Of late, there have been concerns about the impact of Britain’s exit from European Union (EU) on India’s trade. Voices are being raised for government intervention to safeguard India’s interest in the region. However, Brexit’s immediate impact on India will be more significant on currency than on its trade with both EU and Britain. And that is what needs to be immediately looked into.

Ajay Sahai | August 2016 Issue | The Dollar Business

There has been a panic reaction to the news of Britain’s exit from the European Union (EU). The reaction has been emotional and psychological, devoid of facts. British nationalist call it “independence”, but to me Brexit means “isolation” of Britain.
Globalisation is a stark reality and an ostrich approach will not help any country. And not to say, its impact on Britain will be significant and the decision will further compound the economic challenges faced by the country.

Since much has already been written on Brexit, let me confine my analysis to the trade aspect of the development, with focus on India’s trade with Britain
and European Union.

Britain has decided to come out of EU and once it invokes Article 50 of the Treaty, it will have two years time to work out a new arrangement to replace its existing terms of EU membership. Why are we presuming that Britain will walk out of the treaty without looking at its interest, particularly when it has sizable business with EU and vice-a-versa?
In 2015, Britain’s import from EU was $346 billion and EU’s import from Britain was to the tune of $203 billion. How can the two sides ignore trade worth over $500 billion? Britain may negotiate hard with EU to get the same or a similar market access that is available to it under the current treaty. Norway, though not a member of EU, has got favourable access to the EU market and Britain can follow the same.

If Britain and EU stick to their positions without yielding much, the trade scenario may change. However, it may benefit India, both in Britain and EU. In FY2016, India’s exports to EU stood at $35.74 billion (excluding Britain) and $8.87 billion to Britain. The imports, during the same financial year, from EU was $38.34 billion, while from Britain the same amounted to $5.19 billion.

Once Britain and EU decide to trade on MFN basis, Indian exports can get greater market access since they would be competing with EU in Britain and with Britain in EU market on equal tariff footing. In few sectors, where we were losing out due to zero tariff advantage available to British/EU companies, we may now get larger market share.
However, in some sectors like automobiles, pharmaceuticals and food products, Indian exporters may have to face greater challenge as they have to get separate registration/approval both in Britain and EU, which may be time consuming and prohibitive. The varying standards in EU and Britain may pose another challenge to Indian exporters who will have to adhere to the separate standards while accessing EU and British markets.

India may also have to relook at its FTA negotiation with EU as they were based on a market of 28 countries. And, now, with one important country leaving EU, some of the underlying assumptions may require a change. We feel that there will be delay in finalisation of the Transatlantic Trade and Investment Partnership (TTIP) as well for the similar reason.

On the imports front, not much will change (except due to weakening of currency) as India has not given any preferential tariff either to EU or Britain. However, Britain will now have greater flexibility to workout bilateral trade arrangements with India, benefiting both the economies. Some moves are already visible in this direction.

The immediate worry is volatility in currency as both British pound and euro are set to become weaker, strengthening US dollar at the same time. If British pound and euro depreciate, say by 20% and 10% respectively, the manufacturer and exporters of these countries will get added competitiveness. In sectors where they are competing with India or other countries, they may get a bigger market share. The East European countries, in particular, may gain much from the depreciation of euro as they still have low manufacturing cost.

A bigger concern would be lowering of imports in EU and Britain, particularly of lifestyle products, as depreciation coupled with increased incidence of customs duty on account of depreciation would make the product costlier for consumers (already facing huge uncertainty) who may not be willing to pay a higher price for the same. This may impact India’s exports of apparel, footwear, gems & jewellery, carpets, handicrafts, etc., both to Britain and EU.

Many exporters in these sectors have already started facing challenges with the weakening of pound. On the contrary, the currency depreciation will make their exports to India further competitive, which may result in Britain/EU replacing some countries as a source of imports or even may provide a greater challenge to manufacturing
in India.

We may turn out to be a gainer in services exports as 50% of the services sought by Britain comes from European Union. Restriction on free movement of persons can open new opportunities for Indian professionals and skilled workers. However, the Indian IT industry and few other services industry, which have set up base in Britain, may have to face new complications emerging out of such restrictions adding to their overheads to serve their EU clients from separate earmarked workforce.

Voices are being raised for government intervention to safeguard India’s interest. Any government intervention has to be on facts and not on surmise or conjectures. Unless Britain finally negotiates with EU on tariffs, immigration, standards, mutual recognition, for which two years window is available, it will be a little premature for intervention by the government. However, looking at the extreme volatility of the Indian rupee, a little intervention by RBI may be required to stem excessive movement in the Indian currency.