India Inc worried by ‘Pandora’s box of grave uncertainties’
As Brexit roiled financial markets, top industry leaders on Friday said India cannot be in a denial mode as the referendum has opened a "pandora's box of grave uncertainties" and Indian companies, especially in IT sector, will have to rework their strategies for the region. They also foresaw Indian companies having to shift their operations out of the UK to other European locations.
While the government and RBI sought to calm the nerves saying any impact on India would be transient lasting just for a few days, the exporters warned of immediate impact on their margins due to volatility in rupee value.
As the $108-billion Indian IT sector stared at a phase of uncertainty in near-term, homegrown multinationals Tata and Mahindra groups said access to markets and skilled workforce will remain key issues after Britain voted to exit from the EU, an event which also "highlights the importance of sound risk management for the corporate world".
Tata group saw shares of their various companies including Tata Motors and Tata Steel with significant exposure to UK taking a big hit. Exporters feared that the turmoil in global currencies would bring in more currency risks and could prove disastrous for the world trade, although rupee depreciation may appear to be good in longer term for those shipping goods overseas. "It has opened up a Pandora's box of grave uncertainties," Biocon CMD Kiran Mazumdar-Shaw said when asked for implications of Brexit.
She further said: "Will Euro remain intact or will we see others exit? What will be the impact on the Euro itself? Will it devalue and to what extent? How will India's bilateral trade with UK and Europe be impacted?"
Mazumdar-Shaw said India cannot be in a denial mode that it will be immune to Brexit, adding that there is likely to be mayhem for several weeks before things stabilise.
Tech investor and former Infosys director T V Mohandas Pai said Indian IT players catering to clients in the financial services space in London may shift their operations to other parts of Europe as a cheaper Pound Sterling will have the biggest impact on these firms. "That's already impacting them, marginally, depending upon who is exposed to business in the UK," said, adding "now, many of them may migrate to Europe...What happens there is something that needs to be seen. So, there could be temporary relocation over a period of four to five years".
Expressing similar views, IT industry body Nasscom said: "Likely decline in the value of the British pound, which could render many existing contracts losing propositions unless they are renegotiated."
Europe is the second largest market for Indian IT-BPM industry, constituting almost 30 per cent of the sector's export revenue of about $100 billion. The UK plays a key role within this market. In addition to representing a large share of Nasscom's members' activity in Europe, many use Britain as a gateway for further investment across the EU.
Concerns further mounted as commentators said that Britain's exit could mean that the EU could slip into recession while Indian firms would also need to rework their strategy to use UK as a gateway for their European operations.
Besides, there are fears that the UK operations as such might take a hit of several Indian companies due to immigration and other restrictions that might come in because of Brexit.
Financial services major Ambit Investment Advisors' CEO Andrew Holland said Brexit is a huge negative outcome and has far reaching ramifications for global markets and economies. Andrew, who hails from Britain and has been active in the Indian equities markets since 2006, there will be speculation over whether Scotland will call for a new referendum given they voted to "remain" in the European Union.
"Elsewhere in Europe, other countries may well follow suit and hold their own referendums and concerns would rise as to whether the European Union will disintegrate," said Holland who has previously been with Merrill Lynch as MD and Head of Proprietary Trading. "The global and market implications for this are very negative and volatility across all asset classes will be high for some time going forward.
"We could therefore re-visit the concerns of earlier this year that the global economy could now take a shift down and central banks have fired most of their ammunition and anyways it is not really working. So politics will be at the forefront of markets and with that huge volatility," he added.
Stating that markets are going "haywire" after going into a complacent mode into the lead up to referendum, he said going ahead "volatility will remain abound as positions get un-wound and markets speculate on the future of Europe.
RBI Governor Raghuram Rajan however said the Indian economy has good fundamentals, low short-term external debt, and sizeable foreign reserves. "These should stand the country in good stead in the days to come," he said.