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.
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 60-year-old bloc 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.
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 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 (FEIO). 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, the Reserve Bank of India 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.
While FDI inflows from both the EU and the UK independently moderated in recent years, there could be further moderation in flows from UK to India as companies re-orient their priorities in wake of exit from EU. “We have already witnessed a 16.4% decline in FDI flows into India from UK in FY16 in the wake of impending referendum. However, with EU (excluding UK) accounting for seven times the FDI flow of UK, moderation in FDI flows from UK is unlikely to have a damaging impact on India,” said Rao.
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 might squeeze financial conditions to some extent. “The policymakers will have to closely monitor the risk of capital flight (due to risk aversion) from the equity/debt segments and counter it by timely infusions of rupee/dollar liquidity through OMOs and forex market market interventions, respectively.”
While FIEO’s Ralhan saw possible restrictions on movement of persons from EU to the UK to open opportunity for Indian service providers, Rege Nitsure warned of a high probability of a strict UK visa regime, post the Brexit, which could hit students, professionals, tourists and businessmen who want to travel to the UK. “According to the UK Council for International Student Affairs, the number of Indian students studying in universities in UK has already fallen from over 22,000 to 18,000-plus following the withdrawal of the post-study work visa. We expect this situation to worsen further due to the Brexit,” she said.
Rao said: “Indirect impact of a UK slowdown would be both negative (via lower global growth, on both goods and services exports), and positive (lower commodity prices), in turn continuing to keep India’s current account deficit within the 1.0-1.5% of GDP range. In the medium-term, positives could exceed the negatives, as separation from EU enables UK to undertake greater negotiations with other trading partners and remove EU-related tariffs. Trade relations could also get greater boost by removal of regulatory differences in the medium-term,” she added.
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.”
According to Aditi Nayar, senior economist at ICRA Ltd, “Post-Brexit uncertainty may weigh upon (India’s ) merchandise and services exports and delay the concretization of investment plans, partly moderating the expected benefit of the recent FDI reforms. The extent of disorderliness in global markets and risk aversion as well as political developments in the EU would determine the level of contagion in the Indian financial markets as well as the impact on Indian economic growth, although domestic consumption would largely cushion the latter. On balance, there are modest downside risks to our forecast of an improvement in growth of India’s gross value added at basic prices to 7.7% in FY2017”.