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Why Brexit makes India Inc. frown

Neeraj Thakur | Updated on: 15 June 2016, 12:55 IST

The recent stock market tumble has brought one term onto the forefront in India: 'Brexit': That seems to be the new fall guy. But seriously, what is Brexit? And how does it matter to the Indian economy?

Brexit, as most know by know, stands for Britain's possible exit from the European Union (EU). Surely, that will have serious implications for the future of the 28-nation club that has governed the economic interests for the European economies since 1993.

In January 2013, Britain's Prime Minister David Cameron promised if his Conservative Party was re-elected to power in May 2015, he would renegotiate Britain's EU membership and hold an in-out referendum by the end of 2017.

Cameron's campaign was based on the rising perception of Britain not benefiting enough from being a part of the grouping.

The speculations regarding 'Brexit' have kept Asian markets volatile as investors from the region are worried about their investments in the Eurozone.

Would there be a direct impact on India from the decision of Brexit?

Matthew Lloyd/Bloomberg via Getty Images

The United Kingdom is seen as a gateway for Indian, Japanese and Chinese companies to the European markets. Because UK is part of the EU, Indian companies have made heavy investments in the country and expanded their businesses into other European countries.

Impact on India

The biggest worry to Indian companies is a fall in global trade due to Brexit.

In its latest economic outlook forecast, the Organisation for Economic Co-operation and Development warned: "a decision to exit would result in considerable additional volatility in financial markets and an extended period of uncertainty about future policy developments, with substantial negative consequences for the United Kingdom, the European Union and the rest of the world".

A slowdown in demand from the world's developed economies will mean reduced business opportunities for Indian companies.

Indian exports have been falling for the last 17 months. A decline in global trade would mean India's exports sector will have a bad year ahead.

Apart from exports, companies with operations in the UK will also be impacted as the UK economy contracts due to withdrawal of support to its economy under the EU agreement.

The pound has weakened against major currencies since the EU referendum was announced, and has become increasingly volatile leading to fluctuations as the date of voting approaches.

Indian companies with stake in the UK

There are currently more 700 Indian-owned small to large-sized companies in the UK, collectively employing more than a lakh persons.

Some of the major Indian companies that have a huge stake in the UK and European markets are: Tata Motors (Jaguar and Land Rover), Tata Steel, Bharat Forge, Motherson Sumi Wockhard, Cipla, Torrent Pharma, Cummins India, IPCA Labs, Kitex Garments, Zodiac Clothing, etc.

India has emerged as the third-largest FDI source for Britain. A number of Indian companies from IT and Pharmaceutical sectors use the UK as a hub to gain access to the rest of EU.

With Britain being part of EU, Indian companies using it as a hub for exports do not pay additional costs. Once Britain is on its own, the cost of trade for these companies may go up. This will mean a hit on the profits of these companies. Any changes in the way business is to be done in Britain will force the companies to re-arrange their strategies, which may not be a good thing in the short to medium term.

First published: 15 June 2016, 12:55 IST
 
Neeraj Thakur @neerajthakur2

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