The United Kingdom (UK), European Union’s (EU) second-biggest economy, voted by a margin of 52% to 48% to end its 43 years long EU membership, pursuant to a referendum on June 23, 2016. Although in the short-term Brexit may negatively impact India’s trade and investment, it opens up significant long-term opportunities for India.
Opportunities for India
1) Free Trade Agreements (FTA) with UK and EU
India and EU have been negotiating the Bilateral Trade and Investment Agreement (BTIA) since 2007, covering trade in merchandise, services, and investment. This is yet to reach a conclusion. However, post-Brexit, UK will necessarily be excluded from BTIA. Among EU countries, while Germany is India’s largest trade partner, UK stands to be India’s third-largest trade partner and biggest importer of goods. Moreover, India has had a trade surplus with UK in the past three years. It is thus crucial for India to have a first mover advantage by executing a bilateral trade agreement with UK encompassing goods, services and technology.
Furthermore, after losing access to the single market, UK will need to independently navigate global (and EU) tariffs and non-tariff barriers including standards, regulations or rules of origin. Relying solely on World Trade Organization (WTO) rules to enhance trade would not remove trade barriers. UK would therefore mainly depend on independent trade deals. Also, with 50 trade agreements between EU and other countries ceasing to apply to UK and after losing EU’s market, UK would want to develop trade relations with emerging markets like India. This strengthens India’s negotiating position. For UK, India is an attractive trade partner, given its high proportion of skilled working-age population and high growth rate. This strengthens the possibility of an FTA between UK and India and presents a significant opportunity for India’s financial and small and medium-sized enterprises (SME) sectors.
UK and India share complementary interests. An FTA would enhance Indian exports of garments, textiles, machinery and instruments to UK, and Indian imports of engineering goods, spirits, beverages, etc. from UK. Similarly, trade in services of Information Technology (IT) and banking would also benefit. UK was the biggest investor in India among the G-20 nations in 2015, while India represents the third-largest source of foreign direct investment (FDI) in Britain. An FTA can lead to greater trade and investment between the two countries.
Moreover, EU and India would emerge as strong trade partners through enforcement of BTIA. EU is India’s largest trading partner accounting for approximately 13% of its total world trade, while India is EU’s 10th largest trading partner. India is reliant on EU for machinery, nuclear reactors, optical and photo equipment, aircraft, etc. On the other hand, EU’s top imports from India include mineral fuels, oil, distillation products, organic chemicals, textiles, etc. The key sectors of trade in services between the two are sea and air transport, computer and information, financial and banking services.
Indian exports of industrial, agricultural and pharmaceutical products to EU have been hampered by issues concerning Sanitary and Phytosanitary Measures, Technical Barriers to Trade and other Non-tariff Barriers. Despite several rounds of negotiations, BTIA has failed to conclude. Access to EU markets was a key driver for Indian companies to invest in UK. With Brexit, UK would no longer remain India’s gateway into Europe. It therefore, becomes even more important for India to conclude BTIA negotiations to access other EU countries.
However, one of the hurdles in the conclusion of these negotiations is EU’s demand for reduction in India’s tariff rates. While EU’s average MFN applied tariff rate is approximately 4.3%, India has an average MFN applied tariff rate of 13.3%. A lowering of tariffs may increase trade with EU, but for India, this may mean more imports than exports, increasing India’s trade deficit. However, it is crucial to evaluate other positive impacts resulting from increased imports such as increase in India’s industrial growth and as a result, export growth.
2) Rise in cheaper imports from UK
Currently, India’s highest imports from EU countries come from Germany. However, with the depreciation of the pound post-Brexit, high quantity of British goods would be available for cheaper prices to the Indian consumer.
Indian Exports: In the short-term, due to depreciation of the pound, imports into UK would be costlier, which would adversely affect Indian exports, worsening India’s overall trade deficit. However, given the increase in Indian exports to emerging markets, this is not a major threat to India.
Indian companies in UK: Indian IT services companies that have exposure to UK and EU markets and companies based in UK would face several challenges. The depreciation in pound would affect their earnings in rupee terms and a possible increase in tariff barriers would result in increased trading costs. Moreover, there will be increase in operation and compliance costs.
Brexit would possibly lead to bilateral agreements of UK and EU with India. The precise impact of India’s FTAs with UK and EU on its trade balance cannot be known with certainty. However, the FTAs would certainly lead to a rise trade volumes for India. This would result in greater investment in India, lower prices of goods, more competition and greater variety for consumers. There is a possibility that the long-term benefits of Brexit would outweigh the short-term costs for India.
Disclaimer by the authors: This article has been authored by Suhail Nathani, who is a Partner and Sanjay Notani, who is a Partner at Economic Laws Practice (ELP), Advocates & Solicitors. The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.