The entire world was in shock, and in a panic, when a majority of the voters (52 percent) who participated in a special referendum held by the United Kingdom voted to exit the European Union (EU). This was a surprise because the United Kingdom is the world’s fifth largest economy. Also because conventional wisdom, and the polls, seemed to indicate that the U.K. voters would choose to stay put.
The United Kingdom has long viewed itself as India’s metropole and there was concern that Brexit would negatively impact India in general, and our IT industry in particular. India and indeed the world watched and waited for the voting to end. Now that the people have spoken, and Brexit is a reality, the question arises: What do the results of that referendum mean, and how will it impact India’s IT sector?
According to the National Association of Software and Services Companies (NASSCOM), Indian IT firms are likely to experience a phase of uncertainty, especially in the near future. Yet NASSCOM also expects that the exact nature of the impact will only truly be felt many years from now.
According to NASSCOM experts, the overall effect will likely be a mixed one, with Brexit offering up short-term challenges and plenty of opportunities for IT organizations in the long run. What are the reasons for NASSCOM’s prediction of short-term uncertainty, as well as any potential long-term upside for Indian IT companies and professionals in the long term?
Traditional reliance of Indian IT on the UK and Europe
The United Kingdom and the European Union have always been profitable markets for our IT sector. The United Kingdom is presently the second largest market for India’s IT services industry, accounting for 17 percent of our IT exports.
The European continent, excluding the United Kingdom, takes in 11 percent of India’s IT exports and is currently our third largest market for IT products and services. Europe is presently the second largest market for India’s IT-BPM industry, constituting almost 30 percent of that industry’s export revenue.
Traditionally, Indian IT companies have utilized the United Kingdom as the main gateway for entry into the European market. A number of Indian IT companies have had thriving operations in London for several decades.
As a member of the European Union, the United Kingdom allowed for easy movement of skilled labor between itself and Europe at large. This in turn enabled smooth operations for Indian IT firms not only in the United Kingdom, but within other European countries as well.
Short-Term Impact on India’s IT Sector
Although there has been some concern among financial experts that the monetary impacts of Brexit will be felt for decades to come — indeed, the immediate aftermath of the vote caused significant movement in the U.K. exchange rate — the markets have remained strong and have helped reduce any negative effects, at least for now.
There are three primary challenges that Indian firms will likely need to address:
Existing contracts — It is expected that many existing contracts between Indian technology companies and their U.K. clients or counterparts will lose propositions because of the reduction in the value of the GBP.
Fortunately, while renegotiations of deals will likely be required, which can be time consuming and may result in differences of opinion, it is anticipated that all parties will continue to work together in good faith to resolve any issues that arise.
Worker mobility — Prior to Brexit, Indian nationals could immigrate to the United Kingdom, become citizens and then freely travel and work in other countries. Now however, the mobility of skilled workers between the United Kingdom and the continent will be restricted.
This will likely result in increased difficulty for Indian companies to manage their operations in the various European countries. It will likely result in Indian firms having to establish separate headquarters or operations for the European Union, a time-consuming and convoluted process.
Uncertainty — Also, while Brexit appears to have been the favored option of a majority of U.K. voters, the full consequences of the decision to exit will take some time to materialize and be addressed. As the Brexit process unfolds, decisions about large IT projects with U.K. partners may have to be postponed in order to get the priorities right.
If, in the near future, there is any slowdown of the U.K. economy or similar negative impacts of Brexit, then the potential exists that opportunities for Indian IT firms operating in Britain and across the continent will be reduced considerably.
Thus far Brexit’s impact has caused many Indian IT firms to adopt a “wait-and-see” posture before planning their next set of actions. For example, the CEO of Mindtree, Rostow Ravanan, expects uncertainty to prevail along with re-prioritization of businesses and IT across several companies in the United Kingdom and Europe.
Long-Term Positive Outlook
There are, of course, reasons to be optimistic about a post-Brexit future. The withdrawl is bound to have negatives effects, but those reverberations won’t be indefinite. Here are three important mitigating factors that will calm the post-Brexit pandemonium:
India’s IT leadership — Prior to Brexit, Europe contributed more than 20 percent of the revenue for major Indian IT service providers like Wipro and Infosys. These companies and others like them are run by some very intelligent and experienced people. They are sitting patiently, observing and studying the situation and looking for opportunities. The one thing they aren’t doing is panicking about the overall situation.
In fact, Wipro has expressed optimism that Brexit will further strengthen the firm’s ties with the United Kingdom in the long run and throw open several new opportunities. This optimism is based on the possibility of strong Indian-U.K. economic ties, particularly as the United Kingdom starts to look for ways to compensate for any reduction in access to European markets.
More opportunity for Indian IT pros in the UK — Moreover, with the fallout of Britain and Europe, there will be no easy intra-European Union immigration into the United Kingdom, especially for skilled workers. This would seem to favor the migration of skilled labor from non-European Union countries, such as India, which has long enjoyed a very close relationship with the United Kingdom. So if you have any plans of working for U.K. IT companies, then the future is likely to hold promise.
Fewer regulations — Another positive impact of Brexit is that the UK will no longer have to abide by the strict European Union data localization norms or rules. This could potentially make it easier for Indian IT companies to do business within the United Kingdom, which, as noted above, is the fifth largest economy in the world.
Let’s not get carried away
In spite of what the “talking heads” on CNN and other media outlets proclaim, there is really no reason to panic or worry about Brexit, at least as far as India’s IT sector is concerned.
The situation may seem uncertain and in some respects bleak at the moment, but our industry should benefit significantly in the long run as things shake out. Again, these are just assumptions stated by NASSCOM, and only time will tell if they prove to be true.
I, for one, believe in the strength and ability of our IT industry. My money is on an increase in opportunity for our IT firms in general and our IT pros in particular. Do you have any opinions or questions regarding Brexit and its impact on the Indian IT sector? Please feel free to write in the comments section below. And as always, thanks for reading.