CRISIL YOUNG THOUGHT LEADER

2016

BREXIT AND INDIAN CORPORATES

ANUSHRI ADARSH RATHI

CHETANAS INSTITUTE OF MANAGEMENT & RESEARCH

EXECUTIVE SUMMARY
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A portmanteau of the words Britain and exit, it is the nickname for a Britains exit
of the European Union after the June 23 referendum.
The separation process is complex, causing political and economic changes for
the United Kingdom (UK) and other countries. On 2 October 2016, British Prime
Minister Theresa May announced she would trigger Article 50 by the end of March
2017 which would make the UK set to leave the EU by the end of March 2019.

The impact on global growth and inflation on the cyclical horizon is likely to be
relatively small and almost certainly not large enough to push the global economy
into recession. Even if the UK fell into a recession, which is a distinct possibility, the
direct knock-on effect on global GDP through lower UK import demand would be
minimal as the UK accounts for only 3.6% of global imports of merchandize goods
and 4.1% of global imports of commercial services.
The impact on India would definitely be a positive yet attractive one. The foreign
investments could impact the Indian corporates. The paper underlines the implications
of Brexit on Indian corporates.

Word Count Executive summary 191

Dissertation - 2292
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INTRODUCTION- BREXIT
The people of Britain voted for a British exit, or Brexit, from the EU in a
historic referendum on Thursday June 23.
The outcome prompted jubilant celebrations among Eurosceptic around the Continent
and sent shockwaves through the global economy.
After the declaration of the result, the pound fell to its lowest level since 1985
and David Cameron resigned as Prime Minister.
The Brexit victory sent economic shockwaves through global markets and Britain lost
its top AAA credit rating.
BREXIT FALLOUT- GLOBAL IMPACT
The outcome of the EU referendum in Britain didn't just shake up the United
Kingdom, it also brought great uncertainty to the global markets.
The impact of the Brexit vote is becoming more and more apparent, and there is no
telling when or where it might end.
Fulfilling various negative predictions, the leave vote severely impacted markets
worldwide. UK has been a very open country to the other countries across the globe.
It has significant business and trade connections all over the world. It has gathered so
much of strengths with its association with the EU over the past decades, which it
held a strong grip on the world economy. After the exit it now can be said the nation
now holds a lesser grip than before. This may likely cause a degeneration of the trust
worthiness among the global traders towards the nation.
Exporting to UK and importing to UK will now not be a piece of cake. Stringent
policies and strict regulations are now awaiting the roads. The movement of
goods within the EU countries will be challenging now.
IMPACT ON INDIA- UNCERTAINITY

With the financial and political consequences of Brexit continuing to reverberate

around the world, questions persist over its impact for the global economy, including
the worlds emerging markets.
What does Brexit mean for India? As a former British colony, the country enjoys
particularly close economic, trade, political and cultural ties to the United Kingdom.
The biggest drawback of the Leave Campaign is that they have not mapped out the
future course of action if Brexit indeed happens. There is no sound plan regarding
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Britain's future relationship with the EU or any other specific country within the EU.
Will they continue to have access to the European markets? Will trade barriers
increase if they leave? Are there any agreements with the Union regarding the
movement of goods, capital and labour? These are the important questions that are left
unanswered by those advocating for Britain to leave the EU. And it is precisely the
uncertainty over these questions that are spooking financial markets across the world.
If Brexit does happen, global financial market volatility can be readily expected.
Markets across the world will tank. The pound will depreciate against most major
economies. India cannot remain immune to this. Sensex and Nifty will tumble in the
short-run.
INVESTMENTS IMPACTEDIndia is presently the second biggest source of FDI (Foreign Direct Investment) for
Great Britain. One of the main reasons for this is the historic and cultural ties with the
UK that India shares along with the fact that the UK proved to be a gateway into the
rest of Europe.
Indian companies that would set up their factories in the UK could sell their products
to the rest of Europe under the European free market system. However, if Britain exits
the EU, it will not be as attractive a destination for Indian FDI as before. Having said
that, Britain would not want to lose out on capital coming in from India.
Thus, one can expect Britain to try extra hard to woo Indian companies to invest there
by providing much bigger incentives in terms of tax breaks, lesser regulation and
other financial incentives. Further, if Britain is leaving the EU due to the latter's
complex bureaucratic regulatory structure, Indian companies can expect a deregulated
and freer market in Britain. Brexit will likely compel London to seek a more robust
trade relationship with New Delhi.

ECONOMIC KEY POINTSRupee may depreciate because of the double effect of foreign fund outflow
and
dollar
rise.

This

will

increase

petrol

and

diesel

prices

to

an

extent.

The government then may want to reduce additional excise duty imposed on
fuel when it was on a downward trajectory. This will increase fiscal deficit,

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unless

Prices

revenue

of

gold,

electronic

goods,

increased.

among

others

will

increase.

Cheaper rupee will make Indian exports, including IT and ITeS, competitive.
OTHER IMPACTIAL AREASBritains exit from the EU, will surely have a loss to Indias gateway to Europe. This
might force India to forge ties with another country within the EU, which would be a
good result in the long run. India is already trying to build trade negotiations with
Netherlands, France, Germany, and others, albeit in a small way. Netherlands is
India's top FDI destination as of now. A Brexit could force India to build trading
partnership with other EU nations in order to access the large EU market.
With Britain cutting off ties with the EU, it will be desperate to find new trading
partners and a source of capital and labour. There have already been many proponents
of the Leave Campaign that suggest that the UK should look towards the
Commonwealth to forge new alliances. Some analysts predict Brexit could lead to
changes in UK immigration policies that would favour high-skilled workers from
India. Divorced from the rest of the Europe, the UK could potentially face a dearth of
high-skilled EU workers if the movement of professionals from the continent is
curbed. India could benefit from the possible shortfall .Britain will still need a steady
inflow of talented labour, and India fits the bill perfectly due to its English-speaking
population. With migration from mainland Europe drying up, Britain would be able to
accommodate migration from other countries, which will suit India's interests.

Further, Britain is one of the most important destinations for Indians who want to
study abroad. Presently, British universities are forced to offer subsidized rates for
citizens of the UK and EU. With Brexit, however, the universities will no longer be
obliged to provide scholarships to EU citizens, which will free up funds for students
from other countries. Many more Indian students may be able to get scholarships for
studying in the UK.

INDIAN CORPORATESIndia is one of the most lucrative markets for foreign investors and, hence, we attract
attention globally. So, any major change across the globe, be it political or economic,
is bound to have an impact on India too.

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For India, it would be more of a reaction to global news, which does not affect it
directly to a large extent, except possibly some of the corporates which have large
exposure to UK.
Britain always provided a gateway to the European Union. Many Indian businesses
have their offices in Britain so they can avail benefits and continue to remain a part of
the EU. But with Brexit, this benefit will be taken away and may result in companies
relocating their business set ups to other places.
Brexit might also have a positive effect, but these results may not show up
immediately. The process might take time considering that the new government will
take time to design and implement their policies.
In the 2016 financial year, India-UK bilateral trade was worth $14.02 billion. India
exported goods and services worth $8.83 billion while imports from the UK were at
$5.19 billion. In the last five years, the trade has been more or less stable.

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Indian pharma industry which has more exposure towards Europe, will also be
affected. On the other hand the imports from UK will be getting cheaper on the event
of Brexit, mainly rough uncut diamonds, spirits etc.
Company

Impact of Brexit

Tata Steel

Has turnover more than GBP 2 billion from UK

Steel Plants. Has 12 production plants spread across
UK.

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Tata Motors (Jaguar &Land

Rover)

Jaguar and land Rover are UK based and are UKs

largest automotive manufacturers

Motherson Sumi

Have major Automotive Clients in Europe and

derives more than half of its income from Europe

Kitex Garments

Kitex Garments client Mothercare derives 20% of

revenue from UK

Tata Consultancy Services

For FY16, its Europe operation grew by 12.9% and

UK by 8.23%. Europe and UK together are major
contributors to its revenue.

Bharat Forge

Caters European automotive clients, Has 3 plants in

Germany and 1 in UK

Tech Mahindra

Has Banking and Financial Clients from UK, and

acquired UK based firm Fintech

Bharat Airtel

Has been rated by Grant Thornton as fastest

growing Indian company in UK

Marksans Pharma

UK and Europe market account for 60% of their

revenue.

Emcure Pharma

Has acquired UK based Tillomed Laboratories and

still expanding

Other companies which have decent exposure to Brexit are HCl Technologies, Lupin,
Navin Fluorine, Sun Pharma, Bombay Burmah trading Corp, TVS logistic services,
Piramal enterprises etc.
Companies in sectors such as automobiles, auto components, information technology
services, textiles, Pharmaceuticals, gems and jewellery, leather, and leather products
are most vulnerable to changes in demand and currency value. Metal companies
would be hurt by the likely downward pressures on prices and potential slowdown in
demand, at least in the near-term. Sectors such as shipping and ports that are reliant on
global trade will also have to grapple with lower growth and consequently lower
freight rates and utilisation. Further, companies with unhedged overseas borrowings
will be affected by volatility or temporary sentiment-driven weakness in the rupee.
AUTOMOBILE SECTORIn the automobile industry, Brexit may lead to reduction in sales and companies that
derive good revenues of profits from Britain could get hurt majorly.

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The UK and the EU account for 4% and 16% of India's automobiles exports. For
companies manufacturing in the UK, access to the single market is important;
products will get uncompetitive if they have to pay duties. In the near term, products
become cheaper but profits will fetch lower amounts
The UK Passenger Vehicle market is highly export oriented and the segment has close
linkages with the EU automotive market. The anticipated slowdown in the UK and the
EU region will have a dampening effect on the sector. The real impact will also
depend on imposition of any trade restrictions between the EU and UK, which will
become clearer over the medium term.
ITFor IT services, Europe (including the UK) accounts for around 29% of total exports.
India is one of the largest exporters of IT-enabled services and the sector has
significant exposure to the European market especially the UK. UK accounts for
about 17% of Indias total IT exports. The IT companies thus are expected to face the
heat in light of the Brexit. Given the risk of further moderation in growth in the UK
and EU, there is an increased probability that the companies lower their IT budgets (a
discretionary spend). This would have an impact on the domestic software companies.
The immediate fallout of Brexit on the IT industry in India would be the impact of any
possible decline in the value of the British Pound, which would render many existing
contracts losing propositions unless they are renegotiated. Secondly, the uncertainty
surrounding protracted negotiations on the terms of exit and/or future engagement
with EU and any attendant uncertainties in exchange rates would adversely impact
industry since in general, uncertainty affects business negatively. Furthermore, any
negative impact on the British economy in terms of slower growth or worse, could
reduce opportunities for Indian companies in UK.
Consequently, a negative implication of Brexit is that Indian IT companies may need
to establish separate headquarters/operations for EU, leading to disinvestment from
UK and diversion of activity from UK to EU.
PHARMAPharmaceutical United States is Indias biggest market for Pharmaceutical exports,
while EU accounts for 10-13% of Indias total pharma exports. The share of UK in
Indias pharma exports is about 3-4%. India's pharmaceutical sector has significant
exposure to the UK and the EU, with exports of $0.46 billion to the UK and $1.51
billion to the EU. The pharma companies reported having hedged their exposure to the
Euro. Further, the companies pointed out that the rules, regulations and product

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registrations are already different for UK and EU and hence any adverse impact on the
sector can be ruled out.
Therefore, the sector is unlikely to be significantly affected, but companies such as
Aurobindo and Wockhardt, with higher exposure to Europe, will see some impact.
GARMENT EXPORTSGarment exports accounted for a fifth of India's exports to the UK. Indian garment
exporters have already witnessed a 5% drop in demand last year, and could see lower
sales due to a slowdown in growth. Readymade garments account for about 20.0% of
the Indias total exports to the UK. The sector is expected to feel the pinch on account
of moderation in demand. Nonetheless, some of the garment exporters have also
opined that they might be insulated if a Free Trade Agreement is negotiated with the
UK post Brexit.

TRAVEL & TOURISM-

The travel and tourism sector will be affected by the Brexit developments, as it is
directly affected by currency fluctuations. Travel to the UK could get a boost, as the
British economy gains competitiveness via a weaker currency. But, it also means
fewer British tourists in India and lower spending.

CONCLUSION

Businesses may even be affected due to the macroeconomic impact of Brexit. After
Brexit, central banks will intervene to minimise volatility in the financial markets.
They might cut interest rates to improve liquidity globally. As of now not much can be
anticipated about Brexit but surely it will have a cascading effect on our economy. Till
the dust of Brexit is settled Indian companies with ties to the UK and EU need to start
planning their strategies to deal with Brexit now.

BIBLIOGRAPHY
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 http://capitalmind.in/2016/06/brexit-need-know-impact-india/
http://www.ndtv.com/opinion/yourghttp://ficci.in/SEDocument/20369/BREXIT-July-2016.PDF
http://www.business-standard.com/article/international/brexit-impact-onindian-businesses-116080900057_1.html
Guide-to-brexit-and-5-ways-it-will-impact-india-1421554
http://www.forbes.com/sites/ronakdesai/2016/07/06/what-brexit-meansfor-india/#33e42621559f
http://www.ndtv.com/opinion/your-guide-to-brexit-and-5-ways-it-willimpact-india-1421554
http://www.moneycontrol.com/news/business/10-ways-brexit-will-affectsmall-businessesindia_7464641.html?utm_source=ref_article

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