Impact of Brexit on Indo-Britain Relationship

The Brexit referendum on June 23, 2016 was a phenomenal global development. The decision of Britain to leave the European Union and voters voted in favour of Brexit signifying Britain’s exit from the European Union. Voters in the UK have decided to leave the European Union by a margin of 52% to 45%. In coming months, British and European leaders will begin negotiating the terms of Britain’s departure. Experts believe that the global economy is in a situation to face the consequence of Britain’s exit from the European Union.

Exit of Britain from the European Union has taken the other nations by surprise. The significance of Brexit for India and relationship between India and Britain post Brexit are matters of debate. It is expected, as an effect of Brexit there will be uncertainty, capital flows will be a menace and at the economic front, currency devaluations will be in store. World economic growth, which was anyway mumbling, will be further subdued.

According to George Soros, “Brexit could just be the beginning of the end for Europe”. There are too many expected and unexpected positions with the probabilities of disconnection of the European Union (EU) and the Euro, whose impact is considered to have increased sharply over the years.

Impact of Brexit

India is one of the most lucrative markets for foreign investors and, hence, attracts attention globally. So, any major change across the globe - be it political or economic, is bound to have an impact on India too.

One of the most expected impacts is to affect the Currency (the pound and euro). The volatility is expected due to Brexit effect as there is a possibility of devaluation of the pound and euro. A sharp fall in Pound (by 20 percent vis-à-vis Rupee as visualized by many experts) is expected which may have an effect on Indian companies with a substantial presence in the UK. The falling value of the Pound and Euro would make it harder for Indian exporters to sell their produce in the European market. UK has been the gateway to the European Union and the effect of Brexit can negatively affect Indian firms fortune.

At the political scenario, Brexit may be seen as a blow to globalization, which could possibly be further strengthened by a change in political settings around the globe. IT sectors would be hard hit if the clients from the European Union postpone spending due to uncertainty over how things shape up in the future. This would impact revenue growth for Indian IT companies from Europe negatively. Estimates show that UK accounts for about 17% of India’s total IT exports. Given the risk of further equability in growth in the UK and the European Union, there is an increased probability that the companies lower their IT budgets. This would have an impact on the domestic software companies.

UK’s decision to leave the European Union is expected to impact the confidence level of the business and the investor community and there might be a temporary detention in outbound investments from India to the UK until more clarity is obtained on the working framework between the European Union and UK.

Some other sectors likely to face the threat due to Britain’s exit from EU are automobiles, auto components, pharmaceuticals, gems and jewellery. Most of these sectors will be vulnerable to changes in demand as values of Pound will fall. India is a major supplier of auto components to the European Union.

In the Pharmaceutical sector, European Union accounts for 10-13% of India’s total pharma exports. The share of UK in India’s pharma exports is about 3-4%. The pharma companies do not really expect a big hit following the Brexit and have indicated a limited impact of Pound depreciation.

Readymade garment is one of the key export items to the UK from India. Readymade garments account for about 20% of the India’s total exports to the UK. The sector is expected to feel the pinch on account of moderation in demand consequently through the change in export-import policy.

Britain's exit from the European Union is expected to open up significant business and economic opportunities for the Indian education sector. Education in the UK is likely to become more affordable. Indian students studying in the UK should get a more level playing field compared with other European Union students who hitherto had an edge over the rest of the world in the job market. India being one of the largest skilled labour markets, with a population well versed in the English Language could have a distinct advantage.

How will Brexit affect Indian students interested in studying in the UK, and the EU?

Brexit will affect the cost of studying in the UK

For the students of European Union, who pay EU rates at UK universities, tuition will become more expensive if they are treated as international students and charged rates accordingly. They may not even be eligible for EU funding and loans. In that case, a relatively less number of EU students will come to the UK and it will benefit Asian students, particularly Indian students as UK universities will try to attract more students from India.

Indian students, who already pay international rates for tuition fees, will not be affected by Brexit directly, but various other factors could affect the cost of their study. If the Pound remains weak against the Rupee, Indian students ultimately will find themselves better off.

But, if universities suffer financially after Brexit, because of a lack of EU funding or fewer EU student joining UK universities, fees might increase for international students to make up for the deficit.

Indian students aspiring to go abroad for higher studies may prefer EU to the UK

Though it is not clear what will transpire between the UK and the EU, not much is expected to change before the two years when negotiation will be final.

But it is possible that there may be big changes ahead with respect to tuition fees, research funding, visa restrictions, work opportunities and free movement across Europe which might impact Indian students.

There may be a change in funding opportunities for Indian students post-Brexit – in terms of education loans, scholarships or fellowships- in the UK and even in the EU

The funding for Indian students in the UK as well as in the EU might decrease after Brexit if agreements to be worked out over the next few years tightens the purse for the international students. But independent funding sources should not be affected.

There may be stricter norms for taking in international students for the UK and the EU

If EU students are classed as international students, and international students are included in the government’s migration targets, a tighter restriction on the number of international students awaits at a UK university.

On the other hand, If EU students are classed as international students, fewer EU students may decide to come to the UK. In that case, universities might increase their intake of non-EU international students to fill the gap.

Despite an apparent desire in the UK for tighter controls on immigration, UK universities and the mission groups that represent them will try to protect the interests of international students to attract more students.

India’s Relationship with Britain

Broadly, Brexit may not be a smooth sailing for India as among the western countries, Great Britain is the most positive about India’s influence. The change in leadership in Britain will bring about all the rules and formalities to be redone. There will be some confusion in some of the pending trade deals. India has to wait for EU stance on FTA. UK has been a traditional jumping pad for Indian companies entering Europe– so when UK loses a voice in the European Union, India loses a partner in the European Union.

Besides losing a voice in Europe, India would have to face a rising wave of anti-foreigner, anti-trade aggressive flow that might close the doors to global trade and might be fairly hostile to India. India being a developing country needs a global trade to pull them out of poverty. But if rich countries turn their back to trade, Indian companies will face a tough time.

Brexit might also have a positive effect, but results may take some time to show up. The process might take time considering that the new government will take a while to design and implement their policies.

The decision of the United Kingdom (UK) to leave the European Union (EU) is expected to have significant socio-economic and political implications in the years to come. As it assumes greater significance in the context of the changing global order which is moving towards greater multilateralism, the time is very crucial. As per the estimates by Standard & Poor, Brexit is expected to shave off 100 bps from UK’s growth and about 50 bps from European Union’s growth in 2017. Also, investment flow from India to the UK is likely to be affected in the short term as the decision is expected to cause cynicism among investors. The political turmoil and the changing demographic structure in the European countries in the next few months bring about substantive uncertainty. When the real negotiations between the UK and the European Union start by 2017, there might be greater clarity on the political front in the region.

India, unlike the Britain, considers the European Union more as an economic and trading bloc, less as a political organization. Indian businesses are acutely aware of the potential of instability due to Brexit. There are over 800 Indian companies in the UK, the top 10-15 of which can contribute $4 billion to the British economy. Indian companies see the UK as the springboard to Europe. The language and legal system give Indians a comfort level. Many Indian information technology companies are based in the UK with a large working force and offer services to Europe which will be hit too.

The post-Brexit referendum reveals short-term volatility in the Indian market. However, the basic fact remains that the country’s fundamentals being very strong along with less volatility in the Indian Rupee reflect high potential of being less inflicted with the current turmoil in the global market. India is still a domestic driven economy and this very fact would help the country to remain positive and the economic growth to remain resilient.

Author - Dr. Joydeep Goswami

[The Author is a renowned professor of Economics at JIMS in Delhi]