Theresa May Takes Over As UK’s Prime Minister; What Does It Mean For India? 

Less than four weeks ago, pollsters were predicting a “Remain” vote in the UK referendum on the European Union (EU) that took place on 23 June. However, on 13 July, Wednesday, after the UK had instead voted to “Leave”, Theresa May took over as the 76th and second woman Prime Minister of United Kingdom (UK). Over the last twenty-five days, however, the UK has been hit by a whirlwind of completely unforeseen and unanticipated events.

The immediate impact of May’s swearing-in as the Prime Minister was the restoration of political certainty. Markets abhor ambivalence and confusion. May’s elevation and her impeccable track record have infused confidence among people.

Challenges for Theresa May

May is widely seen as a competent, tough and no-nonsense leader; however, her task is cut out in this new role.

May’s first challenge was to appoint a strong and experienced minister to navigate Britain skilfully out of the EU. To achieve this, she put her faith in Boris Johnson, the former Mayor of London and the strongest proponent from the Leave camp. Only time will tell how judicious her choice is. Prima facie, it appears to be a huge risk to hand over this critical responsibility to someone who is known to be a maverick, is unpredictable and in the habit of committing embarrassing gaffes. His credibility dipped precipitously when, after leading the Leave charge from the front, he declined the offer to accept responsibility for the top job. In addition, Johnson is so completely committed to the Leave narrative that it could prove to be a liability when he tries to negotiate a positive deal for Britain.

May’s endeavour would be to strike a deal in which the UK can control migration, yet protect British access to the common market. Negotiating a good deal for the UK outside the European bloc will be a formidable task. It is essential to have a consummate negotiator who will get the best possible deal for Britain. Her selection of a tough eurosceptic to steer this exercise is politically risky and indiscreet.

Equally important for May is to unite her party, which is divided on account of a significant number of members from the party having campaigned for the Leave position. May is a eurosceptic who had campaigned, though not enthusiastically, and voted for the Remain stand. Her opponents in the party are disappointed with her selection, as they wanted a “Brexit prime minister” from the eurosceptic wing of the party. But May, as the longest-serving Home Secretary, enjoys good rapport with senior party functionaries and can effectively don the mantle of a peace-maker.

Although there has been some speculation on a second referendum, May has quashed all hopes of it happening. She has repeatedly declared that she will deliver an honourable exit from the EU, notwithstanding the fact that she backed the Remain position throughout.

The economy took a plunge in the aftermath of the referendum. The pound sterling plummeted to its lowest in 30 years, more than $3 trillion was wiped off the global stock markets and Britain’s credit ratings were downgraded by several rating agencies. Maintaining the dynamism of the domestic economy and retaining London’s premier position as a financial centre will be one of May’s foremost challenges.

Post-Brexit, both Europe and the UK have become diminished not only economically but also politically, as well as in prestige and capacity, to play a substantive role in global and regional economic and strategic affairs.

What It Means for India

Cameron was well known to India. He visited India three times (in May 2010, soon after becoming Prime Minister, and in the months of February and November in 2013) before Prime Minister Modi paid him a return visit in November 2015. Notwithstanding the special relationship that he was nurturing with China, Cameron was keen to foster wide-ranging, multifaceted economic ties with India. He went out of his way to accord a spectacular reception to Modi last November on his three-day visit to the UK.

Theresa May, on the other hand, is a relatively unknown leader. It will take some time before the leaders of India and the UK establish rapport and a comfortable working relationship with each other. May is likely to be pre-occupied with domestic and regional affairs in the coming few months to have much time to devote to relations with India or other extra-regional partners, except the USA.

Prime Minister Modi had indicated his preference for the Remain position during his visit to the UK in November 2015, when he remarked that the UK is India’s gateway to Europe. Indian companies like Tata Group and Aditya Birla Group use their businesses in the UK as launch pads to access the European market for goods and services. Indian companies have more than 800 subsidiaries there, which collectively generate billions of dollars in revenue annually and employ more than 1,10,000 people, according to Grant Thornton, a London-based accounting and consulting firm. Tata Group, which owns Jaguar Land Rover PLC and other companies with interests ranging from steel to telecommunications and tea in the UK, had said in the run-up to the referendum that if the country voted to leave the EU, it could prove to be “highly damaging”.

The UK’s departure from the EU would mean that local companies would not be able to enjoy the benefits of free trade within Europe and would be required to pay higher tariffs, making their products less competitive. They will need to look seriously at establishing manufacturing bases and service platforms on the continent to maintain their competitive edge.

Recently, more Indian companies had started ploughing money into the UK, using it to gain greater access to European markets. In the year ending 31 March 2015, for example, Indian companies had invested in 122 projects in the UK, making it the third-largest source of foreign direct investment after the US and France.

The UK’s decision to leave the EU will force Indian companies to reassess their investments in that country. Uncertainty in the UK could further push down energy prices, which will be beneficial for India as it is a large commodity importer. Operations of a large number of IT firms in the UK could become unprofitable on account of the falling value of the pound. Assets in the UK could become attractive for acquisition by Indian companies on account of a fall in their value. The financial stress on Indian firms and banks could, however, increase on account of increasing uncertainties created by Brexit. Some companies could gain with the weaker pound, as this would help them import at cheaper rates.

India’s healthy macro-fundamentals, including low current account deficit, growing foreign direct investment and high forex reserves have helped restrict the adverse impact of Britain’s exit from the EU.

Brexit could provide greater opportunities for Indians to get work visas if restrictions are imposed on EU citizens to work in the UK. Profitability in the Indian market and prices of shares could show a significant appreciation after the dust settles down, as India could emerge as an even more attractive investment destination.

The UK will be in the market for concluding bilateral trade deals with other countries after its agreements with EU become null and void. India could take advantage of this opportunity and strike a beneficial free trade pact. Discussions with the EU on a bilateral Trade and Investment Agreement have been going on for the last nine years with no end in sight. Issues that have bedevilled negotiations relate to the export of wines and spirits and automobiles and components by European companies to India. The UK will now be more forthcoming in striking a deal. It should be easier to conclude negotiations with the UK quickly.

The Indian stock market, notwithstanding the initial steep decline after the referendum result was announced on 24 June, recouped its losses and continued with business as usual. Indian industry, therefore, appears confident that not only will it be able to ride out this upheaval but will, in fact, be able to emerge stronger in terms of its relations with the EU and the UK.

These are early days. The exact contours of Britain’s relations with the EU, India and other major partners will become clear in the coming months. But while there are bound to be some losses, it appears that the benefits to Indian industry, individuals and at the government level could far outweigh the costs.