Indian IT Inc need not lose sleep over US postures

India, once considered as the preferred destination by many US companies to get their jobs done might not be a considered a hotspot by them anymore, courtesy various protectionist moves in the US like pressurising local firms to stop outsourcing of jobs overseas, ending tax breaks for firms that sent jobs abroad, encouraging local hiring etc.

However, India Inc seems unperturbed about the moves and is optimistic about the positive growth of IT sector in India. The Obama administration that came to power in the year 2008 is striving hard to revive America’s past glory of a financial superpower. The priority of the recovery process is also creation of new jobs. At the preliminary stages, the government had announced stimulus packages to boost the American economy which was reeling under the pressure of economic crisis due to collapse of major banks and financial institutions from mortgage crisis.

However, despite the massive stimulus package of $700 billion the American economy failed to recover to the extent the government had expected and the slow recovery now haunts the administration which is nearing the November elections to the United State Congress and Ohio governorship.

Earlier, in the month of May, Obama had announced new tax proposal to eliminate loopholes that allow US firms to avoid paying tax on profits earned overseas. However, among the news coming from the Unird States government, many feel that the ban on outsourcing of government IT and back office projects outside the US announced by Ohio Governor Ted Strickland is a political posturing.

The announcement came out at a time when IT industry and industry bodies were scouting for options to overcome the senator Charles Schumer’s Border Security Bill doubling fees for H1B visas and the ‘Chop shop’ remark.

US firms to be hit more

On Ohio governor Strickland’s new regulation in off shoring, India Inc reacted strongly. In its strong reaction to Ohio State’s decision National Association of Software and Services Companies (Nasscom), the IT industry representative, termed the move as discriminatory. In a statement, Nasscom said, “We are leading a delegation to the US later this month and will be taking this up with relevant officials in the US. The ban on outsourcing can only be viewed as counter -productive to the US government thrust on reducing public deficit. It only reinforces our stand on discrimination.”

Commenting on the Ohio offshore ban, Infosys Technologies CEO & MD Kris Gopalakrishnan said, “Infosys’ initiative in the public services sector is focused on creating a domestic delivery centre in the US, hence this should not affect us.” Another IT services bellwether Wipro said, “We believe in the fundamental strength of the US economy and has invested in expanding our presence there through partnerships with many.”

Swift reaction

While IT industry reacted swiftly and strongly to the Ohio governor’s statement on outsourcing, analysts estimate that the American government sector accounts for only a small percentage of the total outsourcing business for Indian firms. Industry veterans and analyst feel that the move to curtail outsourcing within the US will create a large impact on the US majors like, IBM, Hewlett Packard, Microsoft, Accenture and Oracle who has significant presence in India by way of offshoring.

According to data, these companies alone share around 11-13 per cent of the US governmental projects. Further, industry experts feel that the move will hit the bottom-line of these corporations who offshore major chunk of their government projects to India where they employ lakhs of people.

According to Industry research firm Tholon, most large American companies have significant presence in India and most of the works are outsourced. “For Indian companies, the US government projects form only a small percentage of business. But these kind of moves will not send a right signal to the market,” Tholon Vice-President Nishant Verma said.

Commenting on the issue MindTree Vice-Chairman and Gardener Subroto Bagchi, “The Ohio ban is more of a political rhetoric. The US government is trying to resolve an economic issue through a political posturing and they still say India is a strategic partner.”

Further he said, “It is nothing new. In the 80s, it was about bashing Japan. Before NAFTA, there was some bashing of Mexico as well. Then it was China and now, with probably the least of all justifications, it is India. Ironically, it is the US that has been the vanguard of the free market and now it risks being seen at the forefront of protectionism.”

A recent data from the US, says that the new US claims for unemployment benefits dropped in last week to a two-month low, while the trade deficit narrowed sharply in July, hopeful signs for the stuttering economic recovery. The new scenario in the financial superpower is considered as a political ball game during the November elections. And market leaders believe that this kind of electoral rhetoric can be expected in the next few months, they also believe that more stringent measures may follow.

Indian lobbying

In such a situation, only relief for the Indian industry is the power of the business lobby in the US. When earlier, the Obama administration came out with some new regulations, industry body Nasscom had said that it will talk to influential Congressmen and Senators and also will avail the services of professional lobbying firms to ensure Indian interests are protected. According to data available in a US government website Nasscom has been actively using the service of Washington based Hill and Knowlton Inc from the year 2003-2008 for lobbying.

As per other media reports Ministry of Commerce and Industry has decided to register its protest against the move by Ohio. According to an expert, the move by the federal government in the US is a poll gimmick and said China also took away a large number of manufacturing jobs from the US. Americans are only targeting India, the reason is that China is a low cost manufacturing country for consumer goods and other components used in the US.

The government cannot directly oppose the Chinese as they manufacture cheaper products consumed directly by US consumers in their daily life. Indian software or call centers are acting as facilitator of better and low cost services in sectors like insurance, banking, hospitality, health and telecom in a cost effective and efficient manner. But the benefits are not directly linked with the consumers.

Commenting on the importance of Indian IT companies in making global firms cost-competitive, KPMG IT Director Kumar Parnkal said, “The unemployment rate and the US recovery is slow. Outsourcing is the right way for small companies to make profit.

The ban in outsourcing and cutting sops will affect profitability of the companies. Companies looking at India as an offshore destination, always look for value as primary objective. The outsourcing is primarily helping the Americans by providing better services at lower cost.”

The worrying aspect of politicians making protectionist move, however, is that more such measures might be taken. The Ohio diktat can also be copied by other states as a popular move resulting in more bans or tax strictures in the future. Indian software exporters must keep this possibility in mind as these moves might impact their profit margins.  

To insulate themselves from such moves in future, Indian firms must diversify to many other countries aggressively and must also develop the domestic software market in a big way.