BREXIT deal signed; what is in it for India Inc?

The UK House of Commons has called a special session on 19th October to debate the BREXIT deal threadbare.

Oct 19, 2019 09:10 IST India Infoline News Service

The BREXIT deal signed between Jean Claude Juncker of the EU and British PM, Boris Johnson, surely managed to change sentiments in the market. That was evident from the bounce in the Nifty and in global markets. It may still be early to celebrate as there could be many a slip between now and October 31, when the actual BREXIT is scheduled.

Next step: Getting British Parliament approval
The UK House of Commons has called a special session on October 19, 2019 to debate the BREXIT deal threadbare. There are 3 basic issues of importance here.
  • Pushing the deal will not be easy because the Labour Party has the numbers. Also, there are members within the Conservative Party who are sceptical about October 31, 2019. Even if Johnson pulls the deal through, it will be only a wafer-thin majority.
  • The second question is on the sanctity of October 31 for BREXIT. If the bill does not go through, the Conservative party may not have a choice but to postpone the BREXIT deadline by another 3 months. Even the EU is open to this idea with EU members rejecting the proposal by Juncker to make October 31 as the binding date.
  • The other option is going back to the people for another referendum on BREXIT, but the vote is unlikely to alter. There is also the option of fresh elections but that would require the support of the Labour party. Most likely, the deadline may get postponed!

Macro takeaways for India from BREXIT
India remains a major trading partner for UK, and the UK has been a major source of outbound Indian investments. Interestingly, the Tata Group is the single largest employer in the UK and that makes India a significant stakeholder in BREXIT. Here is what it means.
  • Rupee has traditionally weakened against the UK£ due to the inflation differential. The BREXIT, as and when it finally happens, is expected to weaken the UK£ and the rupee is likely to be a beneficiary. Both, in terms of student spending and tourism outflows, this could be a big booster for India.
  • In the last few years, India has not been able to leverage its historical relationship with the UK in trade as trade deals have been subsumed into the overall EU model. BREXIT will allow India and UK to negotiate more independent trade models outside of any EU commitments. It could be instrumental in expanding trade in a big way.
  • The aftermath of BREXIT could create uncertainty for the UK and for the EU and that could result in a lot of risk-off investments in the UK and EU reversing direction into EMs. Portfolio investors see no reason to continue to remain invested in EU and UK with low returns when these markets become volatile. This could have a multiplier impact on flows into EMs like India.
  • Today, many leading academic institutions in the UK are out of bounds for Indian students due to the high costs involved and lack of funding. That is because under the EU arrangement, UK is obliged to give concessions to EU students. The end of this deal will mean more favorable terms for Indian students plus funding options.
  • Lastly, BREXIT chaos would mean central banks may stick to an easy money policy for now. RBI and the government will not have to worry about rate hikes or tightening liquidity for the time being.
How will BREXIT impact Indian stocks?
Among the various business groups, the Tata Group derives nearly 60% of its total annual group revenues ($105 billion) from UK and the EU. Hence, BREXIT matters a lot to the group; more so because JLR (a unit of Tata Motors) has pledged to invest $50 billion in the UK and EU in the next 4 years. Apart from Tata Motors, Tata Steel has nearly 10 million tonnes of steel capacity in the UK/EU region, while the UK/EU region accounts for nearly 15% of TCS global revenues.

But it is not just about the Tata Group. Auto ancillary players like Bharat Forge and Motherson Sumi have substantial exposure to the UK and the EU auto markets. They were among the major gainers on the day the BREXIT deal was announced. There are names like Eicher with a significant market share in the UK and EU premium motorcycle market. The list can go on but the bottom line is that India would really prefer a smooth transition. A chaotic BREXIT would be best avoided!

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