• Brexit to hurt capital flows into India, Indian mncs to suffer setback

    Source: FxWire Pro - Commentary / 14 Jun 2016 09:31:50   Eastern Standard Time

    The United Kingdom's referendum scheduled to take place on June 23 that will determine whether UK 'Remains' or 'Leaves' the European Union is likely to hit the Indian sub-continent as well, affecting capital flows amid an adverse impact on Indian establishements settled overseas.

    Britain has always been considered a golden investment destination by most Indian business houses because of the easy access that it provides to over 500 million Europeans. This is because of the ornate legal and tax system that the nation boasts of. Also, it ranks high in the World Bank’s 'ease of doing business' indicator, having a liberal tax system.

    According to data by the British government, 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. According to a corporate report by The Guardian, over 800 Indian MNCs are operating in the UK, employing over 110,000 people. The report also mentioned that these companies generate over 26 million pounds as annual turnover, which is likely to receive a setback if 'Leave' votes surpass 'Remain' on June 23.

    Tata Motors’ largest overseas selling flagship product, Jaguar and Land Rover is also UK’s largest automotive and manufacturing business, contributing around 90 percent to Tata Motors’ operational profit. A vote to exit the EU can have employment implications as well, in the form of fewer hiring and slashing of current employees in a bid of cost cutting.

    Brexit is also likely to endanger the flow of investment and personnel by diminishing Britain's role in providing access to Europe. Further, depreciation in the GBP/EUR is also likely to cause headaches to the Indian economy, especially in an environment of sluggish export growth. According to Goldman Sachs, sterling is predicted to drop almost 15-20 percent immediately in the aftermath of Brexit.

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

    Apart from adversely affecting India, UK, undoubtedly, will suffer if Brexit happens. The nation’s real estate prices will hurt, inflation will also surge as imports become expensive. Further, London’s image as the financial hub of the world may also take a beating. As investor sentiment will be hurt, that might trigger a downfall in flow of money into the economy.