News channels all over the world were flooded with broadcasts of Britain’s withdrawal from European Union (EU) on 24 June 2016.Britishers poured out onto the streets to take part in the referendum organized throughout Great Britain. One could see thousands of ‘leave’ and ‘remain’ placards carried by the voters.72.2% of the population participated in referendum out of which 51.9% voted for ”Leave”.
One of the reason for this unexpected outcome was that Britain was losing out being a part of the EU.
A spluttering economy, immigrant issues and nationalistic yearnings fuelled this outcome. The decision by the UK leaving the European Union has impact on India on multiple layers ,for instance
- IMPACT ON COMPANIES
- With the pound expected to fall 20 percent in case of Britain ,Indian companies with sizeable presence in UK will have to bear the brunt.
- Nasscom recently said that a brexit will have a negative impact on $108 million Indian IT sector In short run .IT companies may need to establish separate headquarters for EU leading to disinvestment from UK.
- This would result in decline in the value of British pounds which would render many existing contracts loosing prepositions unless they are renegotiated.
- Though India is a largely domestic-driven economy, it is no longer immune to global events as was the case in the past.
2. FALL IN CRUDE OIL PRICES
In response to referendum, oil prices immediately declined by 5%. If fall in crude oil prices sustains, it would offset the impact of lower exports on the current account deficit as well as the effect of the depreciation of the INR relative to the USD on inflation.
3. RUPEE MAY HIT 70 VS DOLLAR
The high foreign exchange reserves in historical terms (at $363.82 billion as of June 17) will moderate short-term external debt even after accounting for the upcoming FCNR(B) redemption.
4. BAD FOR AUTOMOBILES
EU today accounts for 35-40% of auto component exports from India. Apart from Auto components, OEMs (original equipment manufacturers) also export passenger vehicles from their Indian manufacturing units, which may get impacted in the event of any slowdown. Further, relative depreciation of GBP (pound) and euro may impact their margins as well.
We can all ponder about the long run effects as well, but the short run discrepancies are going to be hard to deal with, only to be achieved through, a strong combination of monetary and fiscal policies.