SMEpost

10 ways Brexit will affect small businesses in India

SMEPost Bureau & Agencies

The Brexit debate has been plaguing the world for a while. Now, the debate is over and the result is in. In June, the UK finally voted to leave the EU. This decision may not sit well with Indian entrepreneurs and small business owners. But they will have to contend with it. They will have to form new strategies to deal with the post-Brexit world order.

The UK voted for Brexit this year. But it will be early 2019 before the UK actually leaves the EU. There is still a lot of uncertainty about how the impact of the Brexit will actually pan out. Indian companies with ties to the UK and EU need to start planning their strategies to deal with Brexit now.

Here are 10 ways in which Brexit will affect Indian businesses.

  1. India is currently the second-biggest source of foreign direct investment (FDI) for the UK. One of the main reasons for this is the historic and cultural ties the two countries share. The UK has also proved to be a gateway into the rest of Europe. About 800 Indian companies have headquarters in the UK. Until now, they could sell their products and services to the rest of Europe under the European free market system. But after Brexit, the UK will not be an attractive destination for Indian FDI.
  1. Germany could become the new base for Indian small and medium enterprises (SMEs)to set up headquarters. Currently, there are about 1,600 SMEs in Germany. These SMEs are world leaders in their specialized niches. They have access to infrastructure and a business environment adjusted to their special purposes. So, Indian SMEs currently in the UK will find perfect conditions in Germany. Besides, Germany is at the centre of Europe. This means short distances to European suppliers and customers.
  1. Brexit might lead to higher taxes for Indian companies. Some countries levy a withholding tax on interest, dividends, and royalties paid to a person living outside that country. Currently, the EU does not levy this tax on these payments from EU subsidiaries. But when the UK leaves the EU, the latter may introduce withholding taxes. This will result in higher taxation in the UK vis-à-vis EU member states.
  1. After Brexit, there will no longer be free movement of labour between the UK and EU countries. Companies might find it difficult to relocate workers from branches in the EU to the UK and vice versa. For non-EU and UK employees, separate work visas for the UK and the EU would likely be required. This would increase administrative and processing costs for human resource planning.
  1. After the UK voted to leave the EU, the pound has fallen in value against the dollar and, thus, the rupee. Indian exporters to the UK will see revenue and profit hit in the short term due to foreign currency losses.
  1. It will take some time before Britain finally leaves the EU. Once it does, it will seek new trade agreements with non-EU partners, including India. Indian companies can hope to benefit from an easier new bilateral trade agreement with the UK. The agreement would be a better option than the tough and drawn-out negotiations on the EU Free Trade Agreement.
  1. Brexit has led to uncertainty over the outlook for currencies and global growth. Britain could go into recession, dragging down the global economy. Investors are cautious in an uncertain environment. As a result, India’s stock markets could see some volatility. Indian companies could see stock prices fall. They might find it difficult to raise capital.
  1. There is a lot of political and economic uncertainty in the wake of Brexit. This means small businesses cannot make plans for the future. Businesses that are at a high growth stage may have to wait for entry into UK or Europe. Companies with ties to the UK and Europe might have to wait for some clarity to make further business plans.
  1. Indian start-ups in their early stages already operate on paper-thin margins. A falling rupee due to Brexit may force them to take a hit on revenue. It might even force them to increase pricing to counter the losses from a cheaper rupee. Start-ups today are heavily dependent on IT and electronic devices. Brexit will lead to a rise in prices of electronic devices that are crucial to their business.
  1. Businesses may even be affected due to the macroeconomic impact of Brexit. After Brexit, central banks will intervene to minimise volatility in the financial markets. They might cut interest rates to improve liquidity globally. The RBI might take a cue from this and cut rates as well.

The UK voted for Brexit this year. But it will be early 2019 before the UK actually leaves the EU. There is still a lot of uncertainty about how the impact of the Brexit will actually pan out. Indian companies with ties to the UK and EU need to start planning their strategies to deal with Brexit now.

Source: moneycontrol