Wed, Dec 7, 2016 | updated 04:08 PM IST

Brexit may lead to dip in investment flows from India to UK in near term

Updated: Jul 06, 2016 10:09 IST

New Delhi, July 6 (ANI): A FICCI survey brings to the fore the concerns of India Inc. over the possible near term impact of 'Brexit' on Indian business and the economy.

Yet, it remains sanguine that the UK will make renewed efforts to strengthen ties with countries of the Commonwealth group and India stands to gain given its own growth performance and a much better regulatory and business environment.

The respondents were hopeful that this can be an opportunity for India and UK to make renewed efforts to strengthen ties.

While the full impact of the UK move to 'Leave' from the European Union will take some time to unfold, the FICCI survey sought to gauge the sentiment among the Indian companies having operations in or doing business with the UK.

Some of the companies surveyed share deep trade and investment linkages with the UK. Responses were received from about 45 companies covering sectors such as education, information technology, tyres, pharmaceuticals, steel and steel products, automotive, textiles, apparel, financial services etc.

Respondents feel that the 'Brexit' transition may lead to moderation in investments flows to the UK from India. However, 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 percent of the total FDI inflows in the country. In fact, several British companies have exhibited interests in India post launch of the Make in India campaign.

The government has considerably liberalized 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.

The respondents stated that given the strengths of the economy it may be worthwhile to look at a bilateral FTA with the UK and this should focus on goods, services as well as investments. It is felt that UK may now take a less rigid stand (compared to the EU) and it may be worth pursuing a broad based bilateral agreement.

Further, it is important that such an instrument is a hybrid agreement that incorporates the movement of people as a natural corollary to the movement of goods, capital and services so that the impact on mobility of professionals and on ICT sector is not as negatively impacted as anticipated.

About 63 percent of the participants indicated that signing a comprehensive FTA with the UK (on goods, services and investments) may help to mitigate any negative impact of Brexit on India.

For example, if India enters into an agreement with the UK that leads to the legal services market opening up, then this could lessen the negative impact of Brexit on India-UK bilateral relations.

Nonetheless, the companies participating in the survey did indicate some concern regarding a dip in export realizations, additional compliance to competition regulations, rise in operating costs of doing business and possible curbs on immigration leading to brain drain from the UK over the near term.

Further, the IT companies expected to face the heat in light of the Brexit. It was pointed out that 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. India is one of the largest exporters of IT-enabled services and the sector has significant exposure to the European market especially the UK.

In addition some concern has been expressed regarding bond issuance planned in USD and INR. UK's credit rating has been cut, and given most buyers of the bonds are from the EU there is nervousness around these bond issuances.

This is important for India as it would be difficult to imagine financing India's huge infrastructure appetite through debt finance in London as aggressively as currently planned. Again, this would depend on what Brexit scenario that plays out. But in the meantime, greater uncertainty will impact the bond pricing. (ANI)