President Trump signed an executive order last Tuesday that would tighten rules that award visas to skilled foreign workers and directs the federal government to enforce rules that bar foreign contractors from bidding on federal projects. The order is a first effort to promote a “Buy American, Hire American” agenda, a key promise Trump made during the poll campaign. The order calls for enforcing guest worker programmes more aggressively in a way that they don’t become a means for replacing or undercutting American labour at less cost and taking action to crack down on fraud and abuse of the visa programmes. Changing method of allocation of visas The Departments of Labour, Justice, Homeland Security and State are to put forward reforms to see that H-1B visas are awarded to the most skilled or highest paid applicants, in an attempt to close the current loophole of bringing in typically less skilled and lower-paid workers. Currently the visas are allocated on a lottery basis.
To prove this point, administration officials stated at a White House briefing on April 17 that nearly 80% of the H-1B visas granted in 2015 were to workers at salary levels below the median wage for those fields. Only 5-6% of the visas were granted to workers at the highest level of wages, and around 10% were granted to workers at median wages. As a result, workers were often brought in well below market rates to replace American workers. Administration officials cited the cases of Infosys, TCS and Cognizant applying for a higher number of visas than required to garner the lion’s share of the visas, which defeats the purpose of using H-1B visas for skilled domestic work, rather than contract work. As per the briefing, the H-1B salary levels for the three companies are in $60–65k range, which is significantly lower than the average salary for a Silicon Valley engineer at $150k.
Asking agencies about what could be accomplished administratively and what requires legislation On the administrative side, the US government could be looking at increasing visa fees; adjusting the wage scale to be a more honest reflection of prevailing wages; adjusting the lottery system to give master’s degree holders a better chance of getting H-1B visas; and changing the interagency process to allocate a share of H-1B applications to different wage tiers, which could be the first step to a merit-based immigration system.
According to the officials, the President’s executive order did not go into a very high level of detail, but once the policy is set the agencies would be able to inform the administration of how it would be implemented. As per the press briefing, the agencies are ready to act right away on the above aspects, even as legislative reforms could take longer, though they believe that if a bill to check some of the H-1B abuses were to be introduced, it would pass with bipartisan support. Counters unavailability of enough STEM skills Further, the briefing contested the “unavailability of enough STEM skills in the US” argument made by proponents of H-1B visas.
It states that US produces twice the number of STEM graduates than those that actually get placed in STEM fields. Nomura view: Retain cautious stance on the sector. As indicated in our notes earlier, the executive order reinforces our view that while H-1B related laws will take time to pass, measures to close loopholes, increase oversight and make H-1B visas difficult/costly for Indian IT would be put in place. These have both growth and margin implications for Indian IT companies. These external risks, coupled with structural concerns on higher exposure to slower growing legacy, lack of conviction on a cyclical recovery and margin pressures driven by Rupee appreciation and a higher legacy exposure keep us cautious on growth and margins in the sector. HCLT is our only Buy in the space.