Brexit and Indian economy

Brexit refers to the possibility that Britain will withdraw from the European Union with the in-out referendum on its EU membership to be held on June 23. The UK would have two years to figure out the exact terms of the nation's departure. The UK has traditionally been the gateway for Indian IT firms to enter Europe and they have set up a large presence in the UK to serve the EU markets from their headquarters in London. 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.

India invests more in the UK than in the rest of Europe combined, emerging as the UK's third largest 

FDI investor. Access to European markets is therefore a key driver for Indian companies coming to the UK.  Britain's exit from the European Union will have a negative impact on the USD 108-billion Indian IT sector in the short term, industry body Nasscom said. However, it said the exact nature and extent of the impact - if ‘Brexit’ happens - will emerge over a longer period of two years or more.

It added that 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". According to reports, Indian IT companies get anywhere from 6-18 per cent of their revenues from the UK. Consequently, a negative implication of Brexit is that Indian IT companies may need to establish separate headquarters/ operations for EU, leading to disinvestment from the UK and diversion of activity from the UK to EU.

Also, 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 re-negotiated.

In the longer run, Brexit could help strengthen India-UK economic relationship as the UK seeks to compensate for loss of preferential access to EU markets. "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 the UK currently accounts for about 17 per cent of India's IT exports worldwide," it said.

Additionally, with the UK less dependent on intra-EU immigration into the UK, it could become more open to high-skilled immigration from other non-EU countries including India, it added. However, in case Britain decides to stay a part of the EU, the IT industry would need to contend with easy intra-EU migration of skilled workers from India into the UK, since it may continue to be dealt with as an immigration issue and not a trade issue.

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, Nasscom said.

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, it added.