India: BREXIT – Trigger For Larger Things To Come?

Discussion On Consequential Scenarios: Focus On India
Last Updated: 17 October 2016
Article by Anis Chakravarty, Rishi Shah and Shiffali Razdan

BACKGROUND

June 2016 will be remembered in posterity for one of the major global event risks materializing – a British referendum to exit the European Union (EU). This result was unexpected by most quarters of the market and there was an immediate negative reaction seemingly driven by sentiments. Since then, developments have been more in line with broader market consensus as policy makers have expressed their willingness to extend full support to the economy. In fact, the Bank of England has already loosened its monetary policy and is probably going to do more in the coming days to avoid any unnecessary collateral damage. The UK government could also go in for a more pragmatic fiscal policy given that the growth of the economy will likely take a hit.

Markets have remained broadly stable and have reacted on expected lines with adequate capital making its way towards safe haven assets. The initial reaction in the markets was of shock and resulted in steep declines in the equity markets and strengthening of the USD. However, since then levels of risk aversion have reduced and equity markets across the globe have done well along with a rise in price of most sovereign bonds. The biggest negative effect has been felt on the currency markets as the GBP has fallen by around 11% versus the USD. While not completely unanticipated, this does show the investors' concern over the future of the UK markets.

Still, the true ramifications of BREXIT will take months, if not years to become apparent. While there are a number of possibilities that can play out in the coming months, it is important to take a step back and gauge the impact on the Indian economy through its linkages with UK and the broader EU economy.

A LOOK AT TRADE

The UK and the EU are both important trading partners for India, and both are committed to enhance their trade flows in the near future. According to data released by the Ministry of Commerce, UK-India bilateral trade was valued at USD 14.02 billion in FY16, and EU-India trade (including UK) was valued at USD 88.56 billion in FY16. Further, exports to the UK and the EU were worth USD 8.83 billion and USD 44.62 billion, whilst imports were worth USD 5.19 billion and USD 43.94 billion, respectively.

Trade between UK-India and EU-India is an area of focus as all parties are striving to increase trade. In fact, trade deals and negotiations were being discussed even before the referendum took place.

The UK used to be India's third biggest trading partner 15 years ago; today it is its 12th1. Also, the UK is one of seven countries with which India has a trade surplus. Negotiations with the EU are currently being held regarding Free Trade Agreements (FTAs)2, which will likely provide a boost to bilateral trade between nations.

India's imports from the UK are largely dominated by precious metals and stones, boilers, machinery, and mechanical appliances, iron and steel, and electrical equipment while exports to the UK are led by apparel and clothing accessories, boilers, machinery, and mechanical appliances, precious metals and vehicles.

Trade in services

While the bilateral trade relationship between UK and India is dominated by goods, services also form an important part of the equation. As such, the trade in services has declined over the last five years as India exported around USD 6.8 billion and imported around USD 3.16 billion in the calendar year 2011. However, since then imports have increased to USD 3.5 billion while exports have declined and stand at approximately USD 3.9 billion for calendar year 2015.

According to the latest available data on the break-up of trade in services, Indian exports are dominated by travel followed by other business services. Telecommunications, computer, and information services form around 22.8%, possibly because of the fact that UK companies are using contracted telecom services from India, and financial services account for 2.3% of our total exports of services. A closer look at the imports of services shows that again travel forms a major part of the pie accounting for 36.9%, while transportation and telecommunications, computer and information services account for 14.7% and 14.5% of the total imports, respectively.

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Footnotes

1. BBC, The links between the UK and India, November 2015, http://www.bbc.com/news/uk-34767180.

2. European Commission, http://ec.europa.eu/trade/policy/countries-and-regions/countries/india.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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