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Why Indian IT Companies Need to be Watchful of Brexit

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The long-awaited Bxexit deal has finally been sealed. While it is too early to draw inferences about its implications on Indian IT industry – as more updates on the deal are expected in the days ahead – it is obvious that any such shakeup would have an impact on India, given its importance in the IT and IT-enabled business ecosystem, valued at more than $150-billion.

The Immediate Impact

UK is the second largest market for Indian IT services industry, accounting for 17% of total exports, besides being the gateway for Europe. Several Indian IT companies have a large presence in the UK, as well as the larger EU markets based from London. These companies with offices in the UK, availed benefits and continue to remain a part of the EU. The easy movement of skilled workers between EU and UK has been a helpful factor. But with Brexit, this benefit could cease and may call for relocation.

IT industry body Nasscom has said the falling value of the pound could render several existing contracts into losing propositions. In an earlier report, Nasscom had predicted that the effect of Brexit will be felt on the Indian IT sector in the short term. “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,” Nasscom said.

The immediate fallout could be the need for Indian IT companies to establish separate headquarters or operations for EU, leading to disinvestment from UK and diversion of activity from UK to EU. The IT industry in India would foremost be impacted by a possible decline in the value of the British Pound, which would render many existing contracts losing propositions unless they are renegotiated.

At present, 800 Indian companies employ 110,000 individuals in UK, and a deeper partnership with India may be in Britain’s interest, says another report. Hence any negative impact on the British economy in terms of slower growth or worse could reduce opportunities for Indian companies in UK. While the exit of Britain from the European Union may bring marginal benefits for Indian businesses, Indian companies based in the UK may face some problems due to new tariffs and complexities.

“Indian companies and sectors that have invested in Britain are having sleepless nights while worrying about Brexit. They believe that if Britain leaves the EU it will adversely affect the movement of investors into the UK and will directly impact the investment,” said a senior executive working with a leading software enterprise with major interests across Europe.

Most leading Indian IT firms have not commented on it as since they see a possibility of renegotiations for all the ongoing projects because of the devaluation in the value of pound.

Cautious Optimism

Despite fear and uncertainty, many see Brexit as an opportunity for India to be able to negotiate a favorable trade deal with Britain. Experts believe that the weakening British currency might be good news. Tax and investment consultant, Rishabh Parakh says in his blog that in the long run, Brexit will help strengthen ties with Britain because India’s focus on innovation and entrepreneurship still makes it an attractive destination for outsourcing and investment. “India’s economy is doing well and should use the current turmoil as an opportunity. For the common man, with every uncertainty there is a bigger opportunity to pick great stocks. It pays to focus on companies in the consumer driven sector,” he said.

Needless to say, it could be a relief to entities Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies, having a large exposure to Britain. In an interview with Moneycontrol earlier this week, TCS senior executive V Ramakrishnan had said that while the software giant had grown strongly in the continent in the last three years, the indecision around Brexit was hurting. “Of late, in the UK, there have been delays in taking decisions due to the uncertainty. People are watching and waiting,” he said.

Other IT companies also see the development as positive as it brings a closure to the uncertainty, however, they are exercising caution and have still adopted a wait and watch approach.

As Bhavin Turakhia, Founder & CEO of Flock told CXOToday, “India has had strong historical ties with the UK and currently it is one of India’s most important trading partners. In the last four years alone, the number of Indian companies investing in the UK has quadrupled. Similarly, the UK is today the largest investor in India, from among the G20 countries. Hence, what is left to be seen how India and the UK can maneuver through Brexit and enter into new trade agreements that are mutually beneficial to both economies.”

Brexit may also result in companies relocating their business set ups to other places and that can be good news for Indian firms. The most recent example is that of Netherlands – that’s ready to replace the UK, post-Brexit, as the hub for Indian investments into the EU. As the country is building strong bilateral ties with India, Netherland’s Ambassador to India, Marten van den Berg recently stated that IT, management and consulting, among others could be the areas for future course for cooperation.

Other European leaders, particularly from Germany and France, have been wooing the Indian firms in recent months and several technology companies from India are already setting shops in these regions.

Wait and Watch

Brexit might have an overall positive effect on Indian IT, but these results may not show up immediately. The process might take time considering that the government will take time to design and implement their policies. On the long run, the Brexit deal spells good news for Indian companies with large investments in the UK. With the agreement is sealed however, it has more or less ended the uncertainty plaguing the operations of many Indian companies for the last three years.

For now, all eyes are on October 31, 2019, which is the deadline for the UK to leave the EU. The day will decide the future of the global market, and give a greater clarity to Indian IT industry.

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