The Brexit verdict coming up this week has the world on edge. The exact nature and extent of the impact if Brexit happens will emerge over a longer period of two years or more, during which the terms of exit and future relationship with EU are worked out. 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.
If Brexit wins:
The immediate fallout of Brexit on the IT industry in India would be the impact of any possible decline in the value of the British Pound, which would render many existing contracts losing propositions unless they are renegotiated. Secondly, the uncertainty surrounding protracted negotiations on the terms of exit and/or future engagement with EU and any attendant uncertainties in exchange rates would adversely impact industry since in general, uncertainty affects business negatively. For example, decisions regarding large projects could get postponed till clarity on the terms of exit crystallize. Furthermore, any negative impact on the British economy in terms of slower growth or worse, could reduce opportunities for Indian companies in UK.
The UK has traditionally been the gateway for Indian IT firms to enter Europe. Indian technology companies have set up a large presence in UK to serve the UK market and built deep relationships. Many such IT companies from India serve EU markets from their headquarters in London. Easy movement of skilled workers between EU and UK enables this.
Consequently, a negative implication of Brexit is that Indian IT companies may need to establish separate headquarters/operations for EU, leading to disinvestment from UK and diversion of activity from UK to EU. From an Indian tech industry perspective, an exit could thus create scenarios wherein companies will need to establish separate European headquarters. Skilled labour 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.
However, in the longer run, Brexit could lead to strengthening of India-UK economic relationship as UK seeks to compensate for loss of preferential access to EU markets. An exit will lead to a need for UK to prepare for an uncertain future, reshape its economy and enable the change that its citizens have voted for while dealing with possible discordance with EU member states. This could open up new opportunities for UK and India as well. A possible exit of Britain from Europe may increase the country’s focus on being seen as an independent market with a renewed focus to build scale and new markets. With the existing 800 Indian companies employing 110,000 individuals in the country, a deeper partnership with India may be in Britain’s interest. India’s focus on innovation, entrepreneurship and high-end work, renders it a very attractive destination from a talent standpoint, and equally in terms of market access. This could work to the benefit of the IT sector in India, since UK currently accounts for about 17% of India’s IT exports worldwide. Additionally, with UK less dependent on intra-EU immigration into UK, it could become more open to high-skilled immigration from other non-EU countries including India. Further, UK would be under no obligation to adopt restrictive EU data localization norms which it does not subscribe to in their entirety. All these factors could benefit India-UK bilateral economic relations.
If “Remain” triumphs:
If Britain votes to remain, then the current uncertainty would abate with the return of stability in markets and the value of the pound. While the scars of a close and divisive battle may take time to heal, business certainty would be largely restored though much would depend on the course of events as Cameron’s deal with EU is fleshed out and implemented over the coming months and years. However, this may get complicated if internal political uncertainty emerges as a consequence of the acrimonious battle. The IT industry would need to contend with easy intra-EU migration of skilled workers and increasing barriers to skilled worker movement from India into UK, since it may continue to be dealt with as an immigration issue and not a trade issue, which is what it actually is. In this scenario, in spite of a felt need for skilled workers from overseas, including India, such immigration may remain a lower priority below intra EU and political asylum linked immigration, thereby adversely impacting the IT industry in India. Consequently, it is important for the UK Government to take note of the views of the IT industry as the details of the deal are worked out.
Irrespective of the outcome of the referendum, this is set to be a defining moment in the relationship between UK and its European neighbours, but the emergent configuration could end up being a defining moment for India UK economic relations as well. How, and to what extent it will impact Indian IT companies in the region will become fully clear only after the dust settles on the referendum.