- Jun 29 2016
The days following Britain’s vote to leave the European Union, a perceptible gloom settled over its capital. In Underground stations, over a beer after work, in sandwich shops at lunch, I could hear dismayed Londoners wonder how Brexit could be good news for anyone.
Well it is good news, in the long run, for some people. Indian companies and exporters are at the top of that list.
True, some Indian companies are seriously overexposed to the British economy. And investors’ predictable flight to safety after an epochal event like Brexit certainly hits emerging markets such as India: The Sensex dropped like a stone after news broke of the result.
Indian information technology companies like Infosys and Tata Consultancy Services — which rely on Europe for perhaps 30 percent of their export revenue — might now have to set up dual headquarters, in Britain and in Europe. For the kind of low-margin projects they typically take on, this sort of increase in costs is a serious problem. Existing contracts denominated in British pounds might have to be reworked in order to stay profitable, according to Indian IT industry lobby Nasscom.
For other companies, uncertainty is going to make strategic planning difficult. Tata Steel, controlled by Tata Sons out of Mumbai, is in the process of working out what to do with its European plants. One recent report claimed the company was close to combining its European operations with Germany’s ThyssenKrupp. It’s unclear whether such a merger would now go forward.
With luck, though, Brexit could force Indian companies to confront some of the unwise decisions they’ve made. For historical and cultural reasons, India Inc has had a bias toward investing in the UK. Tata Sons itself bought not just Corus, to form Tata Steel Europe, but also storied British names Tetley Tea and Jaguar Land Rover.
India is now the third-largest source of foreign investment in the UK. In fact, Indian companies invest more in the UK. than in the rest of the European Union combined, despite the fact that Britain’s economy is just 17.5 percent of the whole EU.
While Britain is ostensibly an entry point into the EU — Prime Minister Narendra Modi said so himself in 2015 — too often Indian companies have indolently replaced a European strategy with a Britain-focused one. Brexit might force them to look harder at opportunities in the rest of Europe.
At the same time, for as much as Indian companies have invested in Britain, they could stand to export a lot more there — and Brexit might improve the conditions under which India trades with the UK.
Talks on a free-trade agreement, or FTA, with the European Union have stalled because of resistance from industry lobbies in India, who insist on continued protection for several sectors. Indian IT companies, for example, want the Europeans to declare that India’s data security provisions are adequate, which would greatly help the business process outsourcing industry. For their part, Indian automakers fear competition from German and Czech-made cars.
In both cases, it might be easier to strike a deal with the UK than with the EU as a whole. The British, too, have long criticised the EU’s standards for data protection as too stringent; they might be willing to accept a more lax regime, closer to the American one. In cars, India might be readier to compromise, given that Tata Motors has a strong presence in both the UK and India.
Why Britain voted to leave the EU
In a few short months, when disengagement with the EU begins to bite in Britain, India should swoop in and offer to fast-track FTA negotiations with Britain. Whoever has taken over at 10 Downing Street by then will be desperately eager to show voters tangible benefits from the new order.
Indeed, that’s perhaps the biggest reason why India might profit in the long run. Notoriously short of plans for victory, the Leave camp have insisted the old British Commonwealth — of which India is by far the largest and most dynamic economy — can serve as a substitute forum for Britain’s international engagement. It’s been striking to watch the parade of Brexiteers on British television name-checking closer ties with India as a crucial part of their economic plans.
In places like Southall and Leeds, there remain fond memories of Britain’s Commonwealth preferences in trade and immigration, which began to be abandoned when the UK acceded to the European Economic Community in 1973. In the words of Leave campaigner and Education Secretary Priti Patel, “many members of the Indian diaspora find it deeply unfair that other EU nationals effectively get special treatment.” Patel added: “Leaving the EU will help reinvigorate relations between the UK and India.” She’s wrong on much else — but on this, she may well be proven right.
This commentary originally appeared in Bloomberg.
The views expressed above belong to the author(s).