EU Referendum: ‘Brexit’ Could Impact the India-UK Trade

India is the third-largest investor in the UK in terms of number of projects.

The DBS says that Brexit is a tail risk for India, the third largest investor in the UK in terms of number of projects. (Photo: Reuters)

The Development Bank of Singapore (DBS) has said that Brexit is a “tail risk” for India, the third largest investor in the UK in terms of number of projects. Britain is gearing up for the crucial referendum next month.

“Brexit is a tail risk at this juncture,” said DBS.

A ‘tail risk’ is the risk of an asset or portfolio of assets moving more than three standard deviations from its current price. It is sometimes defined less strictly as merely the risk (or probability) of rare events.

Britain will vote on whether to remain in the European Union (EU) on 23 June.

Should the vote swing towards the ‘leave’ camp and trigger a broader risk-off reaction, India will feel the heat through heightened volatility in the global financial markets.

DBS

Admittedly, it is difficult to draw an empirical impact on India’s real economy. But if the leave camp wins, it is likely that the UK will seek trade agreements with non-EU partners, including India.

DBS

But this will require the UK as a precursor to sort out its post-exit arrangement with its main trading partner, the EU, first.

Thereafter, a bilateral trade agreement with the UK might become viable as an alternate to the tough and drawn-out negotiations on the EU Free Trade Agreement.

These should provide a fillip to slowing India-UK trade.The UK accounts for 15 percent of India’s total merchandise trade, but its share has been declining.

DBS

Service Imports to the UK Slowing

Trade in services has also eased, with UK service imports from India slowing, now making up only about 2 percent of the total, much lower than with the US and Asia, it pointed out.

Investment links are, meanwhile, notable.

UK is the third-largest inward investor to India, after Mauritius, and Singapore, with cumulative FDI equity investments of USD 22.7 billion from April 2000 to December 2015 ie: 8 percent of the total FDI inflows.

In turn, India is the third-largest investor (number of projects) into the UK.

If the Brexit vote goes through, Indian businesses that tap the UK domestic markets are unlikely to face many challenges.

However, firms that intend to utilise UK as a base to gain access into European markets might have to rethink plans, DBS believes.

While the domestic reform agenda is on track, a favourable global environment contributed to India’s turnaround in the past two years. If the external backdrop turns less favourable, it may undo some of this improvement. These risks, thereby, warrant close attention.

DBS

For India, Oil Prices Warrant Close Attention

The direction of oil prices warrants close attention as it matters most to India, according to the bank.

Currently, the Indian crude oil basket (in INR terms) is up 50 percent from its January 2016 floor.

The other macro indicators will, however, feel the heat of a sustained rise in oil prices beyond USD 60 per barrel.

From a risk perspective, the direction of global crude prices will be important for India, it said.

For now, it remains to be seen if oil prices stay firm in the face of a resurgent US dollar and oversupply from the oil-producing nations.