Why Should India Care About ‘Brexit’?

Companies may need to rethink their European strategy in the event of a ‘Brexit’; some may take a hit on profits.

UK Prime Minister David Cameron. (Photo: Reuters)

• #Brexit will have an “adverse impact” on investments in India.
  
• Indian companies are the third largest source of FDI in the UK.
  
• Over 800 Indian companies have presence in the UK.
  
• Fastest-growing Indian companies in UK generate over 26 billion pounds of turnover.
  
• Many will need to find another European city to serve as gateway into the EU.

If Britons Vote ‘Leave’

On 23 June, the British people will decide to ‘leave’ or ‘remain’ in the European Union. Recent opinion polls suggest that history is about to be made – Britain may exit after four decades of being a member of the political union.

Based on a recent YouGov/Sunday EU referendum voting intention survey, ‘leave’ voters stand at 43 percent just edging the ‘remain’ camp, which stands at 42 percent. The remaining people polled are still undecided.

“Brexit could mean fewer JPMorgan jobs in the UK and more jobs in Europe,” JPMorgan Chase & Co CEO Jamie Dimon told Bloomberg.

However, the impact of the #Brexit vote will not be limited to Britain or Europe. Several Indian companies will hurt if Britons vote to ‘leave’.

Why Brexit Will Hurt India Inc

The UK has always been touted as an attractive investment destination because of the access that it provides to European market, of more than 500 million people. This is especially because the UK offers a robust legal system, a favourable tax regime and ranks high in the World Bank’s ease of doing business rankings. The fact that English is the most widely spoken language in Britain doesn’t hurt, either.

UK is the third largest source of foreign direct investment in India. Indian companies are the third-largest source of foreign direct investment for the UK, the British government says.

FICCI, one of India’s top industry groups, worries that Brexit could create a lot of uncertainty for India Inc.

...we firmly believe that leaving the EU, would create considerable uncertainty for Indian businesses engaged with UK and would possibly have an adverse impact on investment and movement of professionals to the UK.

Dr A Didar Singh, Secretary General, FICCI

Peter King, partner at the London office of law firm Weil, Gotshal & Manges says Brexit could create considerable risks.

The uncertainty may well lead to economic recession in Europe, and the extent to which the UK is open to trade with India may be affected. A vote to leave the EU will create considerable risks for any Indian business which trades with the UK or the rest of the EU, which may well lead to job losses in India.

There are over 800 Indian companies in the UK employing over 110,000 people, according to a Grant Thornton report. The report also says that the top fastest-growing Indian companies in UK generate over pounds 26 billion of turnover.

Many of these companies might need to do some serious contingency planning were Britain to exit the EU. They may want to consider another European city instead of London as their entry point into Europe, so as to continue to enjoy free trade and workforce mobility. For many, Brexit will hurt India bottomlines too.

London’s mayor, Sadiq Khan on Sunday 12 June 2016, pledged to fight until the moment the polls close to persuade Britons to vote to remain inside the European Union bloc, in the upcoming 23 June referendum. (Photo: AP)

Case in Point: Tata Motors

The largest subsidiary of Tata Motors, Jaguar Land Rover, is also UK’s largest automotive manufacturing business, contributing around 90 percent of Tata Motors’ operational profit.

Peter King thinks that in the event of a Brexit, such a company may need to rethink its European strategy altogether.

At present cars assembled in the UK can be freely sold across the rest of the EU without tariffs. Following a Brexit, it may make more sense to have an assembly plant in one of the remaining EU countries rather than in the UK. Mobility of workforce is another issue for a company like Tata Motors. It will be more difficult to take a worker trained in the UK and redeploy her in France, for example.

Jayant Dasgupta, Executive Partner at law firm Lakshmikumaran & Sridharan and former Ambassador of India to WTO says the impact on profits could be substantial.

One of the attractions of locating a manufacturing facility in a large integrated market like the EU is that while manufacturers from non-EU countries face a tariff barrier, a local manufacturer like Tata Motors – UK being inside the tariff wall – enjoys a 10 percent (the average import tariffs for cars in the EU) price advantage for cars. For an expensive item like a luxury car, this advantage is significant. Britain does roughly half of its trade with the rest of the EU. For the sake of simplicity, if we assume that the exports of Tata Motors, UK is also roughly in that proportion between the rest of the EU and elsewhere in the world, then half of the Tata UK cars exported after Brexit, would lose that 10 percent price advantage. Thus the profitability of Tata Motors, UK may get affected significantly.

In the fourth quarter of financial year 2015-2016, Jaguar Land Rover sold 40,921 units to Europe, that’s 27.3 percent of its global sales. While Tata Motors did not comment on the exact tariffs applicable on JLR sales to EU countries or the potential impact of a Brexit, the company said that business may be hurt.

Jaguar Land Rover supports continued UK membership of a reformed EU. Access to our customers and suppliers is important to us -any changes could impact our sales, our costs and the skills base.

Tata Motors Statement

Other companies like Tata Steel, The Bombay Burmah Trading Corporation, and Cox and Kings may also suffer troubles on account of a Brexit as they too have important subsidiaries in Britain.

(Infographic: Rahul Gupta/The Quint)

(Infographic: Rahul Gupta/The Quint)

(Infographic: Rahul Gupta/The Quint)

(Infographic: Rahul Gupta/The Quint)

UK Independence Party (UKIP) party leader Nigel Farage is confronted by the media before he addresses media and party members during a speech focusing on the upcoming EU referendum in London. Farage is a leading campaigner advocating Britain to cut its ties with the rest of Europe, known by the nom de guerre ‘Brexit‘. (Photo: AP)

Collateral Impact?

Another scenario to be considered is that of Indian subsidiaries of British companies.

The business model of many such companies depends upon the EU being a free trade zone and on workforce mobility. One of my friends, for example, is a UK citizen working for Unilever. His job requires him to be based in Switzerland and to work extensively in Poland and Spain. This will not be so easy under a regime in which the UK is imposing restrictions on workers from the EU working in the UK and the EU is imposing reciprocal restrictions. This is more of an intra-Europe issue and I do not see it having a direct effect on the operations of a company like Unilever in India, except to the extent that management focus and investment will be directed towards restructuring the operations in Europe.

Peter King, Partner, Weil, Gotshal & Manges

The Future of India’s Trade Ties With UK and EU

In the event of a Brexit, 23 June would only be the beginning. If the ‘leave’ camp triumphs, Article 50 of EU’s Lisbon treaty will be activated and that’s when the UK and the EU will negotiate their future relationship. The law allows for up to two years of negotiation, post which the EU could present the UK with a deal.

Any new comprehensive deal between the UK and the EU would be expected to be the subject of difficult and long-winded negotiations. The UK would first need to first determine its own objectives and assemble a team of negotiators able to take on the task and the EU would have no incentive to make life easy for the UK.

Gavin Williams, Partner, Herbert Smith Freehills

Tata Steel plant in Scunthorpe northern England. (Photo: Reuters)

That EU-UK re-negotiation may have a collateral impact on the UK’s other trading partners as well. But some experts believe it will be limited.

Even after a Brexit, the UK will have to abide by its goods tariff, services bindings and all other commitments given to the WTO as an EU Member State. Thus, in terms of bilateral trade with India, nothing will change in substance. However, in respect of independent professionals or contractual service suppliers working for a business entity in the UK, the easy access enjoyed to the rest of the EU markets may get restricted. This may reduce the numbers of such professionals moving from India to the UK, after Brexit.

Jayant Dasgupta, Executive Partner, Lakshmikumaran & Sridharan

As the drama plays out over the next few months, Indian businesses will be watching closely, as will Prime Minister Modi. In a recent interview with The Wall Street Journal, Modi said that the UK is India’s “gateway to Europe’’ and that a united Europe would be favourable to all.

Also Read:
Brexit Would Be Serious Risk to Global Economic Growth: G7 Leaders
EU Referendum: ‘Brexit’ Could Impact the India-UK Trade
World Leaders Voice Their Concern About Britain and Brexit