'Brexit' And It's Meaning For The Indian IT Sector

by Wrik Sen    Jun 21, 2016


In the last few days, many world leaders and CEOs are worried about Brexit, Britain’s possible exit from the European Union (EU) and its reverting into conservative protectionism. Indian organizations are also apprehensive on Brexit. Many believe this will spoil Britain’s trade relations with other countries as more than half of Britain’s export revenue comes from EU states. Some others are wondering what Brexit is all about and how it can impact their business.

CXOtoday compiles an FAQ on Brexit and whether it will have any bearing on the Indian IT industry.

What does it mean?

‘Brexit’ is the short form for British Exit, meaning the exit of Britain from the Eurozone membership it currently holds. This is similar to the ‘Grexit’, which was about Greece exiting the Eurozone membership last year. On Thursday, June 23rd, 2016, the United Kingdom (Britain) will be holding a referendum which will allow people to vote on the future of Britain’s status in the Eurozone, and a possible ‘exit’ status has been coined around the term ‘Brexit’.

Why is it happening?

David Cameron, the current Prime Minister of Great Britain, came to power in 2010, when he was heading a coalition government including the Conservative, Liberal, Democrat members of parliament. He had to withstand political pressure back then, from the UK Independence Party and other Eurosceptics in his own party, who were traditionally ‘pro-exit’ in their stance. In 2013, he had promised a referendum if the Conservative party won the 2015 elections, where he secured an absolute majority. The result of the promise is the referndum, which is stated to take place on June 23rd, 2016. 

What is means for the Indian IT Industry?

The Indian IT industry, which is keeping a close eye on the Brexit development, has given ‘Mixed’ verdict on the development so far. This means that the outcome of a British Exit from the Eurozone membership, would have a ‘low’ impact on the Indian IT Industry during the early parts, whereas later, it could have some amount of ‘higher’ impact as well, though it would be tougher to gauge. The National Association of Software and Services Companies in its official statement mentioned, “An initial analysis indicates that the impact on India’s technology sector may be mixed; clearly negative in the short term and harder to discern in the longer term - with either scenario having some positive and some negative points,” meaning that the impact will be felt only after 2 to 3 years of it taking place.

The UK accounts of 17 per cent of the total IT exports from India, and has been used as route to enter not only the British market, but other larger markets in the European Union (EU), by setting up head-offices in the UK, mainly London, and other branch offices to serve in the EU market. One of the reasons, why this method has traditionally helped the IT industry is, the swift and easy movement of skilled labor between the members of EU and Britain. If Britain does exit the EU, the effect would be:

1) There would be a need to setup individual headquarter/operation offices in other major EU markets, other than that of Britain.

2) This would mean that greater resources would need to be diverted from the UK to the other EU markets.

Trading body NASSCOM, has also mentioned that without renegotiations, the current contracts would lose their positions as a result of loss in value of the British Pound. In a detailed statement, they said, “Skilled labor mobility across EU and UK would be impacted. Changes in the financial system, banks and impact on currency could ensue. Such issues are currently being addressed by the industry through various means including local offices in EU countries, currency hedging etc.”

What if Brexit does happen?

The larger decisions to be taking regarding the impact of the Brexit, would need to withheld for the time being. This would mean a slower trade development between the countries. Also, if the economy of the UK slows down, the opportunities for the 800 Indian companies operating there, could thus reduce.

In the longer run, the relationship between the UK and India could be stronger. The reason being UK trying to compensate for the loss of opportunities, which may initially arise from the lack of opportunities between the countries.

There are 110,000 individuals who are employed in the sector by Indian companies, so a deeper relationship would always be positive in impact. UK would be less dependent on high-skilled labor movement across the EU, and be more open towards non-EU countries like India. It would also mean less obligations to adopt to the restrictive EU data localization norms, as per NASSCOM  

What if Brexit does not happen?

If, however, Brexit does not take place, then there would be a period of low business and trade between the countries. However, this lull would be restored to periods of high growth once again, but over a period of time.

Also, if Brexit does not take place, then India will have to deal with the restrictive labor norms that has been enforced within the EU, and it would be tougher for high-skilled labor to move to the UK, but easy for those within the EU markets. The issue would then be seen as an immigration issue, instead of just a trade issue, as per NASSCOM assessments.