Wake-up call?

Print edition : July 22, 2016

British Prime Minister David Cameron signing the visitors' book at the Jaguar Land Rover factory in Solihull in central England on June 22. Photo: GEOFF CADDICK/AFP

C.S. Verma, Steel Authority of India Chairman, and Lakshmi Mittal, chairman and CEO of ArcelorMittal, signing an MoU in London in May 2015. Photo: PTI

While the overall negative impact of Brexit on India will be short-lived, Indian investments must deal professionally with Europe without always looking at it through the British prism.

A STORY IS TOLD OF A NEW INTERNATIONAL Monetary Fund (IMF) Director who swears to transform the institution into something the world admires, a real force for development, world peace and prosperity. He begins by sacking all the advisers he inherited and embarks on a head-hunting exercise for new blood that shares his vision. The job description includes an essential qualification: applicants must have one hand only. As he explains to the bemused head-hunting company, “I am sick and tired of economists who answer every question with ‘on the one hand, blah, blah, blah, and on the other hand, blah, blah, blah….’ So I want one-handed economists.”

Fortunately for us, as far as the impact of Brexit on India is concerned, we have been spared this two-handed doublespeak. Going by the reports of all manner of experts, business persons and government representatives, both in India and abroad, the broad conclusion is that the overall negative impact will be short-lived, and marginal, though the impact may vary in different sectors depending on their differing vulnerability and exposure to global trends.

The somewhat surprising convergence of views between our government’s financial czars and the eggheads who usually suffer from the affliction of the apocryphal IMF Director, and even more interestingly by our businessmen and industrialists, are based on the following:

The fundamentals of our economy are strong. We are the fastest-growing economy in the world with a growth rate of 7.6 per cent, and even if the fallout of Brexit does its worst, we should still grow at 7.3 per cent, and still be the fastest-growing economy in the world. The fiscal deficit and revenue deficit are thoroughly under control, as is inflation. (The minor consideration that the vast majority of our population, reeling under the price of dal and tomatoes, knows nothing about these fundamentals and cares even less, should not worry us…. Seriously, the calm reaction of the government, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI), as well as the captains of industry, sends out reassuring signals that augur well for a similar calm and stability in the economy.)

India’s foreign exchange reserves are at a healthy $365 billion, which would allow our central bank to inject whatever liquidity is needed to counter volatility. There may be a small outflow of investments, as investors in this situation tend to withdraw money from emerging markets and switch to the safe haven of the world’s currency, the dollar, followed by the yen. But even this should be temporary, as the dust stirred up by the initial shock settles down, as shown by the quick recovery of the Indian stock market from its 1,000-point fall immediately after the result.

The slew of reforms just announced by the government will also counteract the Brexit fallout, given that India remains what the World Bank President Jim Yong Kim on June 30 called the “one bright spot” in a gloomy global economy. We withstood the financial tsunami of 2008 reasonably well, and that was a crisis immeasurably more dangerous than this one. The rupee will slide a bit, but that will arguably help our sluggish exports, make imports more expensive, and help our trade balance, especially with the United Kingdom where the sterling pound will slide even more.

There is time to plan, to prepare, and the space to manoeuvre. Things legally remain the same at least for the next two years, as the new British Prime Minister tries desperately to retain access to the single market, while trying to opt out of the obligations to allow free movement of people—something which is not going to be conceded by the European Union (E.U.), as signals from the remaining 27 membercountries seem to indicate.

What happens to India if the moves towards copycat referendums in a number of other countries become a reality? Certainly, the right wing in the E.U. has been strengthened by the impact of the millions of refugees pouring into Europe from West Asia, Turkey having already blackmailed the E.U. into agreeing to a visa-free regime for Turks, and refugees from Africa showing no signs of a let-up. Xenophobia and incipient racism are rising, and are more brazen. Will the liberals prevail? Will Europe manage to stick to its commitment to pluralism and its loudly tom-tommed image of a humane union dedicated to human rights?

Britain has failed the test; will the E.U. go the same way? We can only wait and watch, and as in much of what happens in international affairs, deal with situations as they arise.

Finally, the debate on investments and the Indian companies in the U.K.

India is the third largest investor in the U.K., with about 800 companies established there.

The depressing fact is that saving the top 15 or 20 companies, the rest (or at least most of them) are trading companies or shell companies, whose main aim is squirrelling away money from India, through under-invoicing and over-invoicing, and stashing it abroad, some of it to engage in business abroad with ready access to cash, without having to bother about the Indian bureaucratic requirements, and the rest of it to be sent back to India as laundered investments. Consider that if the U.K. is the third largest investor in India, the top two are Mauritius and Singapore.

Investments through these routes will not stop —their motivation and causes are immune to the state of the U.K. economy.

Additionally, the companies from India that have a presence in the U.K. are British companies legally, which pay taxes to Britain, not to India. They create jobs for the British, not for Indians, except for a few people in the top management. All that India gets is remittances of profits. And these are not substantial, because Indian investments are either trading companies or manufacturing acquired through mergers and acquisitions, with no transfer of original Indian technology giving them a return on royalties.

This whole business of the U.K. being our gateway to Europe is overstated. First, it might even be a silver lining, forcing lazy Indian businesses to deal professionally with Europe without always looking at it through the British prism. They should use this as an opportunity, not a threat. And the Indian government should make it very clear that all that these companies can expect from it is sympathy, and nothing else.

“Make in India” is an objective that should resonate a hundredfold more with our own companies, rather than foreign ones. If this energises our government to speed up and widen reforms that enable Indian industry to do so, we might, sometime in the near future, look upon Brexit as a welcome wake-up call.

Shiv Mukherjee is a former High Commissioner to the United Kingdom.