on the brink

As Britain votes to leave or remain in the EU, here’s how Brexit could affect India

The prospect of Britain leaving the European Union is worrying investors.

On Thursday, the United Kingdom will participate in a referendum to decide if the country should leave or remain in the 28-member-strong European Union. The EU is an economic and political partnership that allows member countries to operate as a common market with largely standard trade regulations.

The EU generates one-fourth of the global Gross Domestic Product, or GDP, but Britain has always been one of its sceptics. British Prime Minister David Cameron wants Britain to stay, but half the members of his own Conservative Party are rallying behind the “Vote Leave” camp, arguing the vast amount of money that their country pays the EU every week in levies could be better used to develop Britain instead. They also claim that immigrants from European countries who settle in Britain thanks to its membership of the EU are hurting the employment prospects of locals.

Whichever way it goes, Brexit, as the vote is being called, won’t just affect the EU. If Britain were to leave the EU, the impact would be felt on trade and businesses in India too.

Breaking bad

At present, though India’s trade with the UK has been shrinking for the past few years, its total trade with the island nation is still valued at $14.02 billion. These volumes may be hit if Brexit goes through since India will have to renegotiate its trade terms separately with Britain and the EU.

Interestingly, India has a larger trade surplus with Britain than with the rest of the EU. In 2015-'16, for instance, India's trade surplus with the EU, barring Britain, was only $0.6 billion, as compared to the $3.6 billion trade surplus with Britain.

The uncertainty over the future in case of Brexit will put pressure on the British pound, which will end up affecting not just the rupee but also the stock markets in the short term.

“A risk-off trade may lead to some money going out of emerging markets, including India,” Sashi Krishnan, chief investment officer, Birla Sun Life Insurance told the Economic Times.

India makes more investments in Britain than in the rest of the EU put together, according to a country brief by the Ministry of External Affairs. Brexit could jeopardise those investments in the UK as it may hurt the operations and earnings of these companies.

According to the Economist, more than 800 Indian firms now operate in Britain as being based in London provides them with easy access to the rest of Europe. In the event of Brexit, these companies may find it more difficult to directly access markets in mainland Europe.

"This will mean reworking business plans,” Mint quoted credit rating firm Care Ratings as saying.

Add this to the concerns that currency instability in the event of Brexit could also impact the earnings and investment of Indian companies in the UK in the short term.

Back home, major Information Technology companies like Infosys and Tata Consultancy Services also face risks because of their dependence on Europe for technology exports. According to the Mint report quoted earlier, companies like Tech Mahindra, HCL and Infosys make about one-fourth of their total revenues from European countries, including Britain.

Do Indians care?

A report in Outlook magazine said that Indians living in the UK weren’t completely sure about their preference in this referendum, but most agreed that the “Vote Leave” camp should put curbs on European migrants into the island nation so that those already in Britain did not have to fight for jobs.

There is also speculation that an exit from the EU could result in Britain tightening immigration further. Over the past years, immigration reform in the UK has already led to a steady drop in the number of Indian students enrolled in the UK. Around 18,000 Indian students are currently studying in UK universities and this number may fall if Brexit leads to tighter immigration norms.

Disintegration of Europe?

However, there are some who believe that Brexit could be potentially good for India. Policy analyst Anupam Manur wrote on the NDTV website that if Britain left the EU, Britain’s economic position could force it to improve its trade ties with India in order to hedge against China’s explosive growth. “Europe would be looking at the fastest-growing major economy in the world and would need to quickly resolve the pending trade issues with India in order to develop a lasting relationship,” Manur wrote.

Apart from this, some market watchers are worried that Britain’s exit could actually open a can of worms as other countries might volunteer to opt out of the EU too.

“I think the real worry on Brexit is not so much about the impact on the UK, which is of course there, but it is about the possible beginning of the disintegration of Europe, which is a much bigger worry,” Akash Prakash, CEO & MD, Amansa Capital told the Economic Times.

Correction: This article has been corrected for a factual error as it said the

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