BREXIT – Impact of Brexit on Indian economy.

With Britain’s exit from European Union, India will have to renegotiate a separate Free Trade Agreement (FTA) with Britain which shall take months, and till then put the fate of trading companies in limbo.

Earlier when Britain was a part of EU, Indian companies with industrial setup in UK got free market access to member countries of EU, but now when Britain renegotiates it’s trade terms with EU, it shall get access to markets of EU countries at a cost which shall relatively lower the profit margins of companies based in UK.

From India’s view point, Pound –Rupee exchange rate would settle at a new equilibrium level which shall unfold as Britain negotiates trade treaties with rest of the world independent of EU. India’s trade relations would undergo a change as comparative advantage between India and UK would only be unveiled at the new equilibrium level of exchange rate.

India Inc. in recent times has become the third largest source of FDI investment in Britain. For Ex. Tata’s acquisition of JLR, has bolstered profits of Tata Motors which is listed on National Stock Exchange (NSE). Share prices of Tata Motors rocketed upwards when Tata posted stellar sales numbers for it’s newly acquired brand on account of exports from UK to other EU countries at a nominal rate. But now all exports from UK to EU member countries would attract custom duty which would lower profit margins for Tata motors.

Other Indian companies based out in UK shall meet the same fate, as a result of which their advance tax payments to the Indian exchequer will fall, which in turn shall reflect in widened Fiscal deficit figures. This might disturb India’s macroeconomic stability and dampen India’s prospects as an attractive FDI destination for foreign investors would wait for the exchange rate to settle.

Indian students looking to go to UK for further studies would have to acquire UK Pound at the new exchange rate which could move either way. This cost uncertainty would deter their plans.

By: Abhinav