BREXIT: Impact on Indian Corporates

The BREXIT referendum on 23^rd June 2016 was a big shock for the corporates all around the world. A lot of strategic changes are expected especially from countries with significant trade relationship with the European nations. India shares very strong business ties both with the UK and the European Union and thus it is important to understand the vote out effect on the Indian business environment. This would then uncover the story of the Indian corporates who are deeply impacted with this major global event.

I. Introduction

• The European Union (EU) is an economic and political union of European countries and currently has 27 member countries.

• When it first started in 1958, it was known as European Economic Community (EEC) and had just 6 member countries.

• The UK joined officially in 1973 along with Denmark and Ireland. At that time, 67.2% of the people were in favor of joining EEC.

• On Feb 7, 1992, EEC was officially named as EU. All but 9 members got a common currency Euro on January 1 1999.

• By 2013, the European Union had 28 members, with many more (Herzegovina, Bosnia, Kosovo, Albania) vying for entry but in UK citizens were rallying to exit the EU.

• The rising popularity of UK Independent party and its focus on EU’s high membership fees, immigration policies and stringent regulations prompted the then Prime Minister David Cameron to promise a referendum.

• A referendum was held on 23^rd June 2016 and finally 52% of the 30 million voters opted for Britain (the UK) Exit or BREXIT from the European Union.

II. India's Trade Relations with the UK

• The Sensex dropped like a stone as soon as the referendum results were announced.

• The Indian corporates did their business to mainland Europe through their offices in the UK while enjoying a single common European market.

• Indian Prime Minister Mr. Narendra Modi had said, “As far as India is concerned, if there is an entry point for us to the EU, that is the UK”. But with the BREXIT, the entry point has been blocked.

A. View at the statistics of bilateral trade relations

III. Significance of BREXIT on the Indian Business Environment

A. Currency fluctuations: Most immediate effect. British Pound depreciated by around 10%, euro depreciated by around 2% vs INR creating an immediate impact on companies exposed there.

B. Impact through commodities: With global uncertainties, metal, oil have taken a beating and prices have come down.

C. Slowdown in Europe: Indian companies had been following the global practice of making investments in the UK to establish itself as a European Holding company. The questions regarding entire trade negotiations and tariff barriers still looms over companies having facilities in Europe and UK.

IV. BREXIT Impact on Indian Corporates: Benefit or Burden

A. Companies in the IT/ITES sector: Disadvantage

• The US and the Europe had been the top destination for software services exports from India. Close to 25% of the exports (Figure 3) are to Euro zone with the UK alone accounts for 8%.

• The longer term impact would come through the volumes of trade.

• Another hit is through the administrative channel because there would be more protectionist measures.

• With BREXIT, many of them would have to open offices in Europe and that could further add to the cost and uncertainty.

B. Companies in the Auto and Auto component sector: Disadvantage

• Close to around 25-30% of the exports go there and people are supplying largely to the OEM market there.

• A positive that the companies see today is that to get an approval from an OEM, it takes years and as such, the switching cannot be very easy.

• over a period of time if the economy slows down and auto volumes in either EU countries or the UK comes down to a large extent then there would be a negative impact.

C. Companies in the Pharmaceutical sector: Advantage

• Total Indian pharma exports are US$ 13 billion worldwide, out of which EU accounts for US$ 1.51 billion (UK’s share was US$ 469 million).

• The future of Pharma sector largely depends on the regulatory policies, trade policies and investment to healthcare by the UK in near future.

• The big firms (Sun Pharma, Cipla, Lupin etc.) may still want to open new facilities in the UK based on their past experiences to absorb new and changing regulations and also with the belief that the country is expected to pump more money to its National Health Service (NHS) budget.

D. Companies in the Textile Sector: Disadvantage

• The EU is India’s largest apparel market and accounts for 37% of our export.

• India is already seeing rising competition from low cost players like Bangladesh and Vietnam.

• The EU has also given the ‘zero duty’ benefit to Pakistan under the Generalized System of Preference Plus (GSP+ effective from Jan 2014) while Indian textile exports continue to pay 9.6% duty.

• The UK holds the biggest share of exports among the EU countries and even after leaving the union, it might also want to extend the zero duty benefit to Pakistan. So, there seems to be tough times going ahead with currency depreciation and volume growth slowing down.

• There seems to be tough times going ahead with currency depreciation and volume growth slowing down.

E. Companies under the TATA Group: Disadvantage

• Tata Group owns 19 companies in the UK. It employs close to 69,000 UK people (2/5^th of the total employment generated by the Indian firms) and contributes around £ 8 billion to the UK GDP.

• Nearly 70% of the total Tata Group revenue (US$ 109) in FY ‘16 is from overseas market mainly the US and the UK.

• The group of companies registered a steep decline in the revenue on the day of announcement of BREXIT.

• The group is also expecting higher tariff across UK markets for its products.

• The automotive unit of the group, Jaguar Land Rover (JLR) will face a burden of US $1.47 billion in the next 4 years due to a 4% imports on components and 10% levy for the vehicles sold in EU nations.

• With BREXIT Tata Steel would find it difficult to influence regulations of environmental controls and various anti-dumping measures which impact its UK operations.

V. Conclusion

• The aggregate impact of BREXIT on Indian companies is expected to be quite profound.

• Although the negotiations between the EU and the UK still have to be figured out, Indian companies especially with considerable European exposure, are sure to be deeply impacted.

• In the immediate short run, there would be a major slowdown across the continent.

• With the passage of time, in the mid and long run, effective strategic moves and globalization effect would play themselves out well and the effect would turn out to be good for many Indian corporates, thus strengthening the economic ties with both the UK and the EU.

References

[1] FICCI (July 2016): “BREXIT: Views and Suggestions from India Inc.”

[2] Dun & Bradstreet (2016): “Brexit’s Impact on India”

[3] Abhijit Sarkar (August 2016), “Spoils for Brexit for India”, Economic and Political Weekly

[4] Ministry of Textiles, Government of India (2016): “India’s Textiles and clothing exports”

[5] Ajita Shashidhar (January 2016), “Leading from the Front”, Business Today

[6] Department of Health, Govt of the UK (2015): “Annual Report and Accounts 2014-15”

[7] EuroStat (March 2016), “EU trade in goods with India”, EU-India Summit

[8] RBI Bulletin (Jan 2016), “Survey on Computer Software & Information Technology Enabled Services Exports: 2014-15”

[9] Sandeep Singh (June 2016), “Brexit Referendum”, The Indian Express

[10] Yogita Limaye (2016), “EU referendum: Will India benefit from Brexit?”, BBC News

[11] Tata Leadership with Trust (2016), “Annual Report 2015-16”