ISSN (Print) : 2249-1880

SAMVAD: SIBM Pune Research Journal, Vol XII, 42-47, December 2016 ISSN (Online) : 2348-5329

Mapping the Potential Impact of

Brexit on Indian Economy
Dr. Sana Moid*
Assistant Professor, Amity Business School, Amity University, Lucknow Campus, Lucknow,
Uttar Pradesh, India; sanamoid14@gmail.com

Abstract
Bold move of Britain to step out of the European Union came at a time when the global economy was actually in a bad shape
and growth predictions for 2016 had been marked down. ‘Brexit’ resulted in weakness, fragility and uncertainty disturbing
the markets. Even though Britain will remain a full member of EU for at least more than two years but exit negotiations with
the European Commission has started soon. Question addressed in the present study is how these developments are likely
to affect the Indian economy. In India, while Brexit is likely to cause slow growth, economic prospects remain relatively
doubtful due to the affect of factors like strong monsoon, effect of pay hikes and higher public capex. India is strongly
committed for factors like economic stability, while its basics were sound with "a very comfortable external position, a
rock-solid commitment to fiscal discipline and declining inflation.

Keywords: Brexit, European Union, FDI, Indian Economy, Trade, Uncertainty

1. Introduction 1.1 Objectives

• To understand the concept of Brexit and its relevance
Economic integration is an agreement between two or • To study the impact of Brexit on Indian Economy.
more economies for reducing or completely removing • To offer policy recommendations and suggestions for
tariff or non tariff barriers for free flow of goods and implementation.
services as well as for free and perfect mobility of labour,
capital or other mobile factors of production. There could 1.2 What is Brexit?
be five major forms of economic integration: preferential Brexit is a term coined for Britain’s referendum to exit
trade union, free trade area, customs union, common the European Union. Deal was announced by David
market and economic union. In a historic move, Britain Cameron on the date after he secured a deal with other
voted to leave European Union, leaving the world’s fifth- European leaders at a crunch summit in February. Irish,
biggest economy facing deep uncertainty about the growth British, and Commonwealth citizens (except citizens of
prospects and its attractiveness to investors, hurting other Gibraltor) who have been living in the UK, along with
economies in Europe and beyond. Analyzing the concerns Britons living abroad for less than 15 years, were able to
over impact of Brexit on India, the government showed vote. Government decided to hold the vote before the
confidence over the economy that it will not suffer any initiation of summer migration crisis that could stir up
long-term impact of Britain’s decision to leave EU and more Eurosceptic feeling among the British public.
that it is prepared for all eventualities. Brexit is used for “British exit,” that refers to the June
The new agreement with EU has paved the way for the 23, 2016, referendum whereby British citizens voted out
upcoming referendum in the UK about EU membership to exit the European Union. The move moved global
focusing on four areas: economic governance, markets, including currencies, causing the pound to fall
competiveness, sovereignty, and social benefits and free to its lowest level.
movement of people. Since 1973, with the UK joining EU, People who supported Brexit based their support
UK GDP per capita doubled.

* Author for correspondence

 Dr. Sana Moid

on a variety of factors like global competitiveness of Large companies, including original equipment
British Businesses, European Debt Crisis, concerns manufacturers (OEMs), were particularly against to
about immigration etc. Britain already opted out of the Brexit, with connection to EU markets, skilled labour
European Union’s monetary union means that it used and the influencing capability. EU regulations being the
pound instead of Euro – and the Schengen Area, meaning biggest reasons for staying in. Toyota was among those
that it does not share open borders with a number of highlighting the risks of Brexit.
other European nations.
This referendum on Brexit is also a platform of 2.4 Healthcare: Domestic and Foreign
discussion on: (i) reducing the involvement and
Demand could Suffer
improving economic governance for non-euro zone
Government, Bank of England and IMF all focusing
countries; (ii) improving competitiveness (specifically
on the economic risks of Brexit, the pharma industry
reducing regulatory burden); (iii) increasing national
is increasingly worried about the after effects. On the
sovereignty (instead of further European integration); and
regulation side, Brexit would bring more uncertainty
(iv) allowing more national control on the immigration
rather than benefits which is applicable for research
policy.
funding as well.
Table below presents the options available for UK after
2. Possible Impact Brexit.

2.1 Finance: Firms Fear Loss of EU Market 3. Impact on Indian Economy

London has been one of the global financial hubs, along
with. New York. Brexit has put position at risk, depriving Brexit was one of the biggest global macroeconomic events
almost UK-based financial firms of their passport to in June 2016. The decision of Britain exiting the European
conduct business anywhere in the EU. Inspite of developed Union (EU) took the world by surprise and shook markets
domestic financial markets, its size is confined by UK’s worldwide. This is clearly reflected in rebound the Indian
economic output of £1.9trn (US$2.7trn, about 3.9% of stock markets showed post referendum results. There has
world GDP) and a population of about 64m (around 0.9% been a shift to safe options like gold, yen and US treasury
of the global total). for the investors. According to the market analyst Indian
economy can suffer significant impact in the short term.
2.2 Retail: Consumer Uncertainty to Depress In India, as Brexit is expected to cause a slow growth,
Sales economic prospects remain relatively sanguine due to
Leaving EU can create economic shock by creating a local factors like a strong monsoon, pay hikes and higher
situation of uncertainty. Consumers will retrench and public capex. In order to study the impact, it’s important
consolidate income and expenditure as they continue to to highlight the India –UK connection.
witness and wait for the outcome of negotiation. Falling
value of sterling will increase the prices in line with the 3.1 The Good Impact
import cost. For retailers there will be more shocks. The Traveling to UK to get cheaper: One thing that has Indians
supply chains and agreements evolved on an even playing are happy about is the fact that their travel plans to the
field with partners in the EU will need to be revised as UK can get comparatively cheaper. On the other side, as
the goal posts begin to move. Regulatory requirements of the pound loses value, Britain may reinstate in their travel
safety, quality and consumer protection that are currently plans until there is clarity and stability in the currency.
consistent across member states will diverge. Britain is also expected to promote the tourism sector
as Tourist visas may get cheaper and tour operators and
2.3 Automotive: Brexit is Worrying for Car hotels may announce attractive packages.
Firms Cheaper study in UK: Brexit may made life easier for
The Brexit scenario is certainly worrying for many students willing to go to UK for studies. The pound
in the UK automotive industry on a business level. is at 31-year low against the dollar and slumped 8% to

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 Mapping the Potential Impact of Brexit on Indian Economy

Table 1. Options for the UK outside the EU

Model Pros Cons
EEA – the Norway model Belong to Single Market. Required to implement Single Market policies, but
Able to negotiate trade deals independently have no saying in setting the rules of the Single Market.
of EU. Must follow rules of origin for exports to the EU and
subject to EU anti-dumping measures.
Must contribute to the EU budget.
Bilateral agreements – the Free trade of goods along with free movement Bilateral agreements require Switzerland to adopt rules
Swiss model of people with EU. of EU, but no representation in EU Decision making.
Ability to negotiate trade deals independently. No agreement with EU on trade in services.
A la carte approach permits opting out of EU Pay fee to participate in EU programmes, but contribu-
tion likely to be lower than if in EEA.
EFTA Free trade in goods with the EU. No freedom of movement of people with the EU.
Able to negotiate trade deals independently of No access to EU markets for service providers.
the EU. Goods exported to the EU must meet EU product
Not required to consider EU economic poli- standards.
cies and regulations.
Also there is no obligation to contribute to the
EU budget.
WTO Able to negotiate trade deals independently of Trade with EU subject to clause of MFN tariffs and any
the EU. nontariff barriers complying with WTO agreements.
Not required to adopt economic policies and No freedom of movement of people with the EU.
regulations of EU. No right of access to EU markets for service providers.
No obligation to contribute to the EU budget. Goods exported to the EU must meet EU product
Standards.

rupee helping the students to save on school and tuition • Because of fall in value of Pound sterling, those
fees, living expenses, and more. Overseas education importing from UK will gain. Indian export houses
consultants are expected to cash in the opportunity. operating in UK may also gain.
Jobs: It is expected that Indian immigrants will be better • Brexit would weaken global growth leading to decline
position to get jobs in UK. It is said that Brexit can be in commodity prices. This can enhance both the
a plus point for India as labour comes at a lower cost relative and absolute appeal of India.
unlike from the EU. Businesses in UK preferred locals • Lower commodity prices will help the macro
first and then Europeans. However, now, Indian workers, fundamentals: fiscal deficit, current account deficit or
along with other Commonwealth countries like Pakistan, inflation giving government more power to pump up
Bangladesh, are in line to get preference. the investment cycle.

Positive impact could be summarized as: 3.2 The Negative Impact

• India being more of an importing country than an Markets: Uncertainty in the short- and medium- term
exporting nation, the overall effect may turn out markets is likely to continue as Britain works out how
positive if dollar doesn’t rise up much against rupee. the Brexit decision will pan out. Global equity markets
• Because of lower pound value, Indian companies are expected to remain volatile, the effect of which, will
may be able to acquire many high value assets. be seen in India. Assocham has predicted that Brexit will
• As investors look around the world for safe options in result in strong ripples in the Indian markets calling for a
these turbulent times, India stands out both in terms contingency plan by the government and Reserve Bank
of stability and of growth. of India.
• Brexit might give boost to trade arrangements Indian companies: Indian companies based in the UK
between India and the UK. are preparing for reevaluation of their businesses in
• Britain will now be free for a bilateral trade pact with the country as Britain decides to break away from the
India.

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 Dr. Sana Moid

EU including companies like Tata Sons, Bharti Airtel, in the UK and EU, there is a chance that the companies
Motherson Tech Mahindra, pharmaceutical companies, lower their IT budgets (a discretionary spend). This
and several others. would have affected on the domestic software companies.
Trade: The India-UK bilateral trade is of about $14 billion. Pharmaceutical: United States is India’s biggest market for
Because of Brexit, new trade policies from the UK and its Pharmaceutical exports, while EU accounts for 10-13%
negotiation for new trade relations with the EU will affect of India’s total pharma exports. Share of UK in India’s
the trade it does with India and the rest of the world. A pharma exports is about 3-4%. The pharma companies do
slowdown in the British economy as a result of Brexit will not really expect a big hit following the Brexit and have
also hit India-UK trade. indicated a limited impact of Pound depreciation. Further,
the companies pointed out that the rules, regulations and
3.3 Indian IT – Boon or Bane? product registrations are different for UK and EU and
The affect on IT sector doesn’t appear to move other hence any adverse impact on the sector can be ruled out.
way decisively. On one side, short-term volatility and
currency fluctuations are expected to have an impact 4. Findings and Conclusion
on IT companies. The shares of Infosys, TCS and Tech
Mahindra are all little bit down (~3-5%), mostly caused While uncertainty depends largely on the future of
by the fluctuating pound. Brexit, it is important to see that if a ‘Brexit light’ option
is negotiated, it would necessarily entail accepting free
Negative impact could be summarized as below: labour movement from the EU. In such a situation, it
• India will have to adjust to a changing world order. remains to be seen whether there will be a significant
• Sensex and Nifty to tumble in the short-run. difference in immigration from what is now considered
• Foreign funds are likely to move out as the world ‘business as usual’.
outside thinks that investment in India is risky. The main question is: What will be the consequences
• Due to reduction in the value of Pound sterling, of Brexit for India? The Brexit referendums are considered
Indian exports towards UK will suffer. Cheaper rupee as the biggest geopolitical event of the year and have
will make Indian exports, including IT and ITeS, ramifications way beyond just UK leaving EU. Brexit can
competitive. Indian import companies operating guarantee lower commodity and crude prices for a longer
in UK may also suffer loss. Also note that, India duration. After the 2015 crash, commodities have already
is exporting more than what it is importing from entered the bull market on the back, stabilizing Chinese
Britain. Economy and demand revival. CPI inflation has been
showing spike since many months curtailing RBI’s ability
Sectors having the chance to face the heat are: to continue with the downward spiral in policy rates to
Auto components: India is one of the major suppliers spur investment and growth.
of auto parts to the EU region. The region accounts for Looking at Brexit from India’s point of view, Brexit can
around 36% of India’s total auto component exports, weaken global growth and lead to a substantial decline
while the share of UK is about 5%. The UK Passenger in commodity prices that can enhance the absolute and
Vehicle market is mostly export oriented and segment relative appeal of India. India can suffer in terms of:
has close connections with EU automotive market. The Currency: Brexit can increase pressures on the rupee.
anticipated slowdown in UK and the EU region will have While rupee has depreciated by a lower extent against the
a dampening effect on the sector. US dollar compared to other emerging market currencies
Information Technology: India is one of the largest exporters that could well be because of RBI’s intervention to stem
of IT-enabled services. This sector has significant exposure volatility. While on the positive side, Brexit has driven
to the European market especially UK. UK accounts for away fears of US Fed rate hike and could lead to lower
about 17% of India’s total IT exports. India’s IT exports commodity prices.
contribution to other European countries is at about 11%. Equities: It is obvious that the vote to leave EU came as
The IT companies are expected to face the heat in light of a surprise, which explains this sharp drop in risk assets.
the Brexit. Given the risk of further moderation in growth It is speculated that Indian companies won’t be affected

Vol XII | December 2016 SAMVAD: SIBM Pune Research Journal 45

 Mapping the Potential Impact of Brexit on Indian Economy

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