<b>Parthasarathi Shome:</b> Indo-UK economic relations after Brexit

Pros and cons of Brexit for UK and India

Last month I offered a socio-historical background of Brexit. Today I shall provide an economic picture emanating from Brexit with particular reference to Indo-UK economic relations. To get an immediate perspective, Figure 1 reveals how India has surpassed UK in share of world GDP in PPP terms over the last two decades post-liberalisation. In 1994, both languished between 3-4 percent. While India doubled to about 7 percent by 2014, UK's share declined to 2-3 percent or by a percentage point. This points to the distance UK needs to travel to enhance its global economic participation. 

It is interesting to make comparisons in other indicators of UK's economic relationship with India to track recent changes. Figure 2 shows that growth in FDI flows from UK to India vacillated since 2001. Resultantly its growth rate has also flip-flopped during this period. On India's part, Indian mutual funds have increased their investment in UK, the share increasing from just over 1 percent in 2009 to 7 percent in 2014, remaining the same in 2015 (not shown). Clearly with a 15 percent post-Brexit depreciation of the Pound versus the Indian Rupee, these trends are not only likely to continue but may be expected to pick up speed. In other words, UK should benefit from further investment from India but FDI into India would be costlier for UK.  (Click here for graphical data)

If benchmarked, UK's trade relationship with India is not ranked terribly high. Table 1 shows, in terms of UK's exports and imports, India occupies only 13th and 12th position, respectively. On the flip side, Figure 3 shows India's total trade — exports plus imports — while growing significantly since late 1990s, has declined since 2014. This mainly reflects trade with UK and US as opposed to China. In fact, lamentably, Figure 4 shows that India's overall trade balance catapulted since 2007 overwhelmingly due to China with which India rapidly built up a negative balance. Interestingly, India has run a positive balance with both UK and US. This phenomenon is more starkly revealed by separately plotting Indian exports and imports to and from these countries (not shown).

The rupee depreciated steadily against the dollar, yuan and pound in recent years, providing India a cushion for exports (despite which it has had export problems). Now that advantage with respect to the UK is lost.  Clearly, UK should have a greater opportunity to correct its trade imbalance with India while India has to be cautious since Indian goods and services will cost more to the British. In this context, the decision to stall or stop the sale of its UK steel plant by the Tata's is a good example of retained investment in the UK since its immediate recoupment would have fetched much less in any non-UK currency such as the dollar or the rupee. In addition, new investment into the UK will also be less costly to make; thus UK could expect enhanced foreign investment if the environment is accommodating, a point elaborated at the end.  

On the UK side, one area in which it could increase export to India is advanced technology including defence. India, on its side, should use the opportunity to quicken its pace of technology and defence acquisition from UK. At this moment, it should be easier also to link imports with knowledge transfer and further cooperation in the wider defence field. Indeed technical assistance having become cheaper, India should identify areas where UK could provide technical assistance and advice. This could initiate a new era of cooperative development over and above the assistance that DFID, UK's foreign aid arm, or its Foreign Office that has a small technical assistance wing, currently provide. This would be a win-win situation for both parties.   

Before concluding, in pointing to UK's possible advantages from Brexit, UK still is among the best places to conduct business. Figure 5 reveals that, in 2015, World Bank ranked India 130, China 84 and UK 6 in ease of doing business, in a sample of 189 countries. India was even worse than 130 in indices such as starting a business (155), dealing with construction permits (183), paying taxes (157), trading across borders (133), enforcing contracts (178) and resolving insolvency (136) when compared to China or UK that scored much better. UK is at an advantageous position of depreciated exchange rates to utilise its unique opportunity and surge ahead. However, as I have argued last month and earlier, the resolve to tighten its belt and get to work is yet to be witnessed in an environment that punishes work effort. It is to be seen how UK tackles the vacuum in the labour market, having confidently created it.  

This is the second of a two-part series