Brexit: Change brings opportunity

An Indian economist gives his views on the unfolding scenario for India and the world after Britain voted to leave the European Union economic bloc in a referendum on June 23. Last year, India invested more in the UK than in Germany, France and Italy combined. In terms of number of projects, India was the third largest source of foreign direct investment (FDI) to the UK, with around 122 projects generating more than 7,700 jobs in the country (Source: Deloitte). The UK is also one of the largest investors into India, contributing around 6 per cent of the cumulative FDI flows in the last five years. When it comes to bank financing, UK-based banks have a fairly large presence too, accounting for 22 per cent of total claims of foreign banks in India. In terms of trade, the two-way flow between India and the UK, at around $14 billion, has been fairly stable and in contrast with India's total trade with other EU countries, which has been declining. On relative basis, while India's direct exposure is limited, given that the UK accounts for only 3 per cent of overall exports for the receipts of software services, the UK's share is still significant and as high as 12 per cent. Despite economically important (and historical) ties that the UK and India share, one important reason for the deep association is that Britain acts as a regional base for many Indian companies. Anything that weakens this attractiveness could have a bearing on the future course of the relationship, and this is what has emerged as an important concern at the moment. For example, in the UK automotive industry Indian companies play an important role and export around 50 per cent of the vehicles (assembled in the UK) to other EU countries. Due to such deep supply-chain linkages, the auto components and OEMs (original equipment manufacturers) based out of India inevitably become part of the mega trade network - from India to the UK and from the UK to rest of the Europe. Thus, it is not just the direct exposure to the UK but also the indirect connection to rest of the EU region that could be effected on account of Brexit. In the short-term, there could be changes in demand and currency risks that could hurt revenues of Indian companies. In the long-term, there could be cumbersome implications related to regulation and relocation. Having said that, what seems like a challenge could also emerge as a great opportunity for the two countries. The future course of action after Brexit is yet to be mapped out and this sort of choice could also mean a partnership opportunity that has never been tried before. In this regard, post-Brexit, India has already made the first move and is among the early ones to initiate a new trade pact with the UK. Compared to the proposed Broad-based Trade and Investment Agreement (BTIA) that has been under negotiation between India and EU since 2007, signing a Free Trade Agreement (FTA) with the UK could be somewhat easier for India. This would call for strategic re-alignment of the India-UK Joint Economic and Trade Committee (JETCO), which was established in 2005. While traditionally the focus areas of the committee have been on sectors like garments, textiles, machinery, pharmaceuticals and footwear, the new strategy will have to be re-aligned in favor of the Make in India scheme. For a sustainable and mutually beneficial relationship, it will be important to focus on sectors where gains and comparative advantage could be leveraged in the long-term, such as computer electronics and optical products. While there will be a great opportunity for the two countries to combine forces, there will also be constraints that will have to be dispatched on an immediate basis. For India this would mean providing better infrastructure and making it easier to do business. For the UK it would mean giving leeway in terms of migration and non-tariff barriers. The journey has just begun. Abheek Barua is India-based chief economist and senior vice-president at HDFC Bank and a regular commentator on business issues.