US-India: The outsourcing glitch

While the rest of the world swoons over the new US president, India is conspicuous by the discomfort that the new political dispensation is generating in the corridors of power in New Delhi. After eight great years under George W Bush, US-India relations might just be entering another tumultuous era.

Barack Obama, to the extent that his views on issues that impinge on Indian interests are known, is coming to office with a very different set of priorities. Earlier indications of these priorities do not bode well for the future of US-India relations. On three most significant issues - nuclear proliferation, Kashmir and outsourcing - Obama seems to have views that are incongruent with Indian interests. Given the economic turmoil that the world is witnessing right now, the issue of outsourcing has the potential of provoking a serious turn in US-India ties.

Obama took a very tough stand against outsourcing during the campaign and talked of a tax agenda punishing companies who "shop job overseas." He underlined the need to give tax benefits to companies investing in the US - companies "who will keep jobs at home."

The new president played this issue up especially during the primaries to woo those working class voters (the base of the Democrats) who had seen their jobs either disappear overseas or were simply against globalization.

Though Obama has argued that America cannot "shy away" from globalization, he has suggested that strong measures are needed to protect jobs in the US. That said, it is difficult to envision how the Obama administration will legislate against the economic forces that underpin the realty of outsourcing.

However, it is significant that instead of showing leadership on the issue of off-shoring, Obama has tended to take a rather narrow approach tailored primarily to his electoral requirements.

In fact, at one point early in the primaries, the US-India Political Action Committee (USINPAC), one of the major Indian-American groups, publicly protested the Obama campaign, alleging that his staff was "engaging in the worst kind of anti-Indian American stereotyping" in their attempt to take on Hillary Clinton on the issue of outsourcing to India.

Clinton had suggested earlier that there was no way to legislate against the reality of outsourcing and that outsourcing would continue. But even she had asked the Indian companies to invest more in the US to create a greater balance in trade ties between the two nations.

The global economic downturn is taking its toll on the US and India. As US firms scale back due to constraints imposed by the present economic climate, India might be hit severely. The country's US$50 billion IT sector exports around 90 percent of its output to the US.

These recessionary trends also come at a time when the Indian software sector is facing a crisis of confidence, as major Indian information technology companies record a downturn in their revenues with a sense of uncertainty pervading the entire sector. Given that approximately two million workers are employed in the software sector in India, such trends can create problems for the political dispensation in New Delhi.

India's apex IT body, the NASSCOM (National Association of Software and Services Companies), has rejected claims that Obama's plans to cut down outsourcing pose a threat to the Indian IT industry. The Indian corporate sector is also hoping for a quick turnaround in the US economy, which could then benefit the Indian and global economies.

Though the Indian IT forms have repeatedly emphasized that they do not believe the US president will make a move against outsourcing, there is an underlying sense of uncertainty about the possibility of the outsourcing laws undergoing changes in the new administration in Washington.

The expectation in Indian industry is that pragmatism will prevail as Obama realizes the true challenges of economic governance. A high-profile delegation from NASSCOM will be meeting Obama administration officials in March to share their apprehensions and present their viewpoints.

It has been suggested that the offshore outsourcing of jobs could emerge as a major problem for the US economy as the number of service sector jobs vulnerable to competition from abroad increases substantially in the coming years. Yet it is not clear if legislating against outsourcing would solve this real problem that the US economy is going to face in the future.

In fact, prompt recovery of the US economy might be a function of US companies succeeding in cutting costs and offshore outsourcing is one way for companies to do that. It is also intricately linked to the availability of skills locally. Skill shortage will remain a major reason for US companies to continue to tap human resources in India and elsewhere.

Obama will have to seriously consider the impact of any protectionist legislation on the competitiveness of the US economy, especially in this time of global economic downturn.

Rhetoric during election campaigns, more often than not, does not get converted into actual policy. This was reflected in the comment of the Indian finance minster: "Once Obama is in office, he will realize that it is an interconnected world, and countries have to work together."

The US will not improve its economic prospects by hiding behind protectionist walls, however lucrative and popular they might seem in the short term. In fact, they can worsen the global economic environment.

The Indian software industry, meanwhile, is also trying to diversify. Though the US is its largest market, closely followed by the UK, its sights are now on new markets in Latin America, China, Japan and Europe. The industry is expanding by 21 to 24 percent annually, and it is being suggested in some quarters that by 2020 India will be in a position to fulfill the technical needs of the entire world. However, if differences between the US and India on outsourcing are not resolved amicably, both will lose in the long term.