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The Unhealthy Tide Against Outsourcing

March 2004
The Unhealthy Tide Against Outsourcing

While India will only be marginally affected by the recent US Bill against government contracts sub-contracted to India, pundits of both nations see this as bad news, specially when proposed by a country that prides itself on promoting free trade and globalization.

By Siddharth Srivastava


Outsourcing is turning out to be a major issue in the build-up to the US elections. Some of the US-based top executives of Indian IT and BPO firms are now boycotting the fund-raising dinner parties for John Kerry, dubbed the 'BPO party spoiler'. President George W Bush too has faced the flak. When the White House economic adviser Greg Mankiw echoed what was stated in Bush's economic report to Congress, saying that the free flow of jobs, including the migration of services to India, benefited the US economy in the long run, Washington's political class came down on him and Bush like a ton of bricks.

In India, as was to be expected, the reactions to the Bill, have been of unqualified umbrage. "The Senate Bill is a surprise", Union Commerce and Industry Minister Arun Jaitley said, recalling his meeting with US trade representative Robert Zoellick in June last year in which Zoellick had termed as "bad policy", the attempts that were being made then in some state legislatures to ban outsourcing of government contracts to countries such as India.

Jaitley said, "It sends out the wrong signals, especially at a time when US and India are working with others to lower trade barriers and establish fair trade rules." Zoellick who was in New Delhi recently met Jaitley to discuss a range of trade related issues. Speaking to reporters after the meeting Jaitley said that any further progress in the WTO linked to opening up of Indian agriculture will be pegged onto the US approach to outsourcing. "It is strange that on the one hand, people are talking about opening of markets, and on the other hand, (there are also talks of) banning business process outsourcing. Our agriculture is fragile as it is not subsidized, like in the US", Jaitley said.

Echoing similar sentiments, Information Technology Minister Arun Shourie said that this was not the way Washington could advance in multilateral trade negotiations. "I feel this would worsen prospects of multilateral negotiations in trade", Shourie said in a statement from Davos. Nonetheless he also allayed fears that it would make a huge difference to the outsourcing business. Reiterating that India did not do much of the outsourcing business on US Government contract, he said, "Therefore, the direct effect would be little but Indian IT companies must learn some lessons from such moves. We must continue to move up the value chain and evolve such solutions and services which are good and cost-effective. Indian IT companies must diversify to other markets."

Indian industry too has reacted angrily to the passing of the Senate Bill and is seeing it as a case of ?protectionism' building up in the US ahead of this year's presidential election. CII president Anand Mahindra termed the Senate action as ?unfortunate' and said, "Although normally such provisions are not changed, perhaps the US President would reconsider this before signing the Bill."

Software Industry Association, Nasscom's president Kiran Karnik said, "We are dismayed. Such a legislation is not in keeping with the increasing globalization of trade which benefits all countries and is contrary to the spirit of free trade espoused by the US."

Although the full implications of the bill is not clear, it does seem that India will not be greatly affected by it. Only about 2 per cent of India's $10 billion software revenues come from US government contracts, according to Nasscom. Most outsourcing business is in the private sector domain. Most government contracts are already earmarked for American companies by existing laws. According to a report in The Times of India, what is not clear is the impact of the legislation in situations, where foreign or foreign-owned companies have bid to win US government contracts. For instance, part of the contract to build the US government website Firstgov.com was won by a Norwegian company. Also unclear is whether the proposed law will affect foreign companies executing on-site work at US government sites.

Business groups in the US are protesting the measure. "We want to grow the worldwide economy and create jobs. Isolating ourselves is not the way to do it", Director of Communications from Business Roundtable Tita Freeman has said. Business Roundtable is an association of CEOs of the biggest firms in the US and it recently urged the Bush administration not to be swayed by the public furor over the loss of American jobs overseas and not to espouse policies that would prevent American firms from getting jobs done cost-effectively, including outsourcing and subcontracting to countries like India, China or Russia.

Reports also suggest that US companies are expected to lobby against some of the provisions in the bill that affect their operations. Indian-American companies in the tech field, who win substantial amounts of government contracts often under special schemes for minority businesses, are not affected by the legislation, except where they might be sub-contracting the work to an Indian subsidiary. In India, at best only a few call center businesses that have state government contracts may be affected.

Observers here say that US lawmakers are being shortsighted and populist in bringing about such legislation and will be brought to their senses when enough qualified people are not found to do the job. As per one Mckinsey estimate, for every dollar of US spending in off-shoring, the benefit to US could be in excess of $1.10 and to India it could be $ 0.33. That is, this is a zero sum game. Some prominent American ?think tanks' have advised India to keep calm for the moment as the outsourcing backlash is likely to die out once the elections are over in the US.

On the next course of action from the government to counter this, Arun Shourie said, "The real action has to come from the firms who avail our services and they must know the consequences on their competitiveness if they are not allowed to outsource. The move by the US Senate is an important symptom. It may have implications on the chances of similar bills being passed by 8 US states."

In a more macro context, the move is being seen here as a test of US commitment to the ideal of free trade. To votaries of free trade, any attempt to erect barriers in services is as reprehensible as maintaining barriers in the movement of manufactured goods. It is also seen as a battle that is being waged in the political realm. It is the politicians, and not industry spokespersons who are attributing America's so-called jobless recovery to outsourcing.

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