On the 23rd of this month, Britain voted to walk out of the European Union (EU) in a historic referendum. The occurrence has received massive attention from all parts of the globe, and has been popularly named – Brexit.
People in Britain have largely welcomed this move. However, Brexit has sent tremors all through the global economy. To say that India won’t be affected much with Brexit would be a slightly wrong considering the ramifications it can possess.
According to market analysts and rating agencies, Indian economy could suffer significant knock on effect in the short term with the United Kingdom voting for exiting EU. Nomura predicts that India’s GDP will now grow at 7.3% this year, instead of 7.6% that was predicted earlier.
That’s right folks – a single event 5.5 hours away in the time zone can send ripples all across our country!
What are the Specific Areas which will Hurt the Most?
While the entire economy might be negatively affected by Brexit, but there are some particular areas which are most likely to suffer more than others.
- Rupee may depreciate due to the double effect of foreign fund outflow and rise in dollar.
- As a result, fuel prices (petrol and diesel), can rise to a great extent.
- Thereafter, the government might reduce additional excise duty imposed on fuel. Thereby, fiscal deficit will observe a steep rise.
- Cheaper rupee will hit IT and ITeS the most
- Consequently, the prices of gold and electronic devices will soar
Why Indian Startups Stand to Lose?
Even if we remove the macroeconomic factors that are most likely to be affected by Brexit, Indian startups still have enough to lose. Startups usually operate with paper-thin margins in the initial years of business, and most of the modern age startups are dependent a great deal on IT and electronic devices.
If the implications of Brexit are severe, startups will be left with 2 harsh choices – either take a hit on their revenue, or increase their pricing to counter the losses from cheaper rupee, and rise in prices of electronic devices. Both the choices might not augur well for startups and small businesses.
Moreover, NASSCOM has stated that Brexit is likely to cause a huge negative impact on the $108-billion IT segment of India. Chandrajit Banerjee, Director General of CII has stated that most Indian companies choose UK because of the easy access it provided to the European markets. Therefore, Brexit will have an impact on future investment and businesses which are looking forward to expansion decisions.
Also, a rise in fuel prices will be unfavourable for cab startups that have been able to provide cheap rides for people in India. This will lead them to increase their pricing significantly. So, now people might need to have deep pockets even for cabs!
What is particularly a key question is – whether Brexit has the potential to undo the slew of sops and incentives that the government has promised to startups and small businesses in this year’s budget?
However, the actual impact depends on what kind of a trade agreement is drawn up to replace the existing free market access. It remains to be seen whether the effect of Brexit will cease in the coming months or whether it will wreck havoc to emerging economies like India.