Britain’s decision to exit the European Union (EU) and the resultant uncertainties are unlikely to derail India’s growth story or its inflation trajectory, but the country’s current account deficit (CAD) could worsen a tad to 1.3% of its gross domestic product (GDP), according to a report by Crisil Research. Also, information technology (IT) and certain other consumer-oriented sectors like auto components, textiles, leather, footwear, precious stones and metals could face some heat, it adds.
Within the automobile space, component suppliers will be impacted more than original equipment manufacturers, with the exception of the JLR business of Tata Motors, the report says.
“The impact on JLR business will depend on how trade agreements between the UK and other EU countries are rewritten. On the positive side, a depreciating pound will make JLR’s exports from the UK more competitive, at least in the near-term,” the report adds.
The CAD could rise 20 basis points from the 1.1% level recorded in 2015-16, it said. Crisil expects tepid export growth, given lower global growth forecasts, and “some upside from core imports (non-oil, non-gold)” on the back of a pick-up in domestic consumption and investment demand to drive up the CAD in 2016-17. Nevertheless, low imports (due to subdued oil and commodity prices) will prevent the CAD from shooting up, it adds. Crisil, however, retains its growth and retail inflation forecasts for the country at 7.9% for 2016-17 and 5% by the end of this fiscal, respectively.
The report also forecasts the rupee to touch 66.5 against the dollar by the end of the current fiscal, down 50 paise from Crisil’s previous forecast. However, India’s trade competitiveness with the UK will not just depend on the rupee’s movement against the pound, but also on the performance of the currencies of India’s competitors, apart from domestic costs and productivity. In the short run, however, the report doesn’t predict a significant downside to India’s exports in the short term, as the UK accounts for only 3.4% of India’s goods exports.
Over the medium term, exports in sectors like auto components, textiles, leather and footwear and precious stones and metals, which together make up for close to 45% of exports to the UK, and also in services, will “depend on the severity of slowdown in the UK and ructions in the exchange rate”.