The US Cools on Outsourcing

American election-year politics has begun to play an ominous role in the offshoring business, with the sector in India jolted by news that the US government has instituted mandatory no-offshoring clauses on two major projects amounting to US$320 million and US$400 million respectively.

The decision to keep the projects in the United States,, precluding Indian companies from bidding on them, coincides with reports that the US Senate is expected to consider an Obama administration-backed bill called the Bring Jobs Home Act to make it less attractive for American multinationals to send work to countries such as India. The measure is sponsored by the AFL-CIO, the country’s biggest federation of trade unions.

An India Ministry of Commerce and Industry spokesman says the ministry will enter a protest against the US moves. Although they are regarded as political posturing by an Obama administration in trouble with the voters seizing on an emotive issue, the US actions have alarmed corporate India. While the specter of protectionism is raised at regular intervals by the administration against Indian companies, this latest move has frustrated top-notch Indian IT companies that were set to bid for the projects.

The development assumes additional relevance against the backdrop of the US presidential election in November, in which the US’s 8.2 percent unemployment rate is a critical issue. No president has been reelected since Franklin Delano Roosevelt in the 1930s with unemployment that high.

In what has by now become a familiar pattern, the Indian tech sector is trying to counter the move against outsourcing by seeking to point out that rather than taking away employment, it has helped generate millions of jobs in the US apart from paying significant taxes.

While contracts awarded by American individual states in the past have occasionally carried a `no-outsourcing’ clause, the trend is disturbing because it reeks of mounting international protectionism, analysts say. Fears are also amplified because, driven by electoral compulsions, the Obama administration is also likely to attempt to enact new tax laws to deter all outsourcing, including that by private US corporations. Those fears may be unfounded given the fact that the Republicans, who dominate the House of Representatives, have stalled any and all attempts to raise taxes on anything, and the multinationals that outsource are among their core constitutencies.

“Let's play fair, Uncle Sam” read an editorial in The Times of India. Such moves, the article said, are both “ill-timed and ill-advised.” Republicans are countering the move by saying will only make it costlier for American companies to operate, thereby reducing their competitiveness. Besides, they'll also vitiate trade ties and perhaps invite retaliatory measures by India.”

However, the pro-outsourcing lobby is of the view that despite the restrictions, it will be difficult for American companies to overlook the ostensible cost advantages that Indian companies bring to the table. According to a Confederation of Indian Industries report, Indian companies operating in 40 American states have invested more than US$820 million in manufacturing facilities in the US, creating thousands of jobs.

Thirty-four firms surveyed in the report itself have created 52,000 jobs, including some 20,000 by the Tata corporate empire alone. More pertinently, the median average of the work force hired locally in America is 80 percent, debunking the myth that Indian companies tend to import workers from India.

Indian firms such as Tata, Mahindra, L&T, Wipro, Infosys are by now familiar names for Americans as they generate local jobs and bolster economic activity. Tim Griffin, a Republican Congressman from Arkansas, earlier spoke of how the Indian-owned Welspun-Tubular employed more than 600 locals in his home state, while Jean Schmidt, an Ohio Congresswoman, said a Tata investment in her constituency generated 450 jobs, saved a building from being gutted, and improved the tax base in her district.

Analysts are concerned that the restrictions may inhibit Indian investors who consider America to be a fertile playground for their entrepreneurial energy. Uncle Sam, they feel, offers a bouquet of advantages sorely missing from the Indian commercial landscape – cheap land, excellent infrastructure and few regulatory bottlenecks. Many blue chip Indian companies whose projects have been throttled by the notorious Indian red tape have thus been pulling out all stops to root for investing in the American economy.

Washington’s fears, say analysts, are analogous to many countries erecting trade barriers in the wake of the Great Depression of the 1930s to catalyze domestic production and consumption of domestic goods apart from tackling unemployment. But if all nations adopt a similar protectionist mindset, trade liberals fear, it will lead to a skewed situation where global demand will stagnate while trade and productivity will plummet. “One doesn’t have to be a rocket scientist to deduce that if countries can’t access raw materials they need from other countries to support domestic production and can’t export what they have produced in abundance, then global recovery will be decelerated enormously,” says Delhi-based economics professor Prateek Basu.

Mark Mobius, Executive Chairman, Franklin Templeton Investments, also points out in his article “Investment Adventures in Emerging Markets” that free, fair and open trade is vital to foster a thriving global economy. “In the past, when economic conditions have deteriorated,” Mobius wrote, “we’ve seen governments in developed and emerging economies alike engage in protectionist policies. With growth in many countries slowing this year (tied in part to the crisis in the Eurozone), protectionism could be on rise.”

Mobius believes that these protectionist policies don’t work because one of the biggest challenges many markets face right now is insufficient growth. In addition to their own domestic challenges, many countries are also scrambling to avoid getting pulled in by the Eurozone crisis. “Given that the Eurozone is an important trading partner for many emerging economies, there is concern that emerging countries are particularly vulnerable to an increase in protectionist policies.

World trade has already slowed this year in tandem with a global economic slowdown. According to the World Trade Organization’s April report, trade expanded 5 percent in 2011, considerably less than the 13.8 percent in 2010. The WTO projected a further slowdown in to 3.7 percent in 2012. The WTO attributed this possible slowdown to loss of global economic momentum from a variety of shocks, including the European debt crisis.

With fast depleting natural resources, a scramble has also begun among emerging economies to access them at any cost from across the world. The resource-rich nations are often vulnerable to exploitation and end up resorting to protectionist measures. For instance, Bolivia has been nationalizing parts of its energy sector while China has curtailed exports of rare earth elements. Indonesia, similarly, plans to introduce taxes on the export of more than 60 different forms of minerals.

However there’s optimism still among India Inc. for doing future business with America. “America will always be the numero uno destination for companies with global ambitions,” a senior manager at Reliance Capital told Asia Sentinel. “It offers advantages which India cannot even dream of providing in the next 20 years.”

Besides, with Indian trade bodies such as CII and FICCI bringing out reports to support how Indian companies have contributed to the US economy, the propaganda about flight of jobs to India appears weak. Perhaps more worrying for New Delhi now should be the over enthusiasm among India Inc. for investing in the US which offers an encouraging business climate despite the fact that its own economy is cooling as well.