The Tussle Of Protectionism In The US And Its Impact On India”s Outsourcing Sector

Posted on October 2, 2010 in Business and Economy

By Siddhartha Roy:

The Economic Times reported that the US President Barack Obama feels that the US is losing its competitive edge over developing countries like India and China. With these countries heavily investing in education, R&D and exports among others, it is imperative that within a decade – developing countries might overtake the world’s most powerful democracy in several spheres of growth. Post the sub-prime mortgage crisis, as the US strives to get things back to business as usual, many of its policies are adversely impacting the growth of others.

India is often referred to as the “world’s back office” owing to its phenomenal IT outsourcing that has revolutionized the country’s service sector and also spearheading its growth both in terms of wealth creation and employment. It holds at least 50% of the global outsourcing market. This has been possible because, like India’s health tourism, India’s outsourced services have been fundamentally first rate and yet cheaper than those offered by firms in the client’s countries.

In its endeavour to get back on its feet, the US (which according to estimates has lost 8 million jobs during the Recession) has resorted to protectionist measures. The Ohio State Governor recently passed an Executive Order banning Outsourcing. The prime measure being considered is of offering tax benefits to only those firms that create jobs in the US itself.

The US has already passed a Bill in August to secure the US-Mexico border by raising $600 million by hiking work visa fees. A summary of the bill named Indian firms Wipro, Tata, Infosys and Satyam which send thousands of employees each year to the US to work at their clients’ locations as technicians and engineers. The legislation proposes to raise the fees on H-1B visas for companies who have more than 50 percent of their employees on such visas for highly skilled professionals from $320 to $2,320. Similarly the fee on L-visas given to multi-national transferees is hiked from $320 to $2,570.

This huge hike will surely have an impact on Indian firms operating in the US and will affect both the number of engineers/technicians sent abroad and the profits from offshore operations. India is repeatedly stressing its concerns to the US Government regarding the latter’s measures which are harmful to both Indian businesses and Indo-US ties.

A recent Amendment to a Bill aimed at imposing restrictions on hiring foreign workers was blocked on the Senate floor. The bill envisaged a ban on government contractors from using American taxpayers’ money to move jobs offshore. If passed, it would have prevented any company engaged in a mass lay-off of American workers from importing cheaper labour from abroad through temporary guest worker programs.

While the US pushes for such measures and faces a tussle within the country on account of business and political pressures (and both of which point in the opposite direction), Indian IT honchos have maintained that the offshoring bill wouldn’t have had much impact on their businesses. But the visa fee hike is going to hit us hard.

It is difficult to understand how much of liberalization is enough for any economy and how that parameter changes with time. Before the Recession, outsourcing was vehemently supported by both the US Administration and the Business stalwarts. Now, in difficult times, there are measures being laid to thwart it. The Indian service sector seems resilient enough to take these blows. The success or failure of such measures taken depends on the outcome. And that is still unclear.

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