Eye on trade, economy: What Brexit means for India

In the run-up to the UK’s European Union vote, India maintained it was an internal affair of the British but not before saying that Britain was the gateway to Europe. With the British voters stunning the world by becoming the first country to leave the EU, here is it what it means for India.

In the run-up to the UK’s European Union vote, India maintained it was an internal affair of the British but not before saying that Britain was the gateway to Europe.

Traders from BGC, a global brokerage company in London's Canary Wharf financial centre react as European stock markets open early June 24, 2016 after Britain voted to leave the European Union in the Brexit referendum.(REUTERS)

With the British voters stunning the world by becoming the first country to leave the EU, here is it what it means for India:

Jolt to global economy

Brexit could be the single biggest challenge to global economic recovery. The UK accounts for 18% of the European Union GDP. The bloc stands to lose around a sixth of its total economic output after Thursday’s vote.

The European Union and UK are crucial to the Indian growth story. A fifth of India’s foreign exchange reserves come from export earnings and other inflows from the European Union and the UK. India is also the third biggest investor – after the US and France -- in the UK, with 800 companies doing business in that country.

Trade winds

India’s trade negotiations with the EU have always remained troublesome. With Britain freed of strict EU regulations, it will be easier for India to talk business with world’s fifth largest economy. India and the EU have held marathon talks but have still not reached a free-trade agreement.

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Indian firms need to re-strategise

Many Indian firms use the UK as a base for their operations and sales to the rest of Europe while employing 100,000 people in Britain alone. With the UK out of the EU, Indian firms will have to re-think their strategy. Manufacturing firms, in particular, will face tariffs when they export from the UK to the Euro course, a lot depends on how UK rebuilds trade ties with the EU and other countries.

Nearly a third of Indian investment in the UK is in the information technology and telecom sectors. 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.

Read: Britain votes to leave EU in historic referendum, markets plunge

Impact on automobile industry

The leave vote could hit Britain’s resurgent car industry. Britain’s biggest carmaker Jaguar Land Rover is owned by Tata Motors. A recent Reuters report, citing sources, said JLR estimated its annual profit could be cut by 1 billion pounds ($1.47 billion) by the end of the decade if Britain leaves the European Union.

It is estimated that 75% of cars assembled in Britain are exported and almost half of them are sold to other EU countries. There are concerns that the exit vote could bring in new tariffs that would make UK-made cars less competitive.

Financial market volatility

Within minutes of Friday’s results, markets across the world took a hit. The pound plunged to 31-year low while the rupee was down almost 96 paise.

India’s benchmark Sensex took a big 1,058-point plunge in early trade, eroding nearly Rs 4 lakh crore from the investors’ wealth held in stocks.

The ripple effects were all to see and are expected to be felt in the coming days across the world. India will need to guard against this volatility.