Possible Impact of Brexit on India
1. It was expected by many including World Bank that the uncertainty would lead to moving of capital from developing countries to safer countries like US, which is typical of FPIs. However, ten days after Brexit, the markets do not validate this for India. Reasons lie in India being the fastest growing economy with strong macro-economic indicators of Forex reserves, low debt to GDP ratio and stable political situation. Indian government’s decision to liberalise FDI norms have further enhanced the sheen of India as an investment destination. The initial market fall was more a reaction to the fact that markets expected a “remain” vote.
2. The initial days outflow of FPI has been countered by Domestic Institutional Investors (DIIs) purchases. As such, some movement was seen of capital outflow and associated with rise in gold prices suggests that global capital is moving to safer assets. However, within a short time markets have stabilized and outflow of capital won’t impact India.
3. Expected normal monsoon in 2016 in India coupled with implementation of 7th pay commission recommendations will boost domestic demand, lower inflation further and thereby increase the attractiveness of Indian market.
4. India is the 2nd largest source of FDI in UK and the main attraction for Indian investors related to the fact that entry in UK opened up the entire European market for them. Now, they will have to negotiate separate agreement with Europe and given the bitter nature of split, EU may be initially hostile to UK companies.
5. The spread of protectionist sentiment may trigger similar demands in countries like France and Netherlands. Prevailing uncertainty till the position becomes clear may deter Indian investments in EU in the immediate turn. If the protectionist movement gains ground in other countries, it may spike movement of capital out of developing countries.
6. However, there can be positive spillover for India also. EU as a block may try to woo Indian investments to compete with UK and UK will also try to retain its FDI inflow and provide more congenial policy for Indian investments leading to a win win situation. Slowing economy in China further increases India’s appeal to both the EU and UK.
7. Currency- Rupee might face some short term pressure as other than US$ and Japanese Yen (considered safe by investors), other currencies have fallen. This might widen the trade deficit as imports from strong currency countries like US become costlier. The devaluation of Pound may also affect Forex held by India in GB Pound.
8. Education – Under EU, UK was obliged to offer subsidized tution fees for EU students. Post Brexit, UK universities need not do so freeing funds for offering scholarship to other merit students. UK is one of the preferred destinations for Indian students and liberal funding will attract more students. Falling pound will also make it cheaper for students to study in UK.
9. Brexit might lead to medium term contraction of UK’s economy hurting India exports. However, the effect will be marginal as UK accounts for only ~3% of Indian exports ($ 4.4 billion out of total exports of $142 billion)
10. On balance, Brexit does not seem to have any major negative impact for India once the uncertainty settles down and provided such protectionist calls do not gather steam in other countries. Positive outcomes in terms of wooing of India by both UK and EU, strong domestic economy increasing appeal of Foreign investors to India, cheaper education for Indian students are often not seen in short term but will become visible over next 1 year. However, the important policy lesson for India is more broad. Such protectionist calls emerge from societal inequalities and perceived ill effects of globalization. India remains highly unequal in terms of income with the recent Credit Suisse report indicating 95.4% of Indians have wealth (both financial and physical) less than $10,000. Thus, while GDP growth and macro-economic indicators provide comfort, the challenge of inclusive growth needs to be addressed.