Brexit: A Mixed Bag For Indian IT Sector

by CXOtoday News Desk    Jun 27, 2016

ukindia

The United Kingdom, Europe and the world has just woken up to a new reality. As Britain gets ready to exit from the European Union, tech organizations across the world and also in India - that contribute a chunk to the EU - have begun to get anxious on what lies ahead? While this is just the beginning of the process and too early to be understood, analysts forecast its wider implications for IT industry in India.

They believe the IT services sector braces for uncertainty for at least a while. The UK is the second largest IT spending country in the world after the US, with a little over a fifth of overall IT services export from India. Most of the large Indian IT service companies — Tata Consultancy Services, Tech Mahindra, HCL Technologies, Infosys — have already established their presence.

According to a Business Standard report, The major shock would come from a depreciating pound, now down to almost 1985-levels. That means Indian IT firms earning higher revenue in pounds will take a hit.

Read on: ‘Brexit’ And It’s Meaning For The Indian IT Sector

But more than the currency, which seemed as an immediate concern, in the longer term many are wary of the economic and political instability in the entire region. Possibilities are high that if the European clients postpone their investment decision, it will have negative impact on the trade relations with foreign countries. As a result, companies using Britain as their main base for serving other European countries will have to start establishing a local presence in the latter. This does not make much economic sense, due to the scale of the business from those countries.

For example, Wipro has been present in the UK for over two decades and employs a little over 4,000 people there. Other Indian companies expected to take a hit due to the Brexit decision are TCS, HCL Technologies and Tech Mahindra. They also have a relatively higher degree of exposure to the region. About 31 percent of HCL’s total revenue comes from Europe. 

It’s thought that the actual exit will only happen in 2018. Or even 2020, if the Leave faction has its wish. While this may delay the inevitable and the impact until such time as stakeholders are ready for it, it also means a long time of uncertainty as an attempt is made to understand the ground reality of the exit.

 The National Association of Software and Services Companies (Nasscom) termed the Brexit announcement a phase of uncertainty in the near term but a mix of challenges and opportunities in the longer term. According to the association, the Europe market is of prime importance to India. It is the second largest market for the Indian IT-BPM industry, constituting almost 30 percent of the industry’s export revenue of about USD100 billion. The UK plays a key role within this market. In addition to representing a large share of our members’ activity in Europe, many use the UK as a gateway for further investment across the European Union.

Read more: Brexit To Create Uncertainty In Near Term: Nasscom

On what can be done to mitigate potential repercussions that Brexit will inevitably bring and more importantly, how can companies adapt to the important changes and identify new opportunities, Sarwant Singh, Senior Partner and Managing Director for Europe  at Frost & Sullivan explained, “It is important to note that during this interim period, Britain will still be subject to existing EU treaties and laws, but will be barred from decision-making processes. Therefore, existing regulations are likely to continue until negotiations are completed.” 

“However, there is uncertainty regarding the path ahead,” added Singh. “This could trigger a dip in business sentiment and delays in FDI (Foreign Direct Investments). On a positive note though, Brexit could pave the way for Britain to expand trade relations with the rest of the world beyond EU, and this would especially help mitigate risks arising from excessive reliance on one trading partner.”

As we all know Brexit is likely to take a minimum of two years to materialize, with the process for withdrawal from the EU expected to start when Article 50 of the Treaty of Lisbon is triggered. According to some, once the intention of separation is formalized, Britain will begin to negotiate withdrawal terms with EU member states on issues such as trade tariffs and the movement of UK and EU citizens, in effect laying the ground for its redefined relationship with the EU. 

Sunil Kumar Sinha, Principal Economist, India Ratings & Research also sees Brexit as a mixed bag for technology firms. He said, “As the outcome of referendum on Brexit is in favour, the impact is felt across the globe. However, from India’s perspective Brexit will have both positive and negative impact. As Brexit will vitiate the already uneven and fragile global recovery, it will exert downward pressure on global commodity prices and India will benefit being a net commodity importer.”

However, with risk rising in the global financial market foreign capital will flow out putting pressure on rupee to depreciate  and making Indian financial market volatile, cautioned Sinha.

Brexit then is clearly a mixed bag for the tech industry in India. Although the results are a cause for concern, one must remember that they also herald the mark of a new beginning for the UK which will be influenced by a strong government policy and the success of negotiations with the EU and the rest of the world. We will have to wait and watch to see how the nation’s growth story unfolds.