Brexit may impact auto, garments, IT sectors: Crisil
Crisil says that the impact of Brexit in the medium term on consumer oriented sectors will depend on exchange rate movement and the severity of the slowdown itself
Bengaluru: Britain’s decision to exit from the European Union is likely to heighten the uncertainty in auto parts, garments and information technology among other sectors in India.
In a 27 June report titled, Brexit impact on India limited, Crisil Ltd said that the impact on Indian companies will be in the way of demand weakness, volatility in commodity prices, currency impact and the balance sheet impact on account of exposure to unhedged borrowings.
“The market reaction was more severe because in recent days most polls had suggested that the “Remain" camp would win. This very strong reaction, more fundamentally, illustrates that we are moving into completely uncharted territory, where the only certainty will be uncertainty," Jean-Michel Six, chief economist, Europe, the Middle East, and Africa of S&P Global said in a note; Why Brexit Is Rocking Global Markets, released on Friday.
On 23 June, Britain voted 52% in favour to leave the EU, an economic and political partnership of 28 member countries, by way of a referendum.
The ratings company said that the impact on medium term on consumer oriented sectors like auto components, textiles, gems and jewellery, leather and footwear among others will depend on exchange rate movement and the severity of the slowdown itself.
The UK accounts for 3% of merchandise exports from India and 2% of the total trade (Imports + exports).
The auto parts industry is forecast as the most vulnerable as Europe accounts for almost 25% of all exports and the UK accounts for 5%. The other vulnerable sector is garments. Europe accounts for around 35% of all garments exports from India. Garments exporters in India have already seen demand drop by almost 5% last year.
“For IT services, Europe (including the UK) accounts for around 29% of total exports. The UK alone accounts for 17% of overall exports. The economic uncertainty in the EU and the consequent impact on discretionary spends such as IT would, therefore, hurt domestic software companies. Expenses of these companies may also go up if mobility of professionals between the UK and the EU is restricted,"the report states.
Indian companies with significant operations in the UK and EU could also result in losses as they would have to set up bases in other countries in the continent and may find it difficult to operate Europe from London, the report adds.
Pharma companies that have a higher exposure to EU will feel some impact, Crisil says while adding that Europe accounts for around 12% of pharma exports from India.
The report states that the macroeconomic impact on India would be transmitted through trade, credit investment and capital flows. However, Crisil maintains that the headwinds from Europe and UK is unlikely to have an impact on India’s growth projection of 7.9%.
This stable outlook and higher growth numbers would help divert investments toward India in the medium term, Crisil says in its report.
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