Girish Kotecha asked: What are the opportunities and challenges for the India-EU relationship in the context of Brexit?

Rajeesh Kumar replies: The United Kingdom (UK) is due to leave the European Union (EU) on October 31, 2019. Undoubtedly, the British exit or Brexit will have an enormous impact not only on the economic prospects of the UK but also that of Europe and the world. However, the implications of Brexit will largely be shaped by the nature of the divorce deal. The impact of the British exit with a deal will be different from a no-deal divorce. For this reason, it is difficult to predict India's relationship with the EU following Brexit. The EU is India's largest trading partner and the leading destination for Indian exports. In 2018, the EU accounted for 12.9 per cent of India's total trade in goods and around 18 per cent of the total exports. Consequently, Brexit throws up both challenges and opportunities.

First, India sees the British exit as an opportunity to expand its trade and economic relations with both the UK and the EU. The officials have already signalled that Brexit would speed up the conclusion of a bilateral free trade pact between India and the UK as well as India and the EU. However, though Brexit would change the approach of the EU towards India, it does not mean that it automatically leads to a free trade agreement (FTA) between the two. The EU-India FTA negotiations were stalled for more than five years. India's demand for liberalisation of services in cross border trade and people's mobility were the two central issues which led to the suspension of negotiations after several rounds. Considering the burgeoning resentment towards migrants in the EU, any progress in this area is unlikely. Though the FTA negotiations resumed in 2018, it essentially reaffirmed current ties between the two rather than addressing any of the issues that caused the negotiations to stall initially.

Second, there are about 800 Indian companies operating in the UK. Britain serves as an entry point for many of these firms to the European market. A hard Brexit would shut the direct access these companies have to the EU market and would force some of them to relocate or shut down their businesses. Post Brexit, much will depend on how the UK rebuilds its trade ties with the EU. This could also turn out to be an opportunity for the Indian companies to diversify their investments in other EU trading capitals, such as Amsterdam, Brussels, Frankfurt and Paris.

Finally, the uncertainty of a no-deal scenario and risk aversion tendencies across markets can further depreciate the already fragile Indian rupee. Economists note that the US dollar would be the only currency that would benefit from a hard Brexit and the subsequent uncertainty in the global market. Such an outcome will not only affect the pound and sterling but also the currencies of the emerging markets, including the Indian rupee, as well.

Posted on September 20, 2019

Views expressed are of the expert and do not necessarily reflect the views of the IDSA or of the Government of India.