Barack Obama?s barrage of verbal volleys on outsourcing appears to be losing its sting, especially from an Indian information technology standpoint. Sure there were concerns when he first spoke about it but with the US President trying to open old wounds repeatedly, his bark could well turn out to be more frightful than his bite.
Obama?s fear of being ?Bangalored? does not seem to stem from any real concerns about India stealing America?s technology thunder, but merely an attempt at trying to keep him afloat on popularity charts. The affable and charismatic President has been losing his sheen of late, and flaying outsourcing has become one of his pet projects.
Indian IT firms and lobby body Nasscom have consistently maintained that the US anti-outsourcing stance will not be able to nibble away at the software fortunes of the country. Their reading of the situation has been consistent and they firmly believe that the US is only trying to make sure that large multinational American firms do not set up subsidiaries in foreign lands merely to save taxes.
Nasscom has been trying to allay fears that India?s IT exports would be hit, by stating that outsourcing is a phenomenon that cannot be reversed. And to a large extent that?s the case. For all the outsourcing bashing that Obama loves to do, there is very little that he can do to curb outsourcing, as it?s simply a very lucrative and cost-saving option for American companies. Obama?s tirade has got more to do with the US trying to raise funds by mopping up additional taxes than anything else, the lobby body feels.
But there is more to it than what meets the eye. While Nasscom has a point, it?s very clear that Obama has to now go for the jugular with regard to winning back jobs if he has to keep his poll promises. This Wednesday he pledged to push forward with his tax plan?first announced in May 2009?to curb overseas tax advantages enjoyed by US firms. Obama urged the Senate to approve new laws to close international tax loopholes, which could produce $210 billion in tax revenues over the next 10 years. And in days to come he is sure to build on this stance, and try to put added pressure on companies that threaten to outsource.
The reality is that it is still cheaper to outsource. The on-site or onshore cost of a starting-level engineer in an IT company is about $60 an hour. The corresponding cost for work done offshore either in India or China works out to around $25-30 an hour. If the US disallows offshore payments as expenses, then the cost of offshoring will go up to $40 or so, according to estimates. Hence, it is still cheaper for the US companies to offshore jobs to locations such as India and China. Surely, any anti-outsourcing move is likely to hit American companies as hard as it will hit the Indian IT sector, which earns over half of its revenue from the US. While US companies may lose their competitive edge, Indian firms may have to look at other geographies for added revenues.
At this juncture, it may also be worthwhile for us to know the difference between offshoring and outsourcing, to clearly understand what Obama is trying to convey. Offshoring refers to a situation when a firm ships jobs to its overseas subsidiary to save taxes, while outsourcing is about relocation of jobs abroad to save costs, which could result in job losses in the parent country. The offshoring company continues to save a huge amount of money due to wage differences, and then it pays a marginal amount of extra tax because of this change. But that?s not going to be enough to stop offshoring, at least to India.
If Obama has his way, he would make offshoring slightly more expensive for US companies. The hit would then be equivalent to the tax rates of the country that the jobs would go to. The change will reverse a Bush-era policy where US companies were able to defer paying corporate tax on income earned overseas, until they brought it back to the US, either as dividends or as retained profits. They got a tax credit for whatever tax they paid overseas already, and paid the difference to the US government. But what is not clear is whether the change in the deferral policy would lead to more jobs in the US. In any case, Obama cannot hope to build a robust economy in the US by reducing competitiveness of American companies.
In a globalised world, there is no place for protectionism. It is quite amazing that the US is feeling the pinch from countries like India and it?s also amusing to see Obama having to resort to such rhetoric to keep up with people?s image of him. No wonder they call this the Asian century. Signs of that are in the air, just one decade into it.
?dj.hector@expressindia.com
