The downturn is assuming unprecedented proportions. With Barack Obama?s recent announcement, ?Say no to Bangalore, yes to Buffalo,? the global economic scenario for sure is down, and amidst a turnaround. In a role reversal, Bangalore might be Bangalored, and the IT and BPO sector that has been the showcase sector of the Indian economy, will be in a tight spot. With the sector, that is estimated to generate $ 71.7 billion in revenues, 5.8% of GDP, direct employment for 2.23 million and indirect employment for around 8 million Indians in 2009, is in a ?wait and watch? mode.
The move
For observers, such measures were on the cards. As Professor Chintamani Mahapatra, Chairman, Centre for Canada, US & Latin American Studies, JNU, avers, ?The Obama administration has to support the industries as well as the labour class in this time of deep economic meltdown. So the American companies will be asked to make short term sacrifices in the overall interest of the country.?
The proposed tax law may well spell problems for US firms that set up foreign subsidiaries in order to make and sell products and services in overseas markets. As Richard Dasher, Director, US-Asia Technology Management Center, Stanford University explains, ?From now, the lower costs of outsourcing to a subsidiary company in India may be partially offset by having to pay more tax on the revenues of that subsidiary. But a lot depends on how the law treats flows of funds between the companies in a corporate group. If the Obama administration additionally offers new incentives for creating jobs in the US, that may tip the balance, so that companies will indeed decide not to offshore/outsource.?
The ramifications
The move has invited criticism from all quarters. Analysts point out that the measure may reduce the overall profitability of large US firms, as Dasher adds, ?Its impact on their competitiveness depends on the tax conditions under which European, Japanese, or other nations? firms operate. Although the reduction in tax incentives may keep some US firms from ?going global?. As a lot of tax-deferred profit probably goes into continuing to develop the business in the foreign country; the funds are not repatriated to the US. Without a tax deferral, US companies may be at a significant disadvantage in comparison to other countries? firms in trying to grow business in those overseas markets.? Obama?s proposal of ending US companies? ability to defer taxes on profits made overseas will further dampen and squeeze net profitability levels of the companies. As Lauro Vives, Chief Analyst, XMG Global Research, Canada points out, ?The Obama tax plan, much of which rests on dubious grounds, is aimed at all levels of the private sector. Unfortunately, those affected unconstructively will be small to medium companies whose offshoring game plan continues to contribute positively to the corporate bottom-line. In turn, this will have a deleterious effect in making progress in improving the US economy.?
The future
With questions of viability of the tax structure gaining ground, what is also being debated is the US stance of going protectionist. As Vives shares, ?Multiple perspectives must be considered when assessing the effectiveness of the Obama tax plan. Chasing the $210 billion tax revenue and rejuvenating domestic employment would be futile if the Obama administration cannot holistically develop other programmes aimed at realistically re-skilling the aging American workforce and creating an even-level playing field for global trade. It would be shameful to forget that the US has become the world?s largest economy and solidified its national competitiveness on the back of globalisation and offshoring.?
Most are hoping that the tax measures will be short-lived. SK Jain, President, Indo American Chambers of Commerce shares, ?The US for long has stood as a torch bearer for free trade and has propagated the concept out of its own adherence to it, and hence one hopes that such announcements are only transient. I am also confident that the rationale will dawn fast on the seats of decision makers to make amends, I feel retaining work in the US will make the industries incompetent for global marketing which in turn will perpetuate recession. Hence I believe the measures cannot stay for too long.? A sentiment also echoed by Chandrajit Banerjee, Director General, CII, ?Free and fair trade and investment should take priority to deal with economic downturn. Any protectionism would not help the global economy in the long run.?
However companies might find a way around the tax regime too and it will lead to emergence of a new genre of vendors and captives who will ensure operating offshore still remain profitable. As Vives elaborates ?This will be achieved through effective talent management strategies, maximising offshore productivity levels, tighter global service delivery models and optimising investment balance to achieve rate of interest targets. US companies will realise they cannot mortgage near-term tax savings for potential long-term losses from marginalised globalisation plans.?
As for India to soften the impact of this fuss, it will be imperative to ensure that their original value proposition of unmatched ?quality-to-cost? ratio does not get devalued in the future. But what will hold the key out of the crisis would be US stance on protectionism. As Thomas Friedman had cautioned earlier, ?The most important thing Obama has to do, is to prevent us from going protectionist. We go protectionist, everyone goes protectionist. Remember what made the Great Depression great was not the crash of 1929, it was protectionism. And that?s going to take such leadership, to scale through.”