Indias last three budgets, which can be seen as statement of economic policy, have focused on two major principles: to portray India as an attractive destination for capital, and increase in public spending to raise returns and attract private investors.
Uncertainty has descended upon the $150-billion Indian outsourcing industry in anticipation of the protectionist regime under President Trump. Protectionism has been a popular election rhetoric across nations, and more so in recent times. And the voting masses seem to like it. Will Trumps campaign cry for protectionism cross the boundaries of poetic drama and come alive as laws?
BBC World News: Bundeep Singh Rangar on India Budget
India’s last three budgets, which can be seen as statement of economic policy, have focused on two major principles: to portray India as an attractive destination for capital, and increase in public spending to raise returns and attract private investors. It has become apparent by now that these principles haven’t been successful in achieving government’s growth strategy goals. Jaitley’s earlier budgets have benefitted from low oil prices, and increase in gasoline taxes, but even this strategy is unlikely to help this year. In fact, increase in oil prices pose a risk to the country’s growth trajectory.
-We can see a sliver of election budget here, with elections in five states starting this month
-Modi will want to focus on redeeming the damage caused by demonetisation, focusing on those affected the most. The focus of this year’s budget will therefore be increasing the spend on poverty alleviation: Allocation for rural sector for Fiscal Year 2018 is Rs 1,87,200 cr, which is a record, and represents an increase of 24%. This will boost consumer spending that has decreased post demonetisation.
*tax rates cut (from 10% to 5%) for people earning less than Rs500,000
*tax rates cut (2.5% reduction) for companies with turnover of less than Rs500m
*treating low cost housing as infrastructure, to build 10m houses by 2019 for the homeless
-Indian Finance Minister Arun Jaitley will likely increase spending and ease back on cutting the deficit when he presents his fourth budget on Wednesday, as he seeks to lift growth hit by the government's drive to clear the economy of “illegal money”. Demonetisation, however, will have a transient effect on economy.
-Acknowledgment of the failure of current growth strategy is required to avoid future failure.
India's Outsourcing Industry: An Uncertain Future?
Uncertainty has descended upon the $150-billion Indian outsourcing industry in anticipation of the protectionist regime under President Trump. Protectionism has been a popular election rhetoric across nations, and more so in recent times. And the voting masses seem to like it. Will Trump’s campaign cry for protectionism cross the boundaries of poetic drama and come alive as laws? There is no doubt that US being the largest consumer nation in the world, governments across the globe will keep a close watch on Trump’s policies. India will be no exception. The hot-button topic for India – ‘outsourcing’, has surfaced again and the impact of Trump’s announcements, be it restrictions on H-1B visas or penal taxes on US companies for outsourcing jobs, is being felt already in India. And this, coming during times when India's outsourcing industry has been experiencing a rough patch isn't an encouraging development. How hard will an avalanche of protectionist measures from the Trump regime hit India's outsourcing industry?
Neha Dewan And Ahmad Shariq Khan | February 2017 Issue | The Dollar Business
If there were any doubts as to whether President Donald Trump would be any different from presidential candidate Donald Trump, they were extinguished by his short but distinctly xenophobic inaugural speech on January 20, 2017. In front of the thousands who gathered for the inauguration of the 45th President of the United States of America, Donald Trump thundered, "From this day forward, it's going to be only America first, America first. Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families. We must protect our borders from the ravages of other countries making our products, stealing our companies and destroying our jobs. Protection will lead to great prosperity and strength... We will follow two simple rules: Buy American and hire American."
Over the past many months, Trump has made it clear that protectionism is going to be at the front and centre of his foreign trade policy. Protectionism though is a road that has been traversed time and again. Back in 2004, President George W. Bush and Senator John F. Kerry’s election campaigns were flush with aggressive debates on the age-old, raging issue – outsourcing of American jobs. Media reports back home in India notoriously went on as far to say that outsourcing had become the ‘swearword’ of the 2004 US election campaign. Democratic Presidential candidate Kerry’s election campaign had doggedly attacked Republican President Bush on outsourcing, attributing the flat US job market to such ‘wayward’ philosophies. Bush had devoutly defended job outsourcing to India during that time, emphatically stating that the solution to American job losses wasn’t to wall off the economy from the world through protectionist policies. But then, economics and public perception have a tendency to diverge. It is not easy for the average 'Joe' to make sense of the complex economics of outsourcing. And politics in US, it seems, has come a full circle. This time it is Republican President Donald Trump who has promised to apply brakes on outsourcing. And the way he has gone about declaring a 'national day of patriotism' as one of his first executive orders, it seems likely that even if Trump is unable to put a stop to the outsourcing juggernaut, put brakes he will.
70 year-old Donald Trump campaigned and got elected as the 45th President of United States of America.
He has pledged to take US on a more isolationist, protectionist path.
And from his inaugural speech it is apparent that these two elements will be at the forefront of his foreign policy strategies.
While this action of Trump has induced a sense of satisfaction and accomplishment among those who voted him to power, it has made business leaders across the globe wary of the repercussions world trade might face in future. And more so business that are highly dependent on US clientele. Well, not to say, a brake on outsourcing can cause serious damage to India's much-vaunted 'Services exports', which is much-dependent on outsourced business from US.
India & Outsourcing
India’s outsourcing industry which is pegged at $150 billion by broad estimates, has always garnered a lot of attention when it comes to Indo-US relationship. A 2016 NASSCOM report on Information Technology-Business Process Management (IT-BPM) sector in India forecasts that India’s IT-BPM industry is poised to grow at 8% y-o-y in FY2017 – and will add $8-10 billion to the industry's annual turnover in FY2017. The report also suggests that India will continue to gain market share, across segments. For instance, India will account for 7% of global software and IT services and 56% of global sourcing by the end of FY2017.
While IT services segment currently constitute 56.59% of the overall IT-BPM industry, BPM, software and ER&D account for 22.63% and 20.78%, respectively. What's more? The IT-BPM industry accounts for a 45% share in India’s total services exports and contributes about 9.3% to India’s GDP. Overall, the industry is estimated to employ nearly 3.7 million people.
Incidentally, India’s IT-BPM services exports too have witnessed a remarkable growth over the last few years – exports of IT-BPM services from India have jumped 116% from $50 billion in FY2010 to $108 billion in FY2016. Interestingly, as per NASSCOM, India’s software services exports alone accounted for $61 billion worth of export revenues in FY2016, with a major chunk coming from the US market. In fact, Indian IT-BPM industry's dependence on US can be gauged from the fact that over 60% of its export revenues (equivalent to $108 billion) in FY2016 came from US.
While the numbers remain impressive, the election of Donald Trump as President of US has shaken up India’s IT outsourcing industry. (And mind you, this has nothing to do with the fact that he is the only President of the country who took the oath of office after his 70th birthday! An old school Prez, you reckon?) His stance on H-1B visas and penal taxes on outsourcing is already causing IT majors like TCS, Wipro and Infosys to relook their hiring strategies. In fact, Infosys has gone on record to state that they will be hiring more employees for their US offices from American colleges in future, owing to the expected visa constraints.
But is there really a reason to worry? Do US politicians follow through with their campaign promises? A sneak peek into the past reveals that the outsourcing debate has been a popular, highly engaging (read: emotional) topic in all presidential campaigns. It was no less of a power play when former US President Barack Obama and Republican candidate Mitt Romney contested hammer and tongs in 2012 on the all-consuming outsourcing debate. Obama’s campaign managers cheekily even dubbed Romney as the “outsourcing-in-chief”, stating in no uncertain terms that tax breaks for companies shipping jobs abroad would soon be a thing of the past.
Even though Obama had promised voters that he would revamp the Federal Tax Code and categorically spoke on slowing the outflow of American jobs to other countries, he did not follow through. And not to say, the broad tax changes, as rallied and promised so earnestly during his campaign, did not see the light of the day!
Cut to the present. Newly elected US President Trump, in most of his election campaign speeches, went on nothing short of a rampage when it came to the same contentious topic. Playing a dramatically tough taskmaster, he has even proposed a border adjustment tax of 35% on US companies that outsource production to other countries in a bid to restore jobs in America.
How effective is that proposal? According to a study by Gita Gopinath (Professor of Economics at Harvard University), Emmanuel Farhi (Professor of Economics at Harvard University) and Oleg Itskhoki (Professor of Economics and international affairs at Princeton University), the effect of a US border-adjustment tax would not be neutral. An appreciating dollar would erode America’s net foreign-asset position, because an overwhelming 85% of its foreign liabilities are denominated in dollars, while around 70% of its foreign assets are denominated in a foreign currency. With US foreign assets amounting to 140% of its GDP, and its foreign liabilities amounting to 180% of GDP, a dollar appreciation of 20% would result in a capital loss equal to about 13% of GDP.
Considering the numbers, will Trump really be able to fulfill this tax promise? Perhaps. Trump has always been reluctant to go by the book, and his disrespect for traditional economics (and economists) has been apparent. Trump, possibly in a bid to counter the impact, has also proposed slashing corporate taxes from 35% to 15% towards meeting the same objective.
History has always been an intrigued spectator to such magniloquence during election campaigns that have sought to tighten the noose on outsourcing. And nervousness has always played a close ally among Indian counterparts to unveil the fate that surrounds this mysterious saga every time. Will this time be any different?
To put things in a relevant perspective, as per data by Bureau of Economic Analysis (BEA), US companies currently employ about 14 million workers in their overseas affiliates, primarily in IT-BPM, human resources and manufacturing industries. This is perceived to have a direct bearing on US unemployment statistics. For, the 14 million outsourced jobs are nearly double the 7.4 million unemployed in US. And that's what the argument is really all about!
So, are things really going to be hard this time for Indian IT companies as well as those in allied sectors? If need be, are Indian companies ready to take troubles head on? And more importantly, can US companies do without outsourcing services to India?
Arup Roy, Research Director at Gartner, says that if Trump’s announcements ring in true, the Indian outsourcing industry will surely face some difficulties going forward, but then only temporarily. “Outsourcing is an inevitable need for companies in US – it is not a want, it is a need. There is a serious lack of skilled IT resources in US, so they have to rely on external resources. Ultimately, economics will rule over popular politics,” he tells The Dollar Business without a flicker of doubt in his voice.
The Visa conundrum
Among many of Trump’s proposals, the crackdown on H-1B visas seems imminent. The said visa has for long been under the scanner, with Trump now keen on limiting its issuance and usage, and pulling out all stops to restrict immigration. “I know the H-1B very well. We shouldn’t have it. It’s very, very bad for workers. It’s unfair to our workers and we should end it,” he had said during one of his campaign speeches, tugging at the heartstrings of American voters.Essentially, H-1B is a temporary, non-immigrant visa which allows the employment of highly-skilled foreign workers in a scenario where it is tough to get qualified domestic workers. Currently, it is capped at 85,000 visas a year (65,000 for the general category and 20,000 for the advanced degree exemption) with scientists, engineers and computer programmers falling in its usual ambit of such issuances.
During his election campaign, Trump vehemently brought up the issue of visas on various occasions in an attacking manner that has been no less than scathing. “The H-1B programme is neither high-skilled nor immigration: these are temporary foreign workers, imported from abroad, for the explicit purpose of substituting for American workers at lower pay. I will end forever the use of the H-1B as a cheap labour programme, and institute an absolute requirement to hire American workers first for every visa and immigration programme. No exceptions,” Trump had said.
"About 2.8 million positions are vacant in us due to the shortage of talent"
And then there is the proposed legislation – the Protect and Grow American Jobs Act, which looks at raising the emolument of H1-B visa holders from $60,000 to $100,000 annually. The proposed Act has been drafted to ensure that the visas are given to high wage earners, in essence then targeting outsourcing companies which rely on lower wage foreign workers to replace qualified US workers, as stated by Senators Bill Nelson of the Democratic Party and Jeff Sessions of the Republican Party while introducing the legislation in the Senate. The legislation also proposes reducing the number of popular H-1B visas by 15,000 annually, with such visas being granted to the highest wage earner first.
Amol Pomane, Chief Growth Officer, IBN Technologies, explains that Trump plans to increase the minimum wage for an H-1B visa holder to $100,000, with an aim to ensure wage parity in US. Pomane feels that this move is more positive in intent than limiting. “Thanks to the decision, an American and an immigrant candidate will now get equal opportunities to compete. Otherwise, immigrants are very happy to get half of what an American worker gets. Such restrictions will also motivate companies to innovate. From an economic point of view, it’s bad. But if you look at the bigger picture, it is a blessing in disguise,” he says.
Ranjeet Mahtani, Partner, Economic Laws Practice (ELP), a law firm headquartered in Mumbai, holds a similar view and believes that at the outset, it appears that the increase in minimum wages will improve the salary standards for H1-B visa holders in USA. However, he cautions that the flip side is that such an increase may lead to higher costs for Indian firms, especially in the IT industry, which are among the top sponsors of the temporary work visa.
The big STEM debate
Industry experts have their apprehensions when it comes to the stern stance adopted for H-1B visas. Sangeeta Gupta, Senior Vice President, NASSCOM, says the impact of this move – if it comes by – will decidedly and expectedly hurt the movement of highly trained talent from India to US. In addition, it will have an adverse impact on the profitability of US businesses.
She draws attention to the fact that in the last four years, the Indian IT sector has created 411,000 jobs in US and contributed around $20 billion in local taxes apart from investing billions of dollars in the country. “The increasing demand for software engineers in US from countries like India is mainly due to the shortage of STEM (science, technology, engineering and math) graduates in the US market. About 2.8 million positions in US are currently lying vacant due to the shortage of such graduates. This clearly shows that the US education system is not producing enough STEM-capable students to keep up with demand, both in traditional STEM occupations and other sectors across the economy that demand similar competencies,” asserts Gupta.
N. V. Srinivasan, National President, Indo-American Chamber of Commerce is assertive in his standpoint when he says, with utmost belief, that outsourcing will not be affected. “For all American companies, costing is a major factor and outsourcing helps reduce the costs. During Obama’s time also, a law was passed in Texas and New Jersey which said that there should be no outsourcing. But outsourcing has been taking place, unperturbed by such developments. You can make a political statement but practically, for business, there will be no impact,” he assures.
In the last four years, the Indian IT sector has created 411,000 jobs in US and
contributed around $20 billion in local taxes apart from investing billions of dollars in the country.
Vaibhav Gupta, Engagement Lead at IT Tech consulting firm Zinnov adds a further spin to this by putting it all in context. He highlights that in CY2015, around 61% of the 357,857 H-1B petitions filed and 70% of the 65,000 (general category cap) H-1B visas issued originated from India. “The Indian industry can take solace from the fact that US cannot take any drastic measures against outsourcing and immigration owing to the increasing shortfall of skilled labour within US. Currently there is a demand-supply gap of around 3.5 million STEM graduates in US. This shortfall is offset by the immigrant graduates who are more likely to obtain higher degrees in STEM subjects than US borns,” he says with a straight-face.
Of barriers & walls
Other than the H-1B visa move, the package being discussed to improve the US economy includes two key components – slashing the corporate tax rate from the current 35% to as much as 15% and the implementation of a ‘border-adjustment’ tax of 35% which would treat domestically purchased inputs and imported inputs differently, and encourage exports. This tax would be typical of a value added tax (VAT) regime wherein corporations will be unable to deduct the costs of imported inputs from their taxable income and at the same time, their export sales revenue will not be taxed. The purpose primarily is to give a leg up to US manufacturing.
"2.8 million positions in US are vacant due to the shortage of stem graduates."
However, the US industry hasn’t particularly been gung-ho about the anticipated measures that could come by. Retailers, for instance, are of the view that this would make their tax bills soar and will lead to a spurt in prices since they depend majorly on imported goods.
Interestingly, the border adjustment tax mechanism is expected to generate about $1 trillion in revenues in over a decade. Republicans say that this plan would eventually offer perks to companies to move jobs and production back to US and do away with foreign corporate income taxes.
Experts are of the view that such unilateral decisions will harm global inter-linkages. “The Wall Street is driven by Japanese and Chinese investments. There is also a large presence of Japanese and Chinese companies in the real estate sector in US. European companies too have significant presence in US, creating a large number of gainful employments. Indian presence in manufacturing and services is also expanding. In fact, Chinese and Indian students sustain many universities and educational institutions in US. US exports of technology and FMCG to destinations like Brazil, Mexico and India, etc. are huge and diverse. In the given situation, I don’t think any country can take a unilateral decision and stand by it,” says D. K. Sareen, Executive Director, Electronics and Computer Software Export Promotion Council (ESC) candidly.
India currently is the third-largest start-up ecosystem in the world,
with over 4,750 firms, witnessing a growth of 10-12% annually.
Others are also sceptical about objectives (as outlined by Trump) meeting the purpose (that he has set out to accomplish as President). For instance, Bundeep Singh Rangar, Chairman, IndusView UK, believes that though lowering of corporate tax is a positive development from the government’s point of view, there are other aspects to it as well. “Trump is of the view that the reduction in tax collection will be offset by higher GDP growth of 3-5%. Hence, he is hoping that despite lower tax rate, the absolute value of tax collection would be higher. Also, at the same time he is focussing on investing in homeland security and a border wall. However, a combination of such increased spending and lower taxes could create a mismatch,” adds Rangar.
The Heat was on
If one pays attention to the IT sector, a lot may be in store in times to come for India, and not necessarily in a positive way. For starters, IT revenues may contract 3% y-o-y this fiscal (as confirmed by industry watchdogs). After a rather dismal FY2016, Indian IT companies are expected to face a ‘not so great’ year again. Sample this: Last year, Infosys had to axe 3,000 jobs after a contract from the Royal Bank of Scotland went kaput post the Brexit referendum.
Similar was the story with Tata Consultancy Services (TCS) that changed its business model and aligned itself more with software platforms and digital networks. Cognizant too has seen its growth targets take a beating in the past one year. And now with the threat of Trump's new policies, it may be a bit of a double whammy as far as the IT sector is concerned. “It’s an issue for them, of course. Tighter visa rules will pose a big challenge to Indian IT companies like TCS, Infosys, etc. Not only that, asthe cost would increase, potential clients may also reconsider contracts involving substantial losses of American jobs. But the general consensus is that Trump can’t turn economics on its head. Services will move to those places where the resources are cheaper – if India is not an option, then somewhere else,” says Rangar.
Interestingly, while China scores high as the most significant destination for offshoring manufacturing, India rules the chart as far as services are concerned.
President Donald Trump will face diffculties in balancing the budget if he
does cut corporate tax rate by 20% as promised during his election campaign.
India’s position as the leading outsourcing destination for services is due to some unquestionable dynamics at play. For instance, India has the highest volume of diverse, employable talent – the country currently boast of over six million graduates, with over 3.7 million being a part of the IT-BPM industry in FY2016. Besides this, India is also the world’s fastest growing ‘digital hub.’ The number of digitally-skilled workers touches 250,000, with 90,000 in analytics and 70,000 each in mobility, cloud and social media. Moreover, a digital environment also forms the core of innovation in today's world.
"India's it industry has already seen some turbulence after the Brexit referendum"
Having said that, if India really wants to counter such threats of stringent visa regimes and penal taxes in the future, it needs to follow a multi-pronged approach. Firstly, it needs to focus on product innovation by leveraging the world's third-largest base of more than 4,200 start ups. Secondly, the industry needs to look at new business models and differentiated pricing strategy based on business innovation. Process innovation – that encompasses business process alignment and technology advancement which are prerequisites for going up the value chain – is the need of the hour. And lastly but most importantly, the industry needs to cultivate new markets.
Numbers don't lie
While we take small steps to move up the global services value chain, let's do a cost-benefit analysis between paying a 35% tax (and continuing to outsourcing services to India) and hiring local talent in US. Back of the envelope calculations suggest that taking a conservative dollar to rupee PPP conversion ratio of 17, a BPO worker in India is generally paid around 20-35% of the salary that a similar worker in US is paid. Simply stated, though a 35% penal tax will definitely hit bottomlines of Indian companies, it will still not make business sense to hire US workers to do the job locally. Hence, the math is clear – even with a 35% border tax, Trump will not be able to fulfill his promise of bringing back jobs to US.
However, it would be grossly wrong and inadequate to say that only the BPO sector is linked to outsourcing, though that is a popular perception since it accounts for the largest chunk of the pie. Sectors such as legal process outsourcing (LPO), medical transcription (MT) and content outsourcing too have being witnessing an upward shift in revenue shares over the last few years.
In fact, a study by NASSCOM and CRISIL states that the Indian LPO industry is expected to grow at a CAGR of 30%, up from $1.5 billion in FY2014 to $10 billion in FY2022. Interestingly, Dilpreet Singh Sidhu, CEO, Mind Merchants, a Gurgaon-based legal process outsourcing company with centres in London, San Francisco and Singapore, sees a silver lining in the entire Trump rhetoric. “The industry has been on a steady growth path for the last few years and now with Donald Trump becoming US President things might get even better. He is stopping immigration, stopping immigrants from entering US. So, when there will not be enough skilled labour in US, which was being supplied by India and other countries, ideally you would bring the people in or outsource the work. So, the mathematics is pretty obvious,” says Sidhu.
While the BPO sector dominates the outsourcing services exports, other sectors like legal process
outsourcing (LPO) and medical transcription are also growing at a rapid pace.
Rajat Singhania, CEO, BVS Trans Tech, a company that offers medical, legal and general transcription services and primarily caters to the US market, too seems unperturbed by the current situation. “Transcription comes under IT-enabled services. In fact, outside United States, India and Philippines are the only centres dealing in large volumes. The point is that America talks about a free economy, growing at a rapid clip. And if they take such a step they would be deviating from the policies they propagate. It will not be in their long-term global business interest to take such a decision." True it is, all politicians across the world make a lot of claims when they want to get elected, but how many of those actually end up fulfilling their promises once they get elected?
"India's services exports are highly dependent on the north American markets"
While insiders from these two sectors feel that they will face less heat, the math suggests that since salaries in these sectors are higher than in traditional BPOs in India, a high tax on outsourcing may negate the cost advantage that these sectors today enjoy vis-à-vis similar set-ups in US. What will work in favour of these companies though is the lack of skilled resource in US.
Although the rationale behind outsourcing remains undisturbed, there are reasons to worry. Scaremongering and abrupt, unilateral decisions on part of the US government are likely to have a negative impact on foreign investor sentiments around the world. India will be affected too. It is likely that India's outsourcing industry will receive less FDI this year, with investors delaying decisions till the time there is clarity on the policy front.
In fact, when it comes to FDI inflows into India's services sector (the biggest recipient of FDI till date) there are other reasons to worry about. Lowering of corporate tax rate from 35% to 15%, as proposed by Trump, will make US an attractive destination for investors. The fallout may be a lower FDI into India as well as FIIs fleeing India.
Donald Trump has threatened automobile companies like Ford, GM, Ford Motor Company,
Toyota, Nissan, etc., that plan to invest in manufacturing centres in Mexico with a penal tax.
The scaremongering has already had its casualties. For instance, US auto majors have been on their toes after Trump left no stone unturned in making his displeasure known about the way they did business. In fact, he has gone all out in his criticism for the auto majors saying that they manufacture abroad which in turn acts as a threat to job creation in US.
Not surprisingly, American automakers Ford, Chrysler and General Motors Company and even Japanese carmakers have already taken the flak from an angry Trump for their overwhelming presence in Mexico.
Trump did not mince words in any way when he called Ford "horrible" for its plans of moving all small-car production to Mexico within a span of three years. Trump has repeatedly been saying that Ford will be among the companies subject to a possible 35% tariff on products that it is manufacturing in Mexico and exporting to US. Result: Ford has dropped its plan to set up a new $1.6-billion factory in San Luis Potosi in Mexico and has re-directed some of the funds to a US factory in Michigan for developing a new line of electric and autonomous vehicles.
GM too faced fire. Trump said that the car-maker should start preparing itself for paying a border tax for importing the compact Chevrolet Cruze to US from Mexico.
Indian and Chinese students make for over 42% of fee-paying
foreign students in US colleges and universities.
Even Japanese automotive giant Toyota isn’t being spared of the border tax threat for importing Mexico-made cars into US. However, it will be Nissan, Japan’s second-largest automaker, that will face the maximum brunt of the border tax, if at all it's implemented. Vehicles made in Mexico comprise about one-fourth of Nissan’s total US vehicle sales. What remains to be seen is whether the 35% penalty tax on cars made in Mexico will actually make a difference as far as creation of jobs in US is concerned.
"Under fire from trump, ford has dropped its plan to set up a new factory in Mexico"
When it comes to India, the Automotive Component Manufacturers Association of India (ACMA) believes that "US has a significant demand for auto components that cannot be eliminated overnight. The rising demand can only be effectively met by sourcing components from numerous suppliers based out of Asia Pacific region, including India. Hence, for now, the status quo remains." That may be so, but it also signals an ominous threat to India's outsourcing industry – chances are high that we might see some US-headqurtered outsourcing gaints taking reacting to Trump's shout in a manner as US automakers have.
The key question that logically needs to be addressed is – "What counter strategies are Indian companies expected to resort to during these trying times?"
Rajiv Khanna, former President of Indo-American Chamber of Commerce, puts it aptly when he says, “Outsourcing is as old as Adam Smith. You can’t turn economics on its head. Services will move where they are cheaper.” Rangar of IndusView UK holds similar views. "The reality is that the world has become a lot more interconnected than before. Almost everything we consume – from clothes to software – is produced in places that offer cost and skill efficient options. Therefore, while the rhetoric on tariffs is a potent tool for winning an election, the reality is that a less efficient and costlier US manufacturing base will make its products non-competitive in the international marketplace – a scenario which American multinationals are bound to resist," says Rangar.
Further, US companies hire from India or other countries because they don’t find enough qualified candidates within US to fill in the vacant positions. Data from the US Labour Department directs attention to an acute shortage of talented and skilled professionals in STEM domain. In fact, as many as 2.4 million STEM jobs in US are expected to remain vacant till 2018. Hence, the only option left with US companies (and will be in the near future) is to import (allow) talent from where they can find.
According to New York-based Institute of International Education, 274,439 Chinese students found their way into American colleges and universities in FY2014, the maximum (i.e. 31% of the total international students) from any country. While 28% among these pursued business and management, 20% took up engineering, followed by other subjects. Not surprisingly, India stood at second position with 102,673 Indians getting through American universities. While about 38% of them took up engineering, 26% pursued maths and computer science. South Korea was third in line with 68,047 students, of which 17% took up business and management followed by engineering and applied arts. The inclination of Indians towards the STEM domain is clearly shown in these numbers. And not surprisingly, Indians grabbed the majority share of the 20,000 specailised H-1B visas issued by the US government last year.
However, this is not to say that Indian companies should sit back and relax. Diversifying to markets beyond US could be a key strategy that could lift the market at this time. Roy of Gartner feels that companies need to wait and watch as far as US is concerned. “Meanwhile, Indian companies can consider ramping up services in onshore centres – this will make them more compliant to a protectionist regime, if it comes to that. Besides this, they need to diversify and start looking at markets other than US,” he adds.
Lowering of corporate tax rate from 35% to 15%, as proposed by Trump, will make US an attractive
destination for investors. The fallout may be a lower FDI into India as well as FIIs fleeing India.
Gupta of Zinnov Consulting too believes that Indian IT companies’ innate dependency on North America for business will push them to find newer ways to sustain their businesses and meet talent requirements amidst speculations about a stricter visa regime. Recruiting more locally and using sub-contractors is one such way to sustain their talent requirements. Therefore, IT companies need to be overcautious about their policies and readiness towards sub-contracting and hiring locally. It will also lead to a rise in costs for Indian IT companies, but in all probability these additional costs such as legal complexities and hiring attorneys will be passed on to US enterprises. And then, as the cliché goes – necessity is the mother of invention – newer approaches and business models will see the light of the day and help the industry.
What will be more difficult to deal with is 'black swan' events. And Trump seems to be the master of 'black swans'. He has apparently called Nawaz Sharif, the Prime Minister of Pakistan a "terrific guy" and Pakistan a "fantastic country". His admiration for Russian President Putin has hogged the limelight. [In fact, FBI, CIA, NSA and the Treasury Department are investigating an alleged Russian interference in the 2016 elections that apparently benefitted Trump.] Will US, Russia and Pakistan mark a new axis in foreign policy? If that happens, that could hurt India's trade. While the outsourcing industry in Pakistan is miniscule, if Trump bonds with Sharif, that may change.
Interestingly, on his first Monday as the President, Trump with the stroke of a pen, announced the withdrawal of US from his predecessor’s signature trade deal, the 12-nation Trans-Pacific Partnership (TPP). While America formally withdrawing from the TPP does not mean that TPP is dead, it does signal that the days of America leading from the front in setting global trade agenda are coming to an end. With this executive order Trump has also demonstrated that he is willing to follow through on his campaign promises when it comes to his ‘America First’ trade policy.
Though it is hard to see how US will benefit by shying away from large trade deals in the long run, in the short term it does give India and China some respite. India specifically was worried about losing ground to competitors like Vietnam and Malaysia in terms of access to the US market. But the long-term ramifications of America’s withdrawal are many, two of which could be the emergence of China as the forever leader of world trade, and the new-found lack of urgency of ratifying RCEP. Both these possible outcomes do not bode well for India.
Meanwhile, if Trump does put up stringent H-1B norms and a border tax, the IT industry in India is sure to face a temporary set back, till such time that businesses find ways to circumvent the tax. And find they will, for the sake of their and US' financial well being. True it is that the word ‘outsourcing’ is largely misunderstood. In a globalised world, no country can strike a sustainable growth path on its own forever. The US growth strategy hinged on protectionism will be sustainable only when other countries grow to provide markets for its growth.
But the maverick mania so synonymous with Donald Trump has gripped the US administration. And the status quo will stay for some time. We will have to wait for the frenzy to end and economics and rationality to take over. India's outsourcing industry will have to too, for there appears a long, silent night ahead. [Ed's note: Trump has already signed an order directing the construction of a wall on the US-Mexico border. In no time, he has taken steps to fulfill two of his campaign promises that not too long ago, sounded absurd! For sure, this 70-year-old is capable of unbelievable decision-making. And most Americans, like 'I-hate-economics' teenagers seem to be ROFL!]
“US is not going to be a closed-door economy”
Shalabh Kumar, President, Republican Hindu Coalition and a close aide of Donald Trump
Interview by Anishaa Kumar
TDB: How do you see the future India-US trade relationship under the Trump administration?
Shalabh Kumar (SK): Under Obama administration, over the last two years, India-US trade declined from $120 billion a year to $100 billion a year. I am confident that under President Trump’s administration India-US bilateral trade will grow to $300 billion a year by the end of the first term and will be on a trajectory to reach $1 trillion a year by the second term. I expect the trade to grow exponentially by the end of the second term because a lot of legislative actions will take place and a lot of the initial inertias will be over by then. Under President Obama, there were many artificial barriers which will not be the case under this regime.
TDB: There have been talks about restricting H-1B visas which is expected to hit Indian IT businesses. Your take?
SK: There will be two things that will be happening with H-1B visa holders. First, there are approximately 1.5 million H-1B visa holders in US who due to current law may have to wait for many years to get a Green Card. They are very highly educated and skilled workers, some of them have PhDs. That waiting period will reduce. With respect to new H-1B visas, the current number of visas in the current legislation will not change in a year or so. We may not have enough bandwidth to get into regulatory reforms in H-1B visa programmes in the first year of the Trump presidency. Subsequently, what happens is speculative. My estimate is that the limit on H-1B visas is going to increase because the GDP will grow very fast, possibly at a rate of 4-5%. With so many new jobs being created, there will be a need for IT workers.
TDB: There are reports that companies will be fined for hiring foreign workers instead of Americans. Is this something just being discussed for the manufacturing sector?
SK: No, there is no such legislation. The current law (Equal Opportunity Employment) will continue. But, if there is any fraud in the system, the law will be enforced with more stringency.
TDB: You have said that US will be one of India’s closest friends. With so many anticipated conflicts with regards to hiring and outsourcing, how will we grow closer?
SK: There may be some problems but I don’t see a conflict. President Reagan had said, "a rising tide will raise all boats". If there is serious economic growth in US and economic growth in India, there will be increase in trade and jobs and the conflicts or problems will be eased. The relationship will be beneficial for both. In his inauguration speech, President Trump had mentioned his new doctrine that each country should think of its own citizens; US must think of its own, India must think of its own. But that does not mean that there is a conflict. In the larger scheme of things, and in terms of defence, the alignment between US and India will be good for the world. It will be a good position to adopt to counter the aggressive posturing by China, which in a way is being also followed by Pakistan.
TDB: There is a notion that US will reduce or stop its trade with the rest of the world. Is this a premature, false notion?
SK: President Trump is not a Kamikaze! Why would you commit suicide? He is a businessman. If there are factors that will cause harm to the American economy, he is going to fight it.
TDB: Is there place for both 'Made in America' and 'Make in India' to work together?
SK: I think they are very compatible. Both have a stake in increasing trade. For example, India will be able to import the advanced systems from US which India has been wanting to. Previous US laws prevented India from importing these systems. India will also be able to create new jobs in the defence sector for building value-added components for these weapons.
TDB: President Trump has talked about reducing corporate taxes in US. Will that not mean a reduction in FDI inflow to countries like India?
SK: Right now, US has one of the highest tax rates in the civilised world. It will now come down to 18% or 15%. That is going to make America a very attractive destination for foreign investment. Capital will flow in and be invested in United States and the dollar value is going to rise. This will help the GDP owing to capital formation in US. This may have a short-term impact on capital investments in India, but will definitely not have a long-term impact on the bilateral trade between the two countries. When you have increased trade, you will have an increase in investment by US companies in India.
TDB: If you were addressing the members of the Indian services industry on the future of US-India business relations, what would you like to say?
SK: The Indian services industry should not have any fear. There will be a huge infrastructure programme and the US government will be more efficient, and the country's economy will grow at a much faster rate. Services are going to be needed. US is not going to be a closed-border economy. Service companies in India should look forward to increasing business with the US companies.
“No significant change is likely in the approach of US companies”
Rohitash Gupta, Chief Financial Officer, eClerx
Interview by Niladri S Nath
TDB: How do you view US President Donald Trump’s big promise of bringing jobs back to US?
Rohitash Gupta (RG): Most people in the industry believe that it was an election rhetoric and will get diluted or changed during the time of implementation. Skilled labour in certain sectors, particularly the technology services, is scarce in US and hence a blanket statement of getting all such jobs back to US is not practical. Further, it is interesting to note that merely 2% of the workforce in US is in the IT-related areas. Being the businessman that he is, the general belief is that Trump may create incentives for US companies to remain and grow in the country and not impose excessive disincentives for companies who choose not to.
TDB: How are the companies in US reading the situation?
RG: The irony is that companies in sectors such as banking, which are heavily regulated and have got government funding post 2007, are the biggest outsourcers of IT and business process management (BPM) work. It was considered necessary by them to take support of specialist firms to build systems that would support new 'costly' regulations imposed on them while keeping the cost of operations under control.
The other irony is that the debate of the future may not be about keeping jobs within the country or offshore. It would be on whether humans or machines are best suited for a particular role. In a nutshell, no significant change is likely in the approach of large US companies until the new administration settles in and drafts new laws.
TDB: What kind of impact is the industry expecting?
RG: On the negatives side, delay in decision making by large US companies, as they wait for law changes, is the worst possible impact as it can slow down new business momentum. A higher mix of onshore hiring may reduce the percentage margin of Indian IT industry but may not impact the earnings in the medium term as onshore work generates higher revenue.
Actually, the industry sees more positives in the long run because such disruptions and artificial barriers accelerate innovation and pace of automation and artificial intelligence which may finally defeat the argument based on any artificial barriers. We have seen this in almost all regulated businesses, right from banking (Blockchain and Fintech), entertainment (YouTube), transportation (Uber), accommodation (Airbnb) to News (Google, Twitter). So, one can hope that most businesses and services will evolve with self-regulated, boundary-less models and the relevance of ‘state’ may decrease and technology will lead the way towards that outcome.
TDB: How much has such scaremongering impacted industry’s outlook and sentiment?
RG: A few US companies have been adopting a wait and watch attitude before signing off on budgets for any new ‘outsourcing’ programmes. As a result, revenue growth at IT service companies has been slower and it is believed that this may continue for the next two quarters till a clarity on the new administration's policies emerges. From an investor’s perspective, while IT continues to be an allocation on most fund manager’s portfolio, any new investments are being put on hold.
TDB: Will BPOs and KPOs try to attract projects from other developed countries?
RG: A number of companies already have a reasonable presence in Europe, although the rate of adoption of outsourcing is not as high as US. For, Europe has been late a adopter of outsourcing and there is the language barrier. This apart, a number of Indian companies have also been hiring locally in Europe rather than using expats. Finally, policy changes in US may not be the only or main reason for slower growth of industry this year and for similar muted industry projections for near future. The more significant impact is due to technological advancement itself as providers shift their models from full-time equivalent (FTE) based services to technology and outcome based solutions in the digital world. An example of this is the introduction of robotics process automation (RPA). So, while BPM companies themselves can provide RPA based solutions, their revenue may decrease during this transition as RPA can be many times more productive than humans.
TDB: What kind of sops is the Trump administration likely to offer to companies for bringing jobs back to US?
RG: We will have to wait and see the policies in next few quarters. America has one of the highest corporate and individual taxes in the world and lowering it may help in more domestic investments, job creation by boosting demand through increase in disposable income, etc. The US government would have a tough time deciding whether to lower corporate taxes for all and then put penalty taxes for some, or not change the tax and instead create incentives for some.
TDB: Trump has said that he will lower corporate tax rate from 35% to 15%. Is this feasible?
RG: It is too early to comment on this but learnings from recent geopolitical events indicate that ‘anything is possible’ and ‘expect the unexpected’. But if it does happen, then there would be a capital flow out of the emerging markets into US.
“Trump’s Presidency could be beneficial for Indian IT industry”
Rishi Rais, Director, Dignitas Digital Pvt. Ltd.
Interview by Anishaa Kumar
TDB: How has the outsourcing market grown over the years and where does India stand in the global scheme of things?
Rishi Rais (RR): India's outsourcing industry has definitely seen growth in terms of global market share and the sheer size of resources involved in it. An upward trend is predicted primarily because of the following reasons: a huge talent pool, good infrastructure, entry of a large number of aggressive smaller players. The bigger players too are reinventing themselves and competition is keeping everyone on their toes.
TDB: Is Trump's promise to cut down outsourcing rational?
RR: The need for outsourcing depends on various demand-supply scenarios. Developed nations like US outsource work due to a shortage of skilled human resource. The cost factor is secondary. Newly-elected President Donald Trump’s main focus has also been on cutting down manufacturing outsourcing where the major factor for outsourcing is cost, and not the IT outsourcing which is driven by skilled human resource shortage. On the contrary, we believe that Trump’s presidency could be beneficial for the Indian IT industry.
TDB: You mentioned beneficial. Could you elaborate?
RR: Donald Trump is an extremely learned and successful businessman. He understands economics and business well. In fact, he himself has been actively outsourcing services in the past. These facts make the Trump administration’s effect on the outsourcing industry optimistic.
TDB: What could be the possible fall backs on the industry?
RR: Saying too big to fail would be pretty cliché, as the same thing happened in 2007-2008 when the whole financial system underwent a meltdown. I was right in the middle of it when it happened! But there is an old saying, “why break something when it works.” We have seen that since the past decades this model works for both the parties. Even if there is an impact, it might be felt more by the bigger players. As the mid-sized and smaller players are far more agile, they might be less impacted.
TDB: What are your plans in case outsourcing is impacted?
RR: If there are any adverse effects, they will not come in a flash but over time. The contingency plan is to focus on other big markets and our own market in case the need arises. India is developing at a phenomenal rate and that was one of the reasons for us to start a company in India and have continuous marketing efforts in India as well.
TDB: What threats will the ongoing anti-immigrant rhetoric bring to the Indian outsourcing industry?
RR: Anti-immigration is different from outsourcing. Comparing these two is not correct. While one may have some effects on the other, they are quite different from one another. Our aim should be delivering the best possible service.
“Donald trump cannot turn economics on its head”
Bundeep Singh Rangar, Chairman, IndusView UK Ltd.
Interview by Niladri S Nath
TDB: What do you think of US President Donald Trump's campaign promise of bringing the jobs back to US?
Bundeep Singh Rangar (BSR): I believe Donald Trump’s commitment to job creation has some sort of credibility as far as capability is concerned, given the fact that he has created more than 34,000 jobs as a businessman. I also think he was right when he said that the current trade deals are not working in favour of job creation, signalling that it’s time for a change. Now, the question is – can he deliver what he promised? Can he create an environment in which America can enhance its manufacturing base and ensure that workers are paid fairly? Or will he create a distorted and inefficient economy where jobs are created based on high US labour costs, thereby increasing price and wage inflation?
TDB: How are your clients based in US reacting to the populist posturing of Trump?
BSR: It’s no secret that Americans are sceptical of Trump’s ability to discharge his presidential duties. He is up against a polarised public opinion – the situation is quite rare as far as any recent President is concerned. Our clients disapprove his continuous breaches of basic decency, so do many citizens in general. His populism is seen as a marketing strategy, rather than genuine stance. When it comes to actual policy implementation, Trump is proposing mostly the same ideas that other Republican candidates have been advocating for years. Hence, there will definitely be a difference between what he says and what he does. Creating jobs at the cost of competitiveness will have negative consequences on the economy.
TDB: How will this anti-outsourcing stance impact Indian outsorcing industry that still rely on US for business?
BSR: It’s an issue for them, of course. Tighter visa rules will pose a big challenge to Indian IT companies like Tata Consultancy Services Ltd., Infosys Ltd., etc. Not only that, as the cost would increase, potential clients may also reconsider contracts involving substantial losses of American jobs. But the general consensus is that Trump can’t turn economics on its head. Services will move to those places where the resources are cheaper – if India is not an option, then somewhere else.
The reality is that the world has become a lot more interconnected than before. Almost everything we consume – from clothes to software – is produced in places that offer cost and skill efficient options. Therefore, while the rhetoric on tariffs is potent tools for winning an election, the reality is that a less efficient and costlier US manufacturing base will make its products non-competitive in the international marketplace – a scenario which American multinationals will resist.
TDB: What are the factors that could go against India?
BSR: US accounts for around 60% of software exports from India. So, any clampdown on outsourcing will disproportionately affect India. Rising visa costs will impact the profitability of Indian companies. In addition, some of the 11 million people working in the Indian BPO sector could lose jobs. Moreover, there could be job loss in various affiliated industries such as real estate,
TDB: The idea of outsourcing to India comes with a host of inherent advantages which include access to low-cost and educated labour. Do you think the Trump administration can afford to ignore these aspects while formulating policies related to outsourcing?
BSR: No, they can’t. US consumers have benefitted from a higher quality of services from India at a lower price for a long time. If India is out of the equation, the Fortune 500 companies would be looking for alternate vendors in Philippines, Poland, Estonia, Mexico, China, etc. to find a substitute to the $55 billion they spent in India annually. If they reduce or stop outsourcing altogether, it will make goods and services in US more expensive, thereby eroding consumer spending and purchasing power. This will make US products and services internationally less competitive.
TDB: Trump has said that he would lower the corporate tax rate from 35% to 15%. Your take?
BSR: There are two ways to look at it. Lowering corporate tax rate is a positive development from the government’s point of view. He is counting on lower corporate tax, expecting an increase in corporate growth. He is of the view that the reduction in tax collection will be offset by higher GDP growth of 3%-5%. Hence, Trump is hoping that despite lower tax rate, the absolute value of tax collection would be higher. Also, at the same time, he is focussing on investing in homeland security and border wall. However, the combination of such increased spending and lower taxes could create a mismatch.
In addition, he is looking to offer some sort of tax amnesty to the corporates that are willing to bring back overseas profits. We all know that companies, across the globe, always look for a tax-friendly way to bring back home the overseas profits. And, Trump is planning to offer corporates that one-time tax channel, at a flat tax rate, to bring back the wealth to US. His government is expecting to make some $100 million out of this particular tax.