Brexit: As UK walks alone, India shrugs off impact

By: | Updated: June 25, 2016 8:34 AM

The UK’s resolve to walk alone could have a “minimal” short-term impact on India's real economy while policy action would promptly tame temporary market volatility...

Arvind Subramanian, indian economy, Chinese economy, china economy, economic activity, Chief Economic AdvisorChief economic adviser Arvind Subramanian said he saw “silver lining” of a decline in oil prices and likelihood of a rate hike delay by the US Federal Reserve due to the UK vote. (PTI)

The UK’s resolve to walk alone could have a “minimal” short-term impact on India’s real economy while policy action would promptly tame temporary market volatility, top policymakers said, adding that once the immediate turbulence is over, investors would doubtless find India attractive. To validate their stance, they cited the country’s strong economic fundamentals, “rock-solid” commitment to fiscal discipline and “steadfast pursuit of an ambitious reforms agenda”.

Economists said India, as a net importer of oil and other commodities, would benefit from the downward pressure on their prices and predicted that in the medium-term the positives from Brexit for India would outweigh the negatives. Exporters, on their part, did not raise any alarm but remained watchful about of how the currencies of India’s competitors — especially Chinese yuan and the euro — move. While IT companies apprehend short-term pains from volatile currencies, the jury was out on how the UK’s breaking away from the EU would impact India’s overall services exports in the medium term.

Chief economic adviser Arvind Subramanian said he saw “silver lining” of a decline in oil prices and likelihood of a rate hike delay by the US Federal Reserve due to the UK vote.

Also Read: How Brexit pushed fund managers into corner, cost India $92 mn

Though the UK is one of India’s major trading partners with which it enjoys a trade surplus and its third largest source of FDI, the island nation’s relative shares have been on the decline in recent years.

The overall adverse impact on global growth could reflect on India’s goods and services exports but as far as the trade with the UK is concerned, much could depend on the outcome of its negotiations with EU (likely in 2018) regarding the tariffs on goods and movement of persons, most observers felt.

“If Britain gets the same treatment in terms of free tariff and free movement of persons, not much will change for India. However, if Britain gets the treatment as applicable to a non-member country, it may lead to a positive impact on India’s exports to EU as well as to Britain,” said SC Ralhan, president, Federation of Indian Export Organisations.

Subhada Rao, chief economist at Yes Bank, said indirect impact on India through lower global growth could be offset by medium-term gains of enhanced trade with the UK.

Sunil Kumar Sinha, principal economist, India Ratings & Research, however, outlined grim short-term possibilities. “… with risk rising in the global financial markets, foreign capital will flow out putting pressure on the rupee to depreciate and making Indian financial market volatile. A number of Indian corporates having exposure to Europe/UK either through trade or in case their production units are located there would be adversely impacted.”

However, when asked about the Brexit’s impact on capital flows to India, RBI governor Raghuram Rajan said India should not see any major foreign selling given its better fundamentals relative to other economies. He added there would not be outflows as long as the country kept moving forward with reforms like Goods and Services Tax, and international investors remained reassured about the country’s growth prospects.

But some analysts raised concerns about the stability of financial markets. According to Rupa Rege Nitsure, group chief economist at L&T Financial Services, “Financial markets are expected to stay on edge as long as the element of uncertainty continues.” She said there was also some risk of withdrawals by the UK banks from India, which may squeeze financial conditions to some extent.

Finance minister Arun Jaitley said, “All countries around the world will have to brace themselves for a period of possible turbulence while being watchful about, and alert to, the referendum’s medium term impacts…As investors look around the world for safe havens in these turbulent times, India stands out both in terms of stability and of growth.”

Aditi Nayar, senior economist at ICRA, said, “Post-Brexit uncertainty may weigh upon (India’s) merchandise and services exports and delay the concretisation of investment plans, partly moderating the expected benefit of the recent FDI reforms.”

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