A potential trade spat between the US and Indian governments could threaten the bright future of offshore outsourcing, says Kala Rao.
The debate over whether offshore outsourcing of IT services is bad for America could snowball into a trade spat between the US and India as politicians and legislators in both countries face a national election year. The rhetoric has become sharper and angrier on both sides.
In late January the US Senate approved an Appropriations Bill that restricts offshore outsourcing of work contracted out by the federal government. India’s IT minister Arun Shourie promptly decried the bill as a move against free trade. Media reports say around 15 states in the US are considering similar bills against what is now being called ‘offshoring’. On February 16, India’s commerce minister Arun Jaitley took up India’s concerns on the issue with visiting US trade representative Robert Zoellick. Mr Jaitley rapped the US for its ‘double standards’ because it pushed other countries to open their markets while protecting its own market and jobs. Mr Zoellick, in India on a tour to find ways to restart the stalled WTO talks, said trade is a two-way process, and urged the Indian government to open up access to the agriculture and services sectors.
Mixed messages
Democrat front-runner John Kerry’s campaign to protect US jobs is causing concern in India, while positive comments on offshore outsourcing in a recent report by President George Bush’s Council of Economic Advisors made front page news in the Indian media.
India’s IT industry, the star of India’s export growth in recent years, is also worried. Most of them are measured in their response so far to the political debate on outsourcing in the US, a country which contributes around two-thirds of India’s estimated $12bn IT exports. At the annual IT industry conference, hosted by lobby group Nasscom in Mumbai in early February, the US reaction to outsourcing to India cropped up in several discussions. Most speakers, who included top Indian IT company executives, downplayed the impact of the bill. Phiroz Vandrevala, executive vice president of Tata Consultancy Services, India’s largest exporter of IT services, said, “a lot depends on the growth of the US economy this year. The impact (of the bill) is limited as it applies only to work contracted by the US government until September this year.” He hopes that the support by big US corporations for offshoring would help “moderate the reaction” of American politicians to it.
Even though the US economy is expected to grow at around 4.6% this year, there is increasing anxiety over an upturn in unemployment, and that is driving a surge of protectionism, said Elliot Schwartz of the Committee for Economic Development, a Washington-based think tank, who spoke at the conference. “Job migration was not an issue as long there were new jobs that paid better. Now there is no guarantee of new jobs, let alone better jobs,” he pointed out. Export revenues of Indian business process outsourcing firms is estimated to grow 52% in the year to March, according to Nasscom.
As the debate heats up, the focus is likely to be the non-tariff issues such as local privacy laws and visa laws in the US. As the Nasscom meeting in Mumbai ended, TCS, Infosys and Wipro, the three poster boys of Indian IT, were busy denying charges of abuse of an American visa law that allows temporary relocation of their workers to the US. That charge, according to a media report, was made by Michael Gildea, executive director of AFL-CIO, America’s labour federation, before the House International Relations Committee on February 4.
Negative impact
Any move to restrict short-term visas to the US, says an Indian IT executive, hinders the ability of Indian companies to acquire new clients in the US as a lot of the groundwork before moving work offshore is done by sending Indian employees to client sites in the US.
Top US outsourcing firms such as Accenture and EDS, under threat of losing clients to Indian companies, initially helped fuel the furore over offshore outsourcing, he adds. Once the offshore trend was established, they too have set up subsidiaries or sub-contracted work in India over the past year.
Today, they represent a clear threat to Indian outsourcing companies. They could be the target in a new tax law for business process outsourcing (BPO) companies introduced by the Indian government, and seen by some as a retaliatory measure to protect Indian BPO companies.
In his interim budget on February 3, the Indian finance minister announced that BPO companies that had ‘core’ work done out of India will be taxed at home. The distinction between what constitutes core and ancillary work is ambiguous, and is expected to lead to a rush of litigation, according to tax analysts.
Reciprocity
The new tax is in line with the reciprocity clause in international tax treaties, says the CEO of one of India’s biggest IT companies. “Indian companies are taxed on the work they get done out of the US; they also have to make social security payments even though their employees work there for short stints, so why should American companies be exempt from paying tax here,” he asks. The finance director of another large Indian IT firm says the law is likely to be a tool in future trade negotiations with the US.
