The United Kingdom’s planned exit from the European Union, Brexit, keeps getting messier by the month. It led Theresa May to resign, just like David Cameron before her. It may end up making Boris Johnson the U.K.’s next prime minister, or be the cause of him facing judicial consequences. Brexit also led to the creation of the Brexit party, which got the largest vote share in recent European elections. So we now have British representatives in the EU who don’t want to be there. As of now, it shows no signs of getting better for the U.K.
What does this mean for India and why does it matter? The short answer is that Brexit may end up being good for India’s relations with the U.K. and the EU. The long answer, however, is a bit more complex. To get there, let’s put Brexit into context for India.
India and the U.K. share strong trade relations. There is a sizable Indian diaspora in Britain, which means India receives a lot of remittances from the U.K. As per previous estimations, the U.K. sends approximately $4 billion to India through formal and informal channels. Indians are among the most common non-British nationalities in the U.K., with 832,000 residents. India sees the U.K. as a lucrative market in itself and a gateway to the European Union. Between 2000 and 2018, total foreign direct investment (FDI) that flowed into India from all channels from the U.K. is estimated at $50.57 billion. Of this, the U.K. directly invested $26.09 billion in India – increasing its investment by $847 million between 2017 and 2018 – representing 7 percent of all FDI coming into the country.
India also shares strong relations with the EU that could be developed further. The EU is India’s largest trading partner and India was the EU’s ninth largest trading partner in 2015. The EU accounted for 92 billion euros worth of trade in goods in 2018 or 12.9 percent of total Indian trade, ahead of China (10.9 percent) and the United States (10.1 percent). The EU is also a leading destination of choice for Indian exports. Eighteen percent of total Indian exports are to the EU. The relationship is set to become stronger as both parties have been considering entering into a free trade agreement, which would reduce tariffs and barriers to bilateral trade.
How is Brexit likely to affect India’s economic relations with both these parties? A lot of it depends on whether there is a “soft” Brexit or a “hard” Brexit. In simpler terms, it depends on whether or not the U.K. leaves the single market. The EU imported around 44 percent of U.K. exports in goods and services in 2017 — 274 billion British pounds’ worth, out of 616 billion pounds of total exports. Should the U.K. leave the single market, it may have to look for other buyers for its goods and services. In a post-Brexit world, India could benefit from this. South Korea did exactly that recently, by agreeing to sign a free trade deal with the U.K. The timing is no coincidence. The U.K. needs trading partners and leaving the single market will give London strong incentive to expand in markets elsewhere, particularly the Commonwealth.
India is one of the biggest economies in the bloc and has strong trade relations with the U.K. Moreover, Brexit may devalue the pound, which could be a boost to trade volumes between India in the U.K., providing a strong base to build upon. The timing is also ripe for India, with a new government coming in. A flagship trade deal with the U.K. would serve as great news in times where trade wars dominate the news. This is not to say that an FTA is the only way to go. Another feature of Brexit may be that European labor workers might need to leave the EU or stay on different visa requirements should Brexit turn out this way. India could also take advantage of this to incentivize movement of labor between the two countries.
A hard/soft Brexit could also mean stronger ties between India and the EU. With the U.K.’s departure, the EU is likely to want to fill that economic gap. As far as trade with India is concerned, the first order of business might be to work toward finalizing the free trade agreement. If the U.K. can no longer serve as a gateway to Europe, Indian companies might also consider diversifying their current investments in London. An attractive destination could be Ireland, because of its close proximity to the U.K. and membership to the EU. This could also mean investments in other EU trade capitals, such as Frankfurt and Paris. Doing so would benefit the EU as a bloc in a post-Brexit world.
While the full impact of Brexit spans across sectors, the changing nature of the U.K.’s involvement in the single market is what India should be concerned with. While trade relations between India and the EU/U.K. have been strong historically, Brexit could be the catalyst that makes them stronger. As the EU and the U.K. both look for new trade opportunities elsewhere, India could emerge as a beneficiary of this new arrangement. The reshuffle that Brexit brings with it is something the Indian economy should welcome, soft Brexit or otherwise.
Rohan Seth is a program manager at the Takshashila Institution. Views are personal.