Indian economy could suffer significant knock on effect in the short term with the United Kingdom voting for exiting the European Union (EU), according to market analysts and rating agencies.
“In India, while Brexit is expected to cause a slowing of growth, economic prospects remain relatively sanguine due to the impact of local factors like a strong monsoon, the impact of pay hikes and higher public capex,” according to a research note from Nomura.
The company predicts that Brexit will mean India’s GDP will now grow at 7.3 per cent this year, down from the 7.6 per cent predicted earlier.
“The vote to leave the EU will trigger a two-year ‘withdrawal process’ which will determine the future of U.K.’s relationship with the European Union,” said Akshay Chudasama, Managing Partner - Mumbai Region, Shardul Amarchand Mangaldas & Co.
“If at the end of that process, the U.K. exits the single market, EU countries will start imposing tariffs on British products, making it far less attractive for Indian businesses – like Tata Motors – to have a manufacturing base in the U.K.,” said Mr. Chudasama.
Long road However, despite U.K. Prime Minister David Cameron announcing his resignation, the legal road ahead to cement the exit from the EU is a long one with provisions for the process to be extended.
“Despite the relatively close decision at the ballot box, we think a second referendum on this issue is highly unlikely,” according to Moody’s Investors Service.
“As such, the public support for a so-called “Brexit” will set in motion a formal withdrawal process of the U.K. from the EU.
“Under Article 50 of the Lisbon Treaty, the formal negotiation process for withdrawal should take place within a two-year period,” the Moody’s arm said. “However, this process will only start once the U.K. formally notifies the European Commission of its desire to leave and the two-year period can be extended if all member states agree.” The subsequent levy of tariffs by the EU on British products will make doing business in the U.K. less attractive for foreign companies, including Indian organisations.
Sensex tumbles The 30-stock BSE Sensex tumbled by more than 1,000 points. It subsequently recovered and pared the losses to a little over 600 points. Oil prices also fell though experts believe this will be short-lived.
“In response to the referendum in favour of Brexit, as an economic thumbs down to the result, oil prices immediately declined by 5 per cent,” said Kalpana Jain, Partner, Deloitte in India. “Though, this is expected to be a short-lived phenomenon as core oil fundamentals remain unchanged.”
