Brexit : All You Need To Know and its Impact on India

By Shreesh - June 24, 2016

On23June,theUKwillsettleaquestionthatsbeenrumblingclosetothesurfaceofBritishpoliticsforageneration:shouldthecountry
remainwithintheEuropeanUnion,orleavetheorganisationandgoitalone.

What is Brexit?
BrexitisthetermcoinedforBritainsreferendumtoexittheEuropeanunion.Thereferendumisdueforvotingon23rdJune
2016.MomentumisgrowingbehindtheEUexitcampaign,whichwantstoendcentralcontrolbyBrusselsandgiveBritainthefreedomto
manageitsownaffairs.
PrimeMinisterDavidCameronannouncedthedateafterhesecuredadealwithotherEuropeanleadersatacrunchsummitinFebruary.The
Governmentdecidedtoholdthevotebeforethestartofthesummermigrationcrisis,whichcouldstirupmoreEuroscepticfeelingamongthe
Britishpublic.
British,IrishandCommonwealthcitizens(exceptcitizensofGibraltor)wholiveintheUK,alongwithBritonswhohavelivedabroadforless
than15years,willbeabletovote.Theregistrationforthevotinghasendedon9thJune2016at11:59Pm(BST).Ason7thJunethecountof
registrationstoodat525,000.Update:Thecountisfarhighernowatover45million.Thankstowatchfulcommentershere!

Whats the Scenario?

BrexitisaboutBritainsexitfromtheEU.ThisvotehasbeenputinplacebytheideaofgivingmorepowerstothepeopleofBritainindecision
makingoftheircountry,ratherthanbeingtheimplementerofthepoliciesmadeinBrussels(headquartersofEuropeanUnion).Butitsnotas
simplelikecomingoutofEurope.BritaintraderulesareboundbytheEuropeanlaw,butpostBrexitBritaincannegotiatethetermsand
conditionsofthetradewithdifferentcountries.Theprocessismorecomplexandinvolveslotofinterdependentvariables,likewhichcountry
tradesmorewithBritain,whichoneexportsmoretoitorbuysitsgoodsetc.
Britainhasbeenmoreofaimporterthanexporter.WithabigeconomyandlowresourcesitisdependentonEurope,ChinaandIndiaforits
imports.EuropebeingafreetradeareahasbeenprovidingthefreeaccesstomarketsforBritainuntilnow.
ButincaseofaBrexit,BritainneedstolookintoothermarketslikeIndiaandChinaandotheremergingeconomiesfortrade.Butonthe
contraryitcandoaNorway,byestablishingbilateraltradeagreementswithEuropeanNationsevenaftercomingoutofEuropeanunion.
TheBrexitimpactisnotonlylimitedtoBritain,butalsoEuropeancountries.Londonhasalwaysactedasfinancialhub,whichgivesaccessto
capitalmarketsoftheworldtoEurope.ButwithBrexit,EuropeanUnionwillenduphavingalimitedaccesstocapitalmarkets.Inalllikelihood,
accesstothismarketwillformakeypartoftradenegotiations.
ThereareasmanyprosasconsinBritainexitingtheEurope.ThePrimeMinisterhoweverhasbeenaskingthepeopletovoteagainstBrexit,
citingEconomicwoesasanaftermath.Ithasbeenadifficultshottotakeastheadvantagesanddrawbacksweighequallywiththe
referendum.Yes,Britainwillleavethetradeblock,butislikelytobeabletorenegotiatetreatiesinthelongtimethatBrexitwilltaketo
happen.
ThevotejusttellsusthattheBritishpeoplewanttoexittheEU.Itwillthentaketwoyearsormoretoworkthroughexitmodalities,atimein
whichalotofthingscanbebroughtbacktonormal,includingtraderelations.
Thefirstdirectimpactwillbe,BritainsavingonEUmembershipfee.CurrentlyBritainpays8.5bn(12.9bnoutofwhich4.4bnisdeducted
asexpenses)asthemembershipfee,whichwouldbe12.23%oftheirfiscaldeficitforFY2016of69.5bn.Thiswillnotgotozero,butitwill
besubstantiallylower,andmightleadtoadditionalcollectionofdutiesasBritainimposesdutiesoncertaingoodsasanimporter.

Impact on India:
UKhasalwaysactedasagatepassforIndiancompaniestoaccesstheEuropeancompanies,itsmorebecauseoftheaccesstofinancial
marketsinLondonandeaseofdoingbusinesswithEurope,fromUK.WhywillanyonewanttosetupofficeinEuropeandlearnthelocal
languagetogetaccesstothemarkets,whenthesamecanbedonesittinginLondon?
Indiahaspositivetradesurplusof$3.64billionintermsofbilateraltradewithBritain.Thetotaltradestoodat$14.02billioninFY16,outof
which$8.83billionwasinexportsand$5.19wasinimports.
ForthemonthofApril2016theexportstoBritainstoodat17.66%(USA17.80%)ofthetotalexports.Intermsofimports,Indiaimports
only1.45%ofitsnetimportsfromUK.
IfwelookatexportsfromIndiatoUK,themajorexportsaretextilesandclothing,followedbymachineryandautoancillaries.Indiasmajor
exportsintermsofpharmaareUS,UKfollowedbyEurope.

SoontheeventofBrexit,thepoundratemightfallagainstthedollarandthus,therupee.AndthecompanieswhichhaveincomefromUKand
Europearegoingtobehit,atleastforshorterterm.CompanieslikeMothersonSumiwhichhavetheir85%ofincomecomingfromEuropeare
keepingtheirfingerscrossedonthereferendum.
IndianpharmaindustrywhichhasmoreexposuretowardsEurope,willalsobeaffected.

OntheotherhandtheimportsfromUKwillbegettingcheaperontheeventofBrexit,mainlyroughuncutdiamonds,spiritsetc.ThoseSingle
Maltsmayfinallybeaffordable!
Alsoread:Options:Istherea#Brexitplay?UncleThetaexplores.

Indian Firms to look out for on the event of Brexit.

Company
TataSteel

ImpactofBrexit
HasturnovermorethanGBP2billionfromUKSteel
Plants.Has12productionplantsspreadacrossUK.
JaguarandlandRoverareUKbasedandareUKs

TataMotors(Jaguar&LandRover)

MothersonSumi

KitexGarments

largestautomotivemanufacturers

HavemajorAutomotiveClientsinEuropeand
derivesmorethanhalfofitsincomefromEurope
KitexGarmentsclientMothercarederives20%of
revenuefromUK
ForFY16,itsEuropeoperationgrewby12.9%and

TataConsultancyServices

UKby8.23%.EuropeandUKtogetheraremajor
contributorstoitsrevenue.

BharatForge

TechMahindra

BharatAirtel

MarksansPharma

EmcurePharma

CatersEuropeanautomotiveclients,Has3plantsin
Germanyand1inUK
HasBankingandFinancialClientsfromUK,and
acquiredUKbasedfirmFintech
HasbeenratedbyGrantThorntonasfastest
growingIndiancompanyinUK
UKandEuropemarketaccountfor60%oftheir
revenue.
HasacquiredUKbasedTillomedLaboratoriesand
stillexpanding

MarketswoulddefinitelyseeatemporaryhitbecauseofBrexit.WatchourvideoonHowtohedgeyourportfoliousingOptionsduringBrexitor
anyotherglobalevent?
OthercompanieswhichhavedecentexposuretoBrexitareHClTechnologies,Lupin,NavinFluorine,SunPharma,BombayBurmahtrading
Corp,TVSlogisticservices,Piramalenterprisesetc.

Tracking the Possibility of a Brexit

Therehavebeenvariousreportsandmediacampaignstryingtoinfluencethevoters,buthowcanweasanoutsiderderivewhereisthe
momentumgaining?TohavebetterviewonBrexitmomentum,wecanlookathowpoundisperformingagainstthedollarandEuro.Currency
ofthecountryalwaysisastrongindicatorofconfidenceintheeconomy.IfyouseelatelyfromJune7,thepoundhasbeenfallingfrom1.46
levelstocurrent1.41levelstillJun16.
ReadhowBrexitcausedPoundtoplungeandYentorise

ThisfallshowsthegrowingconcernoftheinvestorsofBritainexitingEurope.ButlaterfromJune16toJun21thepoundhasgainedfrom1.41
levelsto1.47.Nowasthedateisnearapproaching,theinvestors/tradersareseeingitunlikelytohappen.Thoughthisdoesntnecessarily
provideanyconcreteconclusions,butcanhelpintrackingthemomentumoftheBrexitcampaign.
BettingsiteslikeLadbrokeshavebeenpredictingtheBrexitpossibility.

IfwelookatindirectimpactonaneventlikeBrexit,itcouldbeaflighttosafetymeaning,foreigninvestorsexitIndianinvestmentstorush
backtothedollar.Thisisunlikely.Soassuchnothingcanbesaidasofnow,butBrexithasnolimitedimplicationsbutacascadingaffectcan
beseenacrosstheGlobalMarketsonthehappeningofBrexit.Itwilltakesometimetosettlethedust,butneverthelessweneedtobe
preparedforit.

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Shreesh