2017 earnings[2].

In a letter to its employee CEO of JLR motors said we are stronger company and UK will be stronger nation if we remain in EU and JLR estimate a loss of 1 billion pounds by 2020.

Not only car manufacturer but manufacturer of auto component also suffers loss due to undesirable referendum .Motherson Sumi System ltd. shares fall by 8.42% which earn half of its revenue from European market.

Thus we can see by the above figure that Indian auto industry having market in Europe suffer loss as UK is one of the gateways of European market.

  • IT sector: –

  Indian IT sector is one of the fastest growing sectors in Indian economy. Europe is the second largest market for Indian IT firms which play a vital role in deciding revenue. As the uncertainty spread all over the world on Brexit and its impact a sudden fall in share of Indian IT firm can be seen.

Tech Mahindra and  HCL suffers the most by steep fall in their share value but it is not possible to estimate that these IT companies will be in loss or earn profit by this referendum as they do not hold any permanent structure in the European market but their business tactic will decide their future earnings.

Figure never lie as said by many distinguish people but NASSCOM predict that period of loss will be short and help the Indian IT firms to make strengthen their presence in both EU and UK.

But there is silver lining for mid-tier IT firms who start their business in UK as referendum put them on same position as of establish firm.

  • Metal Industry:-

 Large amount of import and export of steel and other metal helps to realize trade revenue between India and UK. Both are dependent upon the demand raise by the European market and with shutting down of the door of European market due to Brexit industry which having manufacturing units in UK and industries which are exporting steel and other metal through UK are in the most vulnerable condition.

Tata Steel which has a turnover of nearly 2 billion pound from its manufacturing units in UK and 12 plants across UK hit the most by the Brexit as it shares fall nearly by 10% and also raises possibility of its sold out very high. Tata is not alone Novelis Inc. subsidiary of Hidalco Industries also appear as loser on the Brexit day by losing 5.37% of its share.

  • Oil Industry:-

As news of Brexit spread like fire in jungle price of crude oil in international market falls which give some relief to Indian petroleum companies and which will help them to meet the huge import demand of oil.

However there is initial profit for companies like Bharat Petroleum and Hindustan Petroleum but if the pressure on the price is continue there might be fall in their anticipated inventory gain.

Though Brexit is good for companies engage in distribution of oil but it does not bring good weather for oil producer companies such as ONGC and oil India ltd as low crude prices will lower their revenue.

  • Aviation Industry :-

 Low price of oil in international market comes as a relief to aviation industry. Though there is uncertainty on change in visa policy of UK may act as hinder to their long term happiness. But decrease in value of pound may encourage more people to visit UK which could lead to increase in air traffic.

  • Pharmaceutical Industry:

Impact of Brexit is negligible on pharmaceutical as their primary trading market is USA and neither UK nor rest of the Europe forms major part of their revenue. But their investment hands in UK and other part of Europe may suffer due to loss in currency value of pound.

  • Infrastructure and Real Estate

 Sudden fall in the share price of India’s biggest infrastructure company Larsen and Toubro which have mighty projects in UK as well as in Europe draws a clear picture that the infrastructure industry is harshly affected by Brexit but Real Estate investor have good day ahead as slash in the price of UK real estate market may encourage them to invest and attract buyers

  • Tea:-

 UK is one of the largest importer of India tea. Last year import value is 20.2 million. Volatility in Indian well as British currency never be a deciding factor for determining whether it will be win or lose situation for tea industry because most of the tea trade is done in dollar

.But devalued pound will make market more competitive and thus traders of Africa may clinch revenue of Indian tea industry.

 It worthy to be note that in India’s export to Britain textile and clothing occupy 24% but industry seems to have no effect as decade ago it diversify its maximum export to china and other Latin American nations.

 India trading figure with Britain may help us in drawing conclusion of impact of Brexit on Indian Economy [3]

Thus by the Brexit British pound went to its all time low after 3 decade and impact of which can be seen world wide as Britain is the major trade partner of most of the developing nation. Thus companies which has any sought of income from Europe and UK whether direct or indirect might feels the heat of Brexit.

What Experts Opinion on the Impact of Brexit:-

Brexit will provide the country better market access to the European Union and England, even as there will be some market volatility. As risk aversion sets in, there would be a decline in financial markets and India would see this impact along with other nations. But as trade strategies are reworked there could be potential advantages in the form of better market access for India to the EU and Britain,” , State Bank of India (SBI) Chairperson Arundhati Bhattacharya said said in a statement.[4]

Economic Affairs Secretary Shaktikanta Das said domestic fundamentals are strong enough and the country will not suffer from any long-term impact of Brexit.[5]

He said with comfortable foreign reserves, inflation coming down and structural reforms on path, the country will be able to deal with all eventualities.

Reserve Bank Governor Raghuram ji  Rajan also said the central bank is watching markets closely the fallout of the British vote for exit from the European Union and is ready to act if there was any disorderly behavior.[6]

If we just go by the experts’ views it seems beautiful picture all around the Indian economy that is because any contrary statement by them may be a blow to Indian policy of attracting investments but in reality Indian economy also in choppy waters that can be clearly interpreted from downfall in Indian stock market and rupee value in international market.

Benefits from Brexit

Brexit is swings and roundabouts for India it might comes with loss to some industries but also carry gains for other in its ambit. But to avail such benefit one must be conscious about the latest development in UK administration and policies. Benefits which may arise from the referendum of exit are summed up as follow:-

Education

Those who are planning for studies from UK have a great chance as it became tuition fees become cheaper due to significant fall in value of pound.

Leisure Travel

Though it is bad news for other industries in UK but tourist sector there in UK expecting increasing in overall traffic that is also due fall in value of pound.

Real Estate

UK might become new venue for investment for Indian real estate giant as property rate are slash due to Brexit.

Aviation Industry

Indian Aviation industry may benefit by increase in traffic of tourists to London and other parts of UK as most of the people call it high time (London calling).

 

CONCLUSION

Referendum is like ‘The Carrot are Cooked’ which means a situation that cannot be change and EU officials are also in no frame of mind to provide any relief to Britain thus Britain Government must tries to pull out itself from this tussle and plan its policies by accepting the will of mass and by invoking Article 50 of Lisbon Treaty that is initiating formal mechanism for leaving EU.

Situation like Brexit never happens earlier so one cannot precisely lay down what is the impact of it on UK’s as well as on Indian economy. But industries associate with both economies must design their future plans and strategies by giving considerable value to changes which may bring by UK government and EU in near future. Thus by invoking the Article 50 of Lisbon Treaty earliest as possible British Government must remove the veil of uncertainty.

 

 References /Webliograpohy

  • What happens now the UK has voted Brexit – and what is Article 50? – Article By Matthew Holehouse
  • The Hindu – Published on June 24 2016
  • What Brexit means for India- Article By Ronak D.Desai

 

[1] http://www.firstpost.com/business/brexit-sensex-plunges-605-pts-at-close-7-key-developments-of-the-day-2854298.html

[2] http://www.livemint.com/Companies/CPQX5wTzjfyRuOVE429khN/Brexit-Tata-group-reviews-UK-business-strategy.html

[3] http://capitalmind.in/2016/06/brexit-need-know-impact-india/

[4] The Hindu –  June 24-2016

[5] supra

[6] supra

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