Before we look into Post Brexit relations between India and United Kingdom we need to look at the background of the relations between these two countries. India and the United Kingdom have been close allies for a long time. The bilateral relationship between the two countries were upgraded to a strategic partnership in 2004, and were further strengthened by former PM David Cameroon’s visit to India in 2010 and 2013.
PM Modi’s visit to the UK in November 2015 took the relationship to new heights. The situation has changed since June 2016 when nearly 52% of the population of the UK decided to leave the European Union, reversing the decision taken in 1975 to join the common market.
Post Brexit | Trade relations
The UK continues to be among India’s major trading partners.
- Trade relations between the two countries continue to flourish and more recently so with the visit of the PM Theresa May in November this year. Bilateral trade between India and the UK was $ 14 billion in FY16, which was slightly lower than the previous year’s total trade of $14.33 billion.
- During FY16, the UK ranked 12th in the list of India’s top 25 trading partners moving up six places from 18th in 2014-15.
- Despite the global economic slowdown and the Eurozone crisis, India-UK bilateral trade has been resilient. In fact, the UK’s share in India’s global trade has gone up from 1.89% in FY15 to 2.18% in FY16.
- On the same lines, the EU is also India’s largest trading partner with 13% share in 2015. India was EU’s ninth largest trading partner in 2015 with 2.2% share.
- UK continues to be the third largest investor in India after Mauritius and Singapore with a cumulative FDI investment of $23.10 billion between April 2000 to March 2016.
- UK also ranks first among the G20 countries and accounts for around 8% of all FDI into India for the period April 2000 to March 2016. Its two-way traffic as India is also one of the largest source markets for FDI projects in the UK.
- India received $24.91 billion in FDI equity inflows from EU between April 2012 and May 2015. Thus, the EU along with the UK both remain important to India.
Post Brexit | Why UK matters?
- UK’s membership of the EU has often been cited as an important reason for companies investing in the UK, the UK being their ‘Gateway to Europe,’ giving investing companies – especially Indian, Japanese and Chinese companies -access to the common market.
- While other EU members have equal access to the common market, investors see the UK as their preferred investment destination vis-à-vis other jurisdictions in the EU because of its resurging economy, a robust legal system, the English language, ease of doing business, and liquid capital and equity markets.
Post Brexit | Impact
- The impact on Indian FDI to the UK could potentially be over two time periods: the short-medium term and the long term. The short-medium term covers the interim period before the referendum and it saw FDI decrease temporarily, the deterrents being the potential financial instability and a legal regime overhaul.
- An EY survey of 406 investors (31% of those surveyed) suggested that they would “reduce or freeze” potential investment until 2017. 2017 is a conservative estimate, since investors will be wary of investing in the transitory period after the referendum as well, waiting till the market shows confidence in the new investment regime.
- As the UK has voted to leave the EU, FDI may fall in the long-term as well. As a member of the EU, the UK benefits from tariff-free trade in goods and services to the 28 member states, which it will lose if it leaves the EU, making other EU countries – like Germany – possible alternatives.
- The European political landscape with Greece’s recent default and referendum on being part of the Eurozone, has landed the EU in murky waters. This is likely to make European markets unpredictable, a trend evident since the onset of the Greek crisis. The effect of this has been felt even in Germany, the most financially resilient EU member, with business confidence falling for the second consecutive month, and business expectations dropping for the third consecutive month.
- With the Brexit further pushing Eurozone crisis, Euro would fall further. The Indian Rupee has pared back losses against the Euro in the last year moving from 81.56 to 69.99. Indian investors looking to repatriate profits to India will worry that the Euro depreciation can cut into profits.
Post Brexit | Benefits to India?
- From a trade perspective, the UK may benefit from its freedom to negotiate FTAs or other trade agreements with non-EU nations on its own terms. The EU regulates trade with non-EU members on a pan-EU basis. This prevents the UK from negotiating trade agreements with other nations.
- With the UK looking to attract FDI from emerging markets, Brexit would allow the UK to negotiate bilateral trade agreements in lieu of that objective, without stringent EU regulation. Indian investors will benefit from lower regulation (hence cost) and more access than they currently have.
Post Brexit | Conclusion
It is difficult to predict the outcome of Brexit on Indian FDI because of other competing factors like the unstable European markets, a tumbling Euro and possible disintegration of the Eurozone, all tugging in different directions.
Political drive and willingness on both sides to keep the relationship strong and reach further heights would certainly outweigh the uncertainties arising from Brexit. There is immense potential for enhancing not only trade and investment between the countries but several opportunities in other areas of cooperation as well.