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Brexit by Dr. Bhavna Chhabra final


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Impact on India
Research report FICCI, CRISIL,GT

Published in: Economy & Finance
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Brexit by Dr. Bhavna Chhabra final

  1. 1. BREXIT - IMPACT ON INDIA Dr. Bhavna Chhabra
  2. 2. FACTORS AFFECTING INDIA’S GDP GROWTH •Subdued Global Demand •Weak Rural Income •Recent - Higher Food inflation •Leverage for large corporate’s •Increase in NPA •Low credit take off Stable Government – Initiatives -Make in India, Ease of doing Business •Budget allocation to Agriculture and Rural sector, Education & Infrastructure. •Good Monsoon •GST •Increased flow of FII •Seventh Pay Commission •Urjit Patel –Tough on Inflation control
  3. 3. Survey Done on Indian Inc by FICCI July 2016. 45 Companies (from Education, information technology, tyres, pharmaceuticals, steel and steel products, automotive, textiles, apparel, and financial services ) Pulse of India Inc.
  4. 4. Respondents divided about the likely impact of Brexit on their business interest
  5. 5. About 50% of the participants do not intend to set up separate operations in any other country of the European Union because of Brexit
  6. 6. Impact on Bilateral Trade & Investments with UK over the Medium Term (next 3-5 years)
  7. 7. Impact on Bilateral Trade & Investments with UK over the Medium Term (next 3-5 years)
  8. 8. Impact on Migration & Intra Company Transfers with respect to UK over the Medium Term (next 3-5 years)
  9. 9. Majority of the respondents were of the view that signing a comprehensive FTA with the UK on goods, services & investments may help mitigate any negative impact of BREXIT on India.
  10. 10. IMPACT ON INDIAN ECONOMY  Uncertainty in global markets will impact global economy.  Indian position is fairly stable and will be more dependent on domestic factors.  Good rainfall is expected to improve agriculture sector  Declaration of seventh pay commission is also expected to boost the demand for all sectors specifically automobile sector, Consumer goods sector etc.  GDP forecast still at 7.7% by economic outlook for 2016-17.  Introduction of GST will also have positive impact on GDP.  Brexit is unlikely to have a notable impact on GDP growth in fiscal year 2017. MACRO ECONOMIC FACTORS GDP
  11. 11. IMPACT ON INDIAN ECONOMY India’s exports to the UK have been around 3% of our total exports and exports to the European Union are around 17% of total exports. Our exports to both UK and Europe have been on a downtrend in the past two years on account of subdued demand led by a frail and scattered recovery in the region. Post Brexit there is a heightened chance of this trend being amplified over the near term given the possibility of disturbances in currencies and UK facing a further slowdown in growth. However, some safeguards are expected to be put in place to deal with the volatility in currency in the UK. Also measures to boost growth might be rolled out. The situation is expected to even out over the medium term EXPORTS
  12. 12. IMPACT ON INDIAN ECONOMY FDI UK’s decision to leave EU is expected to impact the confidence level of the business and the investor community and there might be a temporary arrest in outbound investments from India to the UK until more clarity is obtained on the working framework between the EU and UK. However, the Government has considerably liberalised the FDI regime in the country and there has been an increase in FDI inflows over the last two years. This trend is expected to continue. With the slew of measures announced in June 2016, India has opened up almost all sectors for foreign investors barring a very small negative list. India has once again strengthened its position on the investment radar and the growth prospects in the country remain strong. India is expected to get continued attention from the investors including investments from the UK. UK is third largest investor in India and accounts for about 8.0% of the total FDI inflows in the country.
  13. 13. IMPACT ON INDIAN ECONOMY RUPEE VALUE The Rupee can witness some volatility in the coming weeks as there is still anxiety in the global markets. However, RBI has been quick to intervene to manage liquidity through open market operations and use the foreign exchange reserves to tackle currency volatility and capital outflows in case of any skewed movements.
  14. 14. IMPACT ON INDIAN ECONOMY INFLATION Oil and commodity prices have been subdued and there is no intermittent risks at present that will make the prices shoot. Global growth remains muted and an upward pressure on that account is suppressed for now. On the domestic front, good monsoons have been as predicted. Prices of food articles are likely to remain manageable. Conclusion : Inflation seen flat around 5% The inflation forecast of 5% for fiscal 2017 as domestic factors such as the monsoon remain favorable. Global growth will be subdued, keeping oil and commodity prices benign, which is a positive for inflation in India. Also, we expect lower food inflation resulting from a normal monsoon. Proactive measures taken by the government and continued fiscal consolidation will keep inflationary pressures at bay in fiscal 2017.
  15. 15. IMPACT ON INDIAN ECONOMY GOLD Investors sought refuge in gold, a safe haven asset. Gold prices in India shot up as much as 6% on Friday and 4.2% versus the US dollar. At one point, it was up as much as 8.1%, the biggest rally since 2008. The outlook is bullish for the yellow metal in a period of likely prolonged uncertainty as other European countries might be tempted to follow the UK. The chances that the US will hike rates before December have also declined to near zero, which is another boost for gold prices (since rate hikes increase the opportunity cost of holding the metal).
  16. 16. IMPACT ON INDIAN ECONOMY SECTORAL IMPACT - AUTO, IT, TEXTILES, PHARMA, LEATHER & METALS Companies in sectors such as automobiles, auto components, information technology services, textiles, pharmaceuticals, gems and jewellery, leather, and leather products are most vulnerable to changes in demand and currency value. Metal companies would be hurt by the likely downward pressures on prices and potential slowdown in demand, at least in the near-term. Sectors such as shipping and ports that are reliant on global trade will also have to grapple with lower growth and consequently lower freight rates and utilisation. Further, companies with unhedged overseas borrowings will be affected by volatility or temporary sentiment-driven weakness in the rupee.
  17. 17. IMPACT ON INDIAN ECONOMY SPECIFIC SECTOR- AUTO COMPONENTS India is a major supplier of auto components to the EU region. The region accounts for about 36% of India’s total auto component exports, while the share of UK is about 5%. The UK Passenger Vehicle market is highly export oriented and the segment has close linkages with the EU automotive market. The anticipated slowdown in the UK and the EU region will have a dampening effect on the sector. Also, the depreciating Pound will impact the revenue stream companies of over the near term. The real impact will also depend on imposition of any trade restrictions between the EU and UK, which will become clearer over the medium term.
  18. 18. IMPACT ON INDIAN ECONOMY SPECIFIC SECTOR- INFORMATION TECHNOLOGY UK accounts for about 17% of India’s total IT exports. India’s IT exports to other European countries is at about 11%. The IT companies thus are expected to face the heat in light of the Brexit. Given the risk of further moderation in growth in the UK and EU, there is an increased probability that the companies lower their IT budgets (a discretionary spend). This would have an impact on the domestic software companies. Further, the depreciation of Pound does not augur well for the sector and can negatively impact the growth in the sector. Majority of the costs by the IT companies are incurred in INR owing to the off- shoring model deployed by the Indian IT services player. So a sustained depreciation of Pound might call for a renegotiation of the contract, as the profitability of these contracts might fall below the expected levels.
  19. 19. IMPACT ON INDIAN ECONOMY SPECIFIC SECTOR- METALS With the global recovery remaining frail and an evident moderation in China, the steel and aluminium sectors are already facing the issue of overcapacity. Demand in the EU has been subdued and this latest development is expected to further dampen demand. This might lead to a greater weakening of metal prices giving rise to earning pressures for companies.
  20. 20. IMPACT ON INDIAN ECONOMY SPECIFIC SECTOR- PHARMA EU accounts for 10-13% of India’s total pharma exports. The share of UK in India’s pharma exports is about 3-4%. The pharma companies do not really expect a big hit following the Brexit and have indicated a limited impact of Pound depreciation. The pharma companies reported having hedged their exposure to the Euro. Further, regulations and product registrations are already different for UK and EU and hence any adverse impact on the sector can be ruled out.
  21. 21. IMPACT ON INDIAN ECONOMY SPECIFIC SECTOR- GARMENTS Readymade garment is one of the key export items to the UK from India. Readymade garments account for about 20.0% of the India’s total exports to the UK. The sector is expected to feel the pinch on account of moderation in demand; the spend on readymade garments is primarily discretionary. Also, the drop in the Pound is expected to impact the un-hedged export contracts with British counterparts. Nonetheless, garment exporters might be insulated if a Free Trade Agreement (FTA) is negotiated with the UK post Brexit.
  22. 22. IMPACT ON INDIAN ECONOMY SPECIFIC SECTOR- STOCK MARKETS Brexit is a very small event and the market has already digested it. "Some news about Brexit was there in the market for several days, so this did not come to the market as a surprise," says Vikaas M. Sachdeva, CEO, Edelweiss Mutual Fund. "Risk aversion is likely to take hold across asset classes," says Michael Strobaek, Global Chief Investment Officer, Credit Suisse. "Indian markets should perform better compared to most other emerging markets and also the developed markets," says Dipen Shah, Senior Vice-President and Head, Private Client Group Research.
  28. 28. IMPACT ON INDIAN ECONOMY - GOLD Gold prices per oz(Tola = 0.374878 troy ounces)
  29. 29. IMPACT ON INDIAN ECONOMY India’s Relationship with U.K 2004-2016
  30. 30. IMPACT ON INDIAN ECONOMY India’s Relationship with U.K Year 2004-2016
  31. 31. IMPACT ON INDIAN ECONOMY India’s Relationship with U.K Year 2004-2016
  32. 32. IMPACT ON INDIAN ECONOMY India’s Relationship with U.K Year 2004-2016
  33. 33. IMPACT ON INDIAN ECONOMY India’s Relationship with U.K Year 2004-2016
  34. 34. IMPACT ON INDIAN ECONOMY India’s Relationship with U.K Year 2004-2016
  35. 35. IMPACT ON INDIAN ECONOMY Indian MNC’s in U.K
  36. 36. IMPACT ON INDIAN ECONOMY 1.10,000 Employees employed by 800 employers 1. Automotive 36% 2. Industrial products 35% 3. Technology and telecoms 12% 4. Business services 6% 5. Financial services 5% 6. Hospitality 4% 7. Engineering and manufacturing 2% 8. Consumer products 1% 9. Transport and logistics 1%
  38. 38. IMPACT ON INDIAN ECONOMY POST BREXIT CHALLENGES ON INDIAN BUSINESS ABROAD • IT Companies affected the most. • Ambiguity of doing business in UK increases. • Separate entities requires additional investments. • Transfer of professionals and other resources now difficult. • Slowdown impact of investments by Indian corporates in UK expected in medium term. • Increase in compliance cost in the event of merger and acquisitions. • Companies that have operations in the UK and the EU will have to face significant translation losses with the probability of volatility in currencies remaining high. • The exposure on account of un-hedged borrowing abroad will also impact the company balance sheets.
  39. 39. IMPACT ON INDIAN ECONOMY CONCLUSION Road Ahead - India-UK relationship remains strong There is little evidence that the UK will become less attractive to Indian investors and that the spectacular growth witnessed in past like - with the world class universities, vibrant business sectors, long term infrastructure investment, favorable tax rates and an economy that appears to be very much open for business for the foreseeable future. One might expect to see more Indian companies emulating the success of their peers on our 2016 list. Whether a London and a UK outside the EU will remain an attractive destination for Indian companies remains to be seen.