Brexit: Blow likely for Indian companies as they may have to rework plans

The Brexit option is now a reality and quite surprisingly contrary to expectation, the swing has gone in favour of Britain exiting the EU. The ratio of 52% to leave and 48% to remain is just about the reverse of what was expected with one school thinking that it would be a non-event. But now it has become one of the biggest events which will set a precedent for similar thought processes in other areas of economic importance. While technically the Parliament can still decide not to follow the result of the referendum, it is almost certain that this would happen. Also there will be a transition path over the next 2 years before this happens and during this period, the details would be worked on. [caption id=“attachment_2851678” align=“alignleft” width=“380”] Reuters[/caption] There are two thoughts here. The first is that a Brexit will provide an incentive for other nations to also consider leaving the union in case they feel the odds are against them. Hence, the success of Britain or the imperviousness of the economy post departure will be the driving force behind other countries following suit. This will typically hold for the larger countries than smaller ones which have been net receivers of benefit from such a common market. Several political parties would be enthused to make this one of the election planks when they contest for power in the EU nations. Again it will hold more for the larger nations where it can be shown that they are giving more than what they are receiving from the union. Therefore, the countries that go in for elections would be the ones to be monitored for such thinking. The second thought relates to the contra winds bowling now on the concept of decoupling from common economic markets. The focus so far has been on global integration with various countries through various agreements, with the WTO being the biggest integration, albeit only on the trade front. But there are constraints when countries work together on common grounds as it does mean a certain loss of flexibility and independence in pursuing their own policies. This is definitely a negative for globalization. As one of the driving factors for this exit has been the way in which immigration is tackled, it would be a success for local labour force. European countries in particular which are in the euro zone have been impacted by the austerity measures that had to be pursued following the euro crisis. There has already been such thinking when the Grexit concept came up a couple of years back where the work force was affected. There will be some hard thinking now on immigration in general. Will Britain be affected perversely? Probably not, as there is already a strong relation between the two parties which cannot be severed as there is a symbiotic relation. But there will be some areas where Britain will end up losing as it will have to bargain on its own with the EU and may not always be successful. The banking sector in particular will have to redraw the lines as their operations crisscross these countries and play a role in fostering growth in trade. But again, it may be expected that the changes or adjustments required would be minimal as these systems are well set. The worst case scenario is that their operations could be put on par with those of other countries like say USA or Canada and the preferential treatment could be gradually withdrawn. But considering that European banks also have operations in the UK, this possibility may not be very serious. For Indian companies, this will be a big blow as they have to rework their plans immediately. Of late companies have been moving over the England to set up business or acquire companies. In a situation where there are growth challenges in UK and the domestic business not yet picking up, these companies will have to contend with this challenge of dealing with European markets. The IT, pharma, automobile, metals industries could be the ones that come under the circumference of impact here. On the markets front, the stock indices are likely to return to normal after a couple of trading sessions. The fact that the results have come out on a Friday will provide the weekend to recover from the shock and get back to business. The impact on say the Indian markets should be nullified over time. However, the specific scrips which have an exposure to the UK markets would be under scrutiny and pressure. Therefore, while the precipitous fall in the Sensex should get corrected the company impact may be more deep lasting. Currencies too have taken a tumble, including the rupee. This too should get back to normal based on fundamentals. However, the pound would see some permanent correction once the exact impact is digested. The fall out of this could be a stronger dollar which can once again pressurize other currencies. This would need to be monitored by central banks all over to ensure that the 2013 impact does not permeate the epidermis of markets. The Brexit cannot be ignored by countries outside UK due to the effect of currencies which can get destabilizing, though it is not expected as the transition period of a little over 2 years will provide time for adjustments to be made. What we really need to watch out for are similar demergers in other edifices of globalization built over the years. The author is chief economist, CARE Ratings. Views are personal