To be or not to be, was the biggest question. The British people, surprising the world, chose for the exit and the historic decision of Britain leaving the European Union has had a global impact and India has been affected in multiple layers.
If we consider India’s point of view, Brexit is actually quite important for India. This is because besides sharing trade relations, the European Union has been, or rather is, our country’s largest single export market. The EU has a population of around half a billion, and its economy is worth $16 trillion, which is equivalent to one-fourth of global GDP.
According to a Reuters report, the British pound fell as much as 10 percent against the US dollar on Friday on fears the decision could hit investment in the world’s fifth-largest economy. This was more due to the threat that London, playing the role as a global financial capital, could experience months of political uncertainty. The euro slid 2.0 percent against the US dollar. The pound’s decline was the worst in the history. As a result, the INR was also hit. The Indian rupee fell to 68.14 against the dollar, its lowest level since February this year. However it clawed back to 67.79 in afternoon trade.
India need not be excessively worried
However, economists and financial experts are of the opinion that India need not be excessively worried about the development as the transition of UK leaving the EU is going to be slow. Moreover the details are yet to trickle in.
Let’s have a look at what might really happen in the coming days
Investment plans may be deferred
Post the Brexit, there might be an uncertainty upon the performance of merchandise and services exports. There is a chance of delay in the concretisation of investment plans which may partly moderate the expected benefit of the recent FDI reforms that took place in this country affecting the INR. Chances are that there will be some adverse spillover on India in the very near term through financial linkages along with rest of the world. However, Indian policymakers have enough experience and firepower to ward off unnecessary volatility.
Speaking of numbers, in the 2016 financial year, the bilateral trade between India-UK was worth $14.02 billion. While our country exported goods and services worth $8.83 billion, its imports from the UK were at $5.19 billion.
Uncertainty for the IT sector
Reports from Nasscom say that, as much as 30 percent of the Indian IT industry’s $100 billion revenue comes from the European market. This is the second largest for our country’s IT-BPM sector. Its initial analysis says in the near term a likely decline in the value of the British pound could render many existing contracts losing proposals unless there are renegotiations.
Bad for automobile sector
The EU today accounts for 35-40% of auto component exports from India. The market volatility or any slowdown in the region due to policy uncertainty may create an impact on the INR.
Rupee may hit new low vs. dollar
India’s finance ministry officials sought to allay investor concerns of the impact of “Brexit” on the Indian economy. India has the firepower to withstand Britain’s exit from the European Union and is prepared for all eventualities, they said. India is amongst the better performing foremost of world’s economies, with a GDP growth of 7.6 percent for FY2016. The country’s current and fiscal deficits are being narrowed and inflation weakened. However, the INR will be under “considerable pressure” as against the dollar and allude to it as a major concern in coming future.
The brighter side
Indian bankers however feel that Brexit will offer our country better market access both to the EU and UK, even as there will be some market volatility. As risks begin to set in, there would surely be a decline in financial markets and our economy would obviously face this impact along with other nations. But as trade strategies are reworked there could be potential rewards in the form of better market access for India to the EU and UK.