1. How Brexit will impact India’s exports; all you want to know in 4 points

How Brexit will impact India’s exports; all you want to know in 4 points

Beset by a protracted economic recovery, rising cost of massive European Union (EU) bureaucracy, and migrant crisis, British citizens opted for an exit from the EU (now famous as Brexit).

By: and | Updated: September 1, 2016 6:57 AM
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While Brexit is not being seen as something that could lead to global upheaval, any ripple effect on other EU economies like Italy, France and Greece which are not happy with the functioning of the EU could further upset any hope of recovery in global trade.

Beset by a protracted economic recovery, rising cost of massive European Union (EU) bureaucracy, and migrant crisis, British citizens opted for an exit from the EU (now famous as Brexit). However, the legal process (invoking Article 50 of the Lisbon treaty) would give Britain around two years to negotiate and complete the withdrawal from the EU.

Many consider Brexit as the start of the problem and not the end, as a high proportion of Europeans view EU membership negatively. While Brexit is not being seen as something that could lead to global upheaval, any ripple effect on other EU economies like Italy, France and Greece which are not happy with the functioning of the EU could further upset any hope of recovery in global trade. Moreover, the lack of a concrete plan by the British government for negotiating the terms of withdrawal is adding to Brexit jitters. With the EU being India’s largest trading partner, it would be pertinent to examine whether Brexit would be an opportunity or threat for India’s exports.

Major exports

The value of India’s exports to the EU in FY16 stood at $45 billion, i.e. 17% of its total merchandise exports in dollar value terms. Of that, Britain alone accounted for over 20%, i.e. $9 billion. However, the devil lies in the detail.

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Of this $9 billion, roughly $2.5 billion or 28% is accounted for by apparel and made ups. Britain accounted for over 30% of India’s export of pharmaceuticals to the EU, i.e. $430 million out of a total of $1.51 billion. Roughly one-fourth of India’s export of automobiles and components to the EU were shipped to Britain, i.e. $530 million out of $2.3 billion. Thus, collectively, export of these three items to Britain accounted for 40% of India’s total merchandise exports to the EU.

Moreover, Britain is India’s second-largest destination for export of IT services after the US, and accounted for half of $24 billion IT exports to the EU. Brexit has already induced RBS to shelve the idea of a separate Williams & Glyn Bank—that’s a big loss to Infosys which had got the contract to build IT applications. Britain is an important source of income from travel and tourism, as roughly 10% of foreign tourists in 2015 came from Britain.

Major impact

The impact on India’s exports will happen in two ways: (1) decline in demand for India’s goods and services because of Brexit-induced growth slowdown in the UK and EU, and (2) unfavourable exchange rate movements.

Brexit will have direct and indirect impact on growth prospects of both Britain and the EU. As per IMF, Brexit will mop up anything between 1% and 9% of Britain’s GDP growth rate, depending upon actual terms of its withdrawal from the EU. If Britain fails to retain duty-free market access, rise in EU tariff and non-tariff trade barriers will disrupt existing supply chains. That, along with slowing GDP growth, will reduce the demand for India’s exports to the region.

Brexit comes a time when emerging economies have been struggling to export to the rest of the world. India’s merchandise exports grew by just 1.27% in June after declining for 18 months in a row, but fell 6.84% in July. Brexit will make India’s exports revival difficult.

Exchange rate movements

The net impact of Brexit on India’s export competitiveness will depend upon the relative movement in exchange rates of the pound, euro, yuan and rupee against the dollar, and also the sensitivity of India’s export basket to change in prices/exchange rates. Between June 23 and August 10, the rupee gained 0.9%, while the yuan, euro and pound lost 1.1%, 1.7% and 13.2%, respectively, against the dollar. Obviously, the rupee has become relatively stronger vis-a-vis the dollar compared to the yuan by 2%, euro 2.6%, and pound by over 14%. That is likely to adversely affect India’s export competitiveness in price-elastic items such as textiles and clothing.

The biggest threat to India’s export is, however, from the weaker yuan. Indian exports could face increased competition from cheaper Chinese products—from steel to textiles—not only in European markets but also in third country export markets such as the US, because of relative weakness of the yuan vis-a-vis rupee against the dollar.

The weakening of the pound and euro will make it expensive for European tourists visiting India and hurt India’s forex income from travel and tourism. A weaker pound and euro will also affect the price competitiveness of India’s IT companies and hurt overall IT exports.

The EU imported $1.8 trillion worth of merchandise from non-EU countries such as China, India and the US in 2015, which is roughly 10% of global imports. Yet the direct impact on India’s exports due to Brexit may be limited, but further turmoil in the UK or EU may lead to competitive devaluation of currencies of other emerging economies seeking to protect their export market share in a sluggish global demand.

This could put pressure on the rupee despite India’s comfortable forex position and better control on current account balances. In case RBI doesn’t allow comparable fall in the rupee vis-a-vis currencies of emerging economies, India’s exports will further lose price competitiveness and continue to under-perform.

Brexit & India-EU FTA

India could think of a separate FTA with Britain, as hinted by British Business Secretary Sajid Javid, to maintain existing bilateral trade. However, the expected benefit from an India-EU FTA could be lost as India will have to renegotiate a trade pact with the EU with recalibrated trade tariff offers. This could delay the conclusion of negotiations on India-EU FTA. Till that happens, India’s apparel exports will continue to suffer from comparative tariff disadvantage and unfavourable exchange rates vis-a-vis countries like Bangladesh and Pakistan.

Brexit and the TPP are the two big threats for the revival of India’s exports. On the positive side, India has diversified its exports significantly away from the EU and other developed markets towards emerging markets of Asia, Africa and Latin America. That could minimise the damage. However, Brexit could be problematic for sectors which are overexposed to Britain/EU, like textiles and clothing, IT and pharmaceuticals. The Japanese yen has gained immensely against the dollar over the last few quarters and that makes its imports cheaper. India can use this limited window to push exports (to Japan) to make up for the likely loss from Brexit.

Ritesh Kumar Singh is a former government official and currently a corporate economic advisor based in Mumbai. Prachi Priya is Asia economist for a top corporate house. Views are personal

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