An equally embattled President of United States eloquently argues against outsourcing and appeals to American companies to create more jobs in the US.
Coming close on the heels of the US government decision to hike visa fee for H-1 and L-1 visa holders, the executive order by democratic Governor Ted Strickland and the rhetoric of Obama - both considered as a measure to restrict outsourcing have sent the Indian IT industry into a tizzy, causing ruffles in corporate boardrooms and diplomatic circles.

Advocating protectionist measures by candidates during an election campaign in the US is not new. Campaigns, especially ones during recessions have always been filled with promises on how to protect American jobs and wages. During the 1991 presidential campaign which was conducted in the midst of a deep recession, presidential candidate Ross Perot was adamantly opposed to the North American Free Trade Agreement (Nafta) and coined the phrase ‘Giant Sucking Sound’ while referring to the American jobs heading to Mexico. Ultimately Perot lost the election but helped elect Bill Clinton who signed Nafta into law.

During the 2000 presidential campaign, Al Gore wanted stringent conditions imposed on China for granting permanent normal trade relations status, while Pat Buchanan wanted 100 per cent tariffs imposed on Japanese and Chinese goods to save American jobs. None of the proposals succeeded.

In the 2008 campaign, candidate Obama was pandering to Big Labour by promising to renegotiate Nafta with Canada. This made Canadian government officials nervous. President Obama has not talked about renegotiating Nafta since assuming office. The congressional and senate campaigns in non presidential election years also follow a similar pattern.

But what is new is the current global economic environment? With the world economy entering a new growth phase or ‘New Normal’ as many economists have termed it, Indian IT companies have failed to recognise the challenging political and economic environment in countries of their operation. They continued to rely on rosy growth and earnings projections for their industry and were ill-prepared for regulatory actions in developed world.

There are plenty of options the Indian IT industry can explore to overcome this imbroglio. One is to sit tight and wait for the campaign to be over and pray that the Republican wins the election. It is entirely possible that the republican gubernatorial candidate John Kasich, a former congressman and budget committee chairman, who has a penchant to cut government spending and has an impeccable record on free trade, could get elected and reverse the ban on IT outsourcing.

Some of the other options for Indian IT companies include mimicking the Japanese automobile industry or to increase their presence in developed countries through inorganic growth. The Japanese automobile industry shifted their manufacturing base to the source of business when the going got tough in the 1990’s.

The Indian IT companies too could do the same by shifting some of their operations to the US and western Europe and open development centres in those countries.

Infosys has already set a precedent by opening a global development centre in Canada and others should follow suit. Indian IT companies are also flush with cash and with valuations being cheap, could mop up companies in developed world and become global companies in a short period of time.

Failure to anticipate change

But the most important lesson for Indian IT industry from the visa fee increase and the ban on IT outsourcing debacle was their failure to anticipate regulatory changes in the US. They should better learn to predict such changes in future and lobby hard before these legislations are signed into law.

Unlike in India where most companies have a tendency to appeal to the ministries for a rollback or withdrawal of part of a draconian piece of legislation after it becomes law, the political environment in the western world is different. Intense lobbying has to start before the legislation is framed. It is a futile exercise to appeal in international forums through Government of India after such legislations become law.

 Much of the damage to the industry would have already been done by the time disputes are resolved. Indian companies have to recognise the fact that they need to be pro-active in stopping legislations that are unfavourable to them before it becomes law.
IT outsourcing is irreversible as long as Indian companies maintain their labour cost advantage over competitors. But it has to dawn on the Indian IT industry that hyper growth of last two decades is over.

With the United States and western European nations set for anemic economic growth over the next decade and unemployment expected to remain high for the foreseeable future, Indian IT industry is likely to face more political challenges and trade barriers in future.

 Apart from being adept at public relations and lobbying, they need to innovate, strengthen their presence in the developed world and add value to customers in order to overcome those challenges.