The UK will be in the market for concluding bilateral trade deals with other countries. India could take advantage of this opportunity and strike a mutually beneficial free trade pact...
Less than four weeks ago, pollsters were predicting a “Remain” vote in the UK referendum on European Union. On Wednesday, July 13, Theresa May took over as UK’s 76th Prime Minister. Over the last 25 days, the UK has been hit by a whirlwind of completely unanticipated events.
Immediate impact of Ms May’s swearing in was to restore political certainty. Markets abhor ambivalence and confusion. Ms May’s impeccable track record infused confidence among people.
May is widely seen as competent, tough and no-nonsense leader. The first challenge was to appoint an experienced minister to skilfully navigate Britain out of the EU. For this she has reposed her faith in Boris Johnson, the staunchest proponent of the “Leave” camp. Only time will tell how judicious her choice is. Prima facie it appears to be a huge risk to assign this critical responsibility to someone who is unpredictable and in habit of committing embarrassing gaffes. His credibility dipped precipitously when after the referendum he declined to contest for the top job. His total commitment to “Leave” position could be a liability when he seeks to negotiate a positive deal for Britain.
Ms May’s endeavour would be to strike a deal in which the UK can control migration yet protect British access to the common market. Her selection of a capricious Eurosceptic to steer this exercise could prove to be politically risky and indiscreet.
Equally important for Ms May is to unite her party which has split through the middle on account of a significant number having campaigned for the “Leave” position. Ms May is a Eurosceptic who had campaigned, though not enthusiastically, for the “Remain” stand. Her opponents in the party are disappointed as they wanted a “Brexit Prime Minister” from the Eurosceptic wing of the party. Ms May enjoys good rapport with senior party functionaries to effectively don the mantle of a peacemaker.
Although there has been some speculation on a second referendum, Ms May has quashed all such hopes. She has repeatedly declared that she will deliver an honourable exit from the EU.
Economy took a huge plunge in the aftermath of the referendum. Pound sterling plummeted to its lowest in 30 years, more than $3 trillion was wiped off global stock markets, Britain’s credit ratings were downgraded by several rating agencies. Maintaining the dynamism of the domestic economy and retaining London’s premier position as a financial centre will be one of Ms May’s foremost challenges.
Former Prime Minister David Cameron was well known to India. He visited India three times (in May 2010 soon after becoming the PM, and in February and November 2013) before a return visit by Prime Minister Narendra Modi in November 2015.
Mr Cameron was committed to fostering wide-ranging, multifaceted economic ties with India. He went out of his way to accord a spectacular reception to Mr Modi on his three-day visit to the UK last November. Ms May is so far a comparatively unknown leader. It will be some time before rapport and comfortable working relations between leaders of India and the UK are established. Ms May will be pre-occupied with domestic and regional affairs in the coming months to have much time to devote to relations with India or other extra-regional partners, except the US.
Mr Modi had indicated his preference for “Remain” position during his visit to the UK in November 2015, when he remarked that the UK is India’s gateway to Europe. Most Indian companies use their businesses in the UK as launch pads to access the European market in goods and services. Indian companies have more than 800 subsidiaries in the UK which generate billions of dollars in revenue annually and employ more than 1,10,000 people, according to a London-based consulting firm. Brexit would mean local companies wouldn’t be able to enjoy benefits of free trade within Europe and would be required to pay higher tariffs making their products less competitive. They will need to look seriously at establishing manufacturing bases and service platforms on the continent. Last year India was third largest source of foreign direct investment after the US and France.
The UK’s decision to leave the EU will force Indian companies to reassess their investments in that country. Financial stress on Indian firms and banks could increase on account of increasing uncertainties. Operations of large number of IT firms operating in the UK could become unprofitable on account of falling value of the pound. Uncertainty could further push down energy prices which will be beneficial for India. Assets in the UK could become attractive for acquisition by Indian companies on account of fall in their value. Some companies could gain with the weaker pound as this would help them to import at more competitive prices from the UK.
Brexit could provide greater opportunities to Indians to get work visas if restrictions are imposed on EU citizens to work in the UK. Profitability in the Indian market and prices of shares could show a significant appreciation as India could emerge as an even more attractive investment destination.
The UK, on its exit from the EU, will be in the market for concluding bilateral trade deals with other countries. India could take advantage of this opportunity and strike a mutually beneficial free trade pact. Discussions with the EU on a bilateral trade and investment agreement have been going on for the last nine years with no end in sight. The UK will be more forthcoming in striking a deal.
Indian stock market suffered an initial steep decline after the referendum result was announced but soon recouped most of its losses. India’s healthy macro fundamentals, including low current account deficit, growing foreign direct investment and high forex reserves helped restrict adverse impact of the result. Indian industry appears confident that it will emerge stronger in its relations with the EU and the UK.
These are early days. Exact contours of Britain’s relations with the EU, India and other major partners will become clear in the coming months. There will be some losses but benefits to Indian government, industry and individuals could far outweigh these costs.
The author is a former ambassador
