Brexit impact on India: Can opportunities outweigh risk?

On March 29, 2017, the UK government formally initiated the process of the country’s exit from the European Union (EU). While this negotiation might go in different directions, the general hope is that the net effect of Brexit might transpire to be positive for India.

Key opportunities
Free Trade Agreement (FTA) - After losing access to EU single market, the UK would want to develop trade relations with emerging markets from around the world. India, with its strong economic fundamentals and a large domestic market, is in a better negotiating position. India’s high proportion of skilled working-age population and high growth rate will be of particular interest for the UK. Potential sectors to benefit from an FTA between the UK and Indian include textile, machinery, engineering goods, information technology and banking.

Service sector - India which is laying greater emphasis on innovation and high-end works, could emerge as a major source of high tech exports for the UK. The country’s BPO market could see strong growth prospects if FTA between the two countries was to foster easy visa regime and greater market access for Indian firms.

Easy market access - India is the major Foreign Direct Investment (FDI) source for the UK because many Indian firms have used it as a gateway to Europe. With the UK moving out of EU, it might not be as attractive to Indian firms as before. Intuitively, the UK government would not like to miss out Indian investment and will thus try to attract Indian firms by offering more incentives such as tax breaks, easy regulations and opening up markets

Cheaper imports - The UK’s currency is expected to remain weaker, so it would be less expensive for Indian firms to import from their subsidiaries in the UK.

Education – Brexit opens up substantial opportunities for the Indian education sector. Educational institutes in the UK might offer more incentives, which could essentially make education in that country less expensive. Importantly, in the post-Brexit world, Indian students studying in the UK might get a more level playing field compared with other EU students who were until now enjoyed an advantageous position.

Key challenges
Political risk - As the UK formally begins its separation from EU, it has been widely deliberated that the UK leaving EU might compel several other European economies to consider referendums and renegotiation of terms with EU. Apart from regional uncertainty, the changing dynamics can potentially reverberate to reach Asia and thus India.

Global growth impact - The potential of a significant weigh down on global growth once the new trade terms take shape is real. While India currently enjoys improved macroeconomic stability, the country cannot be isolated from the impact from global and regional subdued growth.

India’s FTA negotiation with EU, which saw an impasse on the issue of bilateral investments, might now need a renegotiation of FTA with the union. Additionally, a separate trade agreement with the UK might also need to be worked on.

Immigration norms - There are expectations that the immigration rules for Indians into UK might take on a relatively favourable stance. While this might imply positive news for Indian companies in the UK to expand workforce, companies with operations throughout EU will now have to reassess their workforce mobility, along with expansion plans and operations.

Currency weakness and unhedged exposure - According to reports, deepening recession risks and unhedged exposure the British Pound on account of Brexit might impact IT demand, affecting revenues of Indian IT companies in the UK by almost 10 per cent. While The Indian Rupee is primarily anchored to the Dollar, the currency is not completely devoid of volatility, necessitating RBI’s intervention when applicable.

Contingency planning - Reports suggest that, currently, over 800 Indian companies in the UK employ over 1.1 lakh people. The top-growing Indian companies are said to have generated over GBP 26 billion in turnover in 2015. Additionally, the number of Indian companies in the UK is growing at more than 10 per cent given that Britain for long, has served to be India’s point of entry into Europe. While this might be an early phase to conclude on the empirical impact of Brexit on India, is imperative, the above considerations demand a thorough assessment of evolving developments and the prioritisation of contingency planning.

- By Jajit Bhattacharya, Partner, Strategy and Economics at KPMG in India. All views and opinions expressed herein are those of the author and do not necessarily represent the views of KPMG in India.