India Inc will be hurt, Indian immigrants may benefit but the overall Anglo-Indian relationship will decline with Brexit. Britain’s possible withdrawal from the European Union following a referendum in June 23 is a mixed bag for India, but likely to be a net negative.
If the “leave” campaign wins (and it is leading now), the immediate impact will be on the world’s capital markets – and India will fare poorly. Already, global capital is seeking safe havens as it fears a fall in the value of the sterling and the euro. The nonconvertible rupee will be expected to lose value and so will be dumped – even though both capital flows and the exchange rate are likely to recover.
One currency the rupee will gain against will be the pound. An informal survey of Mumbai forex traders comes up with an expectation of a 15 to 30% drop in sterling’s value if the “leave” campaign wins.
The medium-term impact will be on Indian firms which have invested in the United Kingdom. India is the third largest source of foreign investment in Britain. Many of these firms use the UK as a base for their operations and sales to the rest of Europe.
Manufacturing firms, in particular, will face tariffs when they export from the UK to the EU. “Tata Motor Jaguars would face a 10% tariff when being exported from the UK to the continent,” says Charles Grant of the London-based Centre of European Reform.
Watch | Why India doesn’t want Brexit
CLSA has pinpointed other Indian firms that will suffer: Tata Steel and auto component makers such as Bharat Forge and Motherson Sumi. Motherson, for example, derives 60% of its UK sales from exports to the EU.
For the information technology sector, argues Nasscom, Brexit will be “clearly negative in the short term and harder to discern in the longer term with either scenario having some positive and negative points”.
Many Indian IT service firms such as TCS, Infosys and Wipro have a large UK footprint. The fall in sterling will shrink the sector’s earnings in the UK, roughly 17% of their global earnings.
But many also use the UK as a base to provide services to other European countries. Though services will be less affected by Brexit, some may have to move offices and personnel across the English Channel.
Nearly a third of Indian investment in the UK is in the IT and telecom sector. If some of this has to migrate to the continent along with the manufacturing firms, Indian investment into the UK will be diverted to the EU.
Going by Brexit campaign rhetoric, a UK-EU divorce could actually boost Indian migration to Britain. Since it joined the EU, Britain has deliberately given preference to European Union migrants and shut down migration paths for Commonwealth and other non-EU countries.
Britain saw about 70,000 migrants a year from the Commonwealth through the 1970s, mostly from India. Restrictions imposed afterwards saw, by the early 1980s, Indian migration fall to 18,000 a year. By the 1990s, less than 5,000 a year were becoming British citizens. The hunt for tech workers and highly skilled migrants in the 2000s pushed the figure up again but the numbers kept below 20,000 a year.
Obligated by treaty, the UK left its borders open to other EU citizens. Since the original EU member-states were of comparable economic wealth, this did not mean much. When the EU included the poorer countries of Eastern and southeastern Europe, this changed. Between 2004 and 2009, some 1.5 million EU citizens migrated to the UK.
These EU migrants, epitomised by the “Polish plumber”, combined with the global financial crisis laid the basis for the rise of the anti-EU UK Independence Party which, in turn, forced Prime Minister David Cameron to promise a referendum on the UK continuing in the EU.
The Ukip’s supporters tend to be opposed to migrants, but its leader Nigel Farage has been more nuanced. He has argued that a Ukip government would treat immigrants from within and without the EU on an equal footing. This line of thinking, echoed by many Brexit supporters, argues that the Commonwealth represents an economic and political alternative to the EU for British interests.
Farage has gone as far as to say he would prefer Indians to continental Europeans. In an interview he said, “I have to confess I do have a slight preference. I do think, naturally, that people from India and Australia are in some ways more likely to speak English, understand common law and have a connection with this country than some people that come perhaps from countries that haven’t fully recovered from being behind the Iron Curtain.”
Boris Johnson, the former mayor of London who has challenged Cameron from within the Tory Party on Brexit, had similarly complained against the sharp decline in Indian students in the UK and sought to reverse the government’s policy of denying them post-study work visas.
Johnson has also pushed for a renewed Commonwealth-centred foreign policy but his biggest immigration suggestion -- a visa bloc that encompasses the UK, Canada, Australia and New Zealand – does not include India.
The truth is that even in the case of Brexit, the UK will continue to tighten its borders against all migrants – because the majority of the UK electorate are opposed to migration.
While EU citizens would no longer have priority over Commonwealth migrants, the general hostility to migrants would not change no matter Thursday’s vote. As The Economist commented, “Yet it is politically unrealistic to believe that Britons who have just voted to leave the EU partly to curb uncontrolled migration from eastern Europe will want to welcome many more migrants from places like India and Africa.”
Though the Brexit campaign has argued for a revitalised Commonwealth as the alternative to European integrity, a UK in splendid isolation would have a smaller profile in Indian foreign policy.
Foreign minister Sushma Swaraj explained, however indirectly, why. “Britain is India’s gateway to the EU,” she said, while insisting Brexit was a sovereign decision on which New Delhi had no opinion.
This underlines the fact that one of Britain’s key foreign policy utilities for India has been to serve as New Delhi’s lobbyist within the EU. Because of their close economic ties, London’s continuing influence among smaller South Asian states and a new strategic closeness between India and the United States, it is generally true that there is not much space between Indian and British foreign policy.
There are exceptions. For example, the two are at loggerheads over the Taliban in Afghanistan as the US military withdrawal from that country gathers pace. But London has been supportive of Indian policies in Bangladesh, Nepal and the Maldives.
In the last case, the UK helpfully allowed opposition leader Mohamed Nasheed to leave a Maldivian jail and go to London for medical reasons – helping India move closer to stabilising the political situation in Male.
While India has close ties with other EU countries, notably Germany and France, it tends not to see them as being able to represent its views within the EU. Partly this is historical legacy, but it also reflects a belief that Britain thinks in a more realpolitik fashion than many European states which New Delhi finds frustratingly focussed on human rights and other post-modern concerns.
This has been under pressure the past few years in any case. The UK’s unwillingness to work with the EU has meant that its voice in Brussels has been proportionately smaller than the size of its economy. Other countries, particularly Germany and Poland, have offered to take up the same role within the EU as the UK has traditionally played. A Polish diplomat once counted the nearly dozen EU countries, mostly in Central Europe, as well as Warsaw’s close ties with Berlin, as part of a hardsell of his country as India’s representative within the EU.
Obviously, in case of a Brexit, the UK would no longer be able to play this role for India, drastically reducing its utility for New Delhi.
Combined with India’s ability to talk directly to Washington, the almost lack of any political coherence within the Commonwealth and an increasing sense in New Delhi that Britain’s clout in Asia is now minimal, there would be little of substance in the bilateral strategic partnership announced in 2004. As one British diplomat ruefully admitted, “As far as hard power goes, our army is now smaller than Nepal’s.”
While an older generation of Indians still think that a UK outside the EU would automatically mean stronger bilateral ties, the reality would almost certainly be different.
New Delhi’s statement on Brexit indicated what India thought. As Ian Bond of the Centre for European Reform wrote recently, “the major countries of the Commonwealth” have all indicated they preferred the UK to remain in the EU.