Obama Acts Tough on Outsourcing

United States President Barack Obama's State-Of-The-Union Address announcement to slash taxes to American firms to generate jobs in America instead of outsourcing them is likely to create more problems than it solves, both in the US and overseas, analysts say.

The nature of the business will make it difficult to impose tax penalties on US firms that outsource jobs, according to a survey in India by Asia Sentinel of industry officials, independent consultants and financial analysts.

"This is a really a complex issue as enormous job losses have taken place in the US and it is difficult to quantify the exact tax losses triggered by outsourcing," John Daval, a New Delhi-based outsourcing consultant, said in an interview. "On the contrary, if Obama's measures are implemented, US consumers may end up paying higher taxes as service costs will also shoot up. Ultimately, this embargo will have to go, as it also violates the American tenets of free trade and globalization."

"Rather than impinge on jobs, outsourcing has enhanced the competitiveness of US corporations and created more jobs in the US economy," Daval added. Even if Obama's measure is implemented, he says, it is ambiguous how he can achieve his objectives. "How can he be sure that American companies won't devise ways to outwit his system? For that matter, how will the US administration keep track of the job outflow?"

While many Indian IT firms feel there is no need for panic, others say the president's protectionist stance doesn't bode well for the industry and may shackle its growth. The decision, they feel, will have a multiplier effect on India's outsourcing industry as nearly 70 per cent of India's US$40 billion software is directed at the US market. The Indian software and outsourcing industry employs some 2 million people, earning revenues worth US$52 billion, of which nearly US$48 billion comes from exports.

Moreover, a report by IT consultancy firm Forrester Research estimates that 3.3 million American jobs will be lost to outsourcing in the 15 years ending 2015. Already, half of the Indian IT- BPO industry's US$71.7 billion revenue comes from the US. According to Gartner, Indian BPO vendors will command 10 percent of the global market by this year end.

"I think the concerns that we have are about indirect protectionism. I don't think the tax break issue is really the one which is important for us. Obama's comment was not related to outsourcing. It's about US companies operating in regions where they get tax benefits," the National Association of Software and Services Companies Vice President Ameet Nivsarker was quoted as saying.

"It's more a US-US issue rather than one aimed at stopping outsourcing, or offshoring, or anything to do with India," added Som Mittal, the industry association's president.

In fact Obama's move, many believe, will hit American companies more than the Indian outsourcing industry. This is because for recession-hit US firms, the need to whittle down operational costs will be of vital importance. For this, they have no choice but to offshore to low-cost destinations like India that also provide them with an English-educated workforce.

However, another school of thought strongly believes that any move to curb outsourcing in a major way will have a significant import for India, among the world's top five outsourcing destinations along with the Philippines, Ireland, China and Brazil, according to a report by the international consulting firm Tholons. Moreover, while Indian IT-BPO export services have recorded exponential 35 percent growth for the last five years, its competitors too, have not exactly been twiddling their thumbs.

The Philippines, for instance, has pushed up its outsourcing revenues by 25 percent from US$4.8 billion in 2007 to US$6 billion in 2008 while augmenting industry employment by 33 percent to an estimated 400,000 employees. Emerging and stiff competition from China and Vietnam can also be a game changer, analysts say.

However, industry watchers assert that the Indian IT firms are also looking at pastures beyond the US for outsourcing revenue and have already started augmenting their presence in other countries. India's largest IT services provider Tata Consultancy Services (TCS), for instance, has more than 7,000 employees in Latin America and has also set up a delivery center in Cincinnati, US with a capacity of 1,000 workers.

According to the analyst firm Gartner, even if the specter of protectionism looms large over the Indian BPO industry, there is no need for despair. Obama's statement, they say, needs to be put into a political context. The embattled US President has been fighting a slowdown and job loss with unemployment touching a disquieting 10 per cent across the US.

Many Indian entrepreneurs believe Obama raises the bogey of protectionism every so often to deflect from other major issues. "This issue was raised by the US President even during his election campaign and then again later last year. But, he can't forget the fact that Indians employed in the service industry have contributed majorly to the US economy. Indians are also running successful businesses in the US which employ hundreds of locals," says Satyavrat Arya, a Pennsylvania-based IIT alumnus.

Analysts believe the issue will be debated fiercely and that pro-India lobbies will be pressed into service to protect the country's interests. Besides, the Indian diaspora itself is a sizeable community which should enable India to reap the benefits of a demographic dividend.

According to the American Community Survey of the US Census Bureau, the Asian Indian population in the United States has ballooned from almost 1/68 million in 2000 to 2. 57 million in 2007: 57 percent growth, the highest for any Asian American community, and among the fastest growing ethnic groups in the United States.

Given the size of that community and the ambiguity of the issues, it is questionable, once the rhetoric dies down and the politicking begins in Congress, whether any action will be taken at all.