Of late if you have been listening to the US President Barack Obama?s take on the outsourcing industry, you must be wondering where does India stand in such a scenario. Is the honeymoon period over for the $50-billion offshoring industry in India? The answer to that might not be simple at this point, but industry experts feel all is not lost though, and India still has a strong story ahead. Recently the protectionist measures taken by the US government with regard to outsourcing has raised uncertainty about India?s future as the leading outsourcing destination globally. But, industry is optimistic that the economic viability and business imperatives of outsourcing are compelling and present a reasonably strong case for India.
Outsourcing is an economic reality. ?India is an integral part of the global sourcing strategy and cannot be neglected in the whole picture. One such US state banning government department from outsourcing to India doesn?t shake India?s position as the fore-runner in the global sourcing providers list,? says Kumar R Parakala, global head, (sourcing advisory), KPMG.
The Indian IT-BPO industry is estimated to be a $60 billion business, of which exports account for about $50 billion and the rest constitutes the domestic revenues. According to Nasscom, the IT-BPO export revenue could reach to $175 billion by 2020. Today the industry employs about three million people across India and has largely influenced the sea change in the West?s perception about the country.
Sandeep Aggarwal, executive vice-president, (sales, solutions and transition), Intelenet Global Services, says, ?Outsourcing to India is now equally about quality rather than mere cost. Given the recently announced protectionist and tax reforms by the US government, it could mean that large outsourcing customers may have to pay certain taxes on their income from international markets.?
Analysts feel since Indian IT is exposed to the US private sector largely and barely to the US government IT budgets, headwinds like these will have a minimal effect. The US accounts for around 61% of India?s IT and IT-enabled service exports, and most of it comes from the US private sector.
The current stay on outsourcing is perceived more in the light of the US state government as customers and has the potential to hurt egovernance contracts and to a lesser extent, private demands. ?The ban if becomes wide-spread will be limited to government projects, which probably constitute not more than 5%,? says Aggarwal.
Recently, the Ohio state, has banned the outsourcing of government IT projects to offshore locations like India. The move came shortly after the US enacted a controversial legislation, Border Security Law, by almost doubling the application fee to about $4,300 from $2,300 for H-1B and L1 visas, used highly by the Indian IT professionals. Nasscom president Som Mittal sees these ?protectionist move? by the US as a ?disturbing trend.?
?I hope the US would make more positive investments in research and development to create jobs and to become more competitive, rather than taking any regressive action which seems negative and will lead to protectionist measures around the world,? Mittal said at a Nasscom event in Bangalore recently.
Analysts feel unemployment rate of over 9% in the US and a sluggish economy have led to measures like visa-fee hike and the Ohio ban. ?The protectionism has become more of an marketing gimmick rather than agenda by the US government because of the elections due in November. This is a fad which will die away once the US unemployment normalise,? says Srishti Anand, IT analyst, Angel Broking.
However, the Indian government is taking interest in the matter. It plans to raise the issue in the Trade Policy Forum meeting scheduled on September 21. In addition to this, a delegation comprising of Nasscom executives and representatives of top Indian IT-BPO companies plan to visit Washington shortly, to raise concerns on US? anti-outsourcing tirade.
?There could be a positive impact if the Indian Prime Minster also raises the issue with his US counterpart when the latter visits India in November. It needs to be pointed out to the US government that Indian IT-BPO firms are not only providing outsourcing services, but also employing US talent by setting-up operations in the US,? says Parakala of KPMG.
Today outsourcing business in India is a healthy mix of integrated, pure play and captive organisations. Large integrated players generated more than a third of total BPO revenue, with 23% of revenue reported from BPO captives, according to Nasscom.
Enterprises are more educated now and understand that India is an integral part of the global sourcing strategy. ?Indian IT companies still have a huge cost arbitrage vis-?-vis local IT vendor in US. Outsourcing will remain the need of hour and offshoring will be the only viable option to invest into infrastructure,? says Anand.
Industry watchers feel that withdrawal of tax breaks might be detrimental for offshore set ups of MNCs like IBM and Accenture rather than Indian IT vendors. ?Indian IT vendors have their delivery centres for clients and they will not have any tax implication because already they pay service taxes and don?t enjoy any tax credit,? she adds. On the client side, the companies who outsource work to Indian offshore players don?t claim any tax benefit on the offshored IT work.
However, in the short term, measures like the Ohio ban might have an impact for Indian companies servicing government clients in Ohio, which are not many in number. ?The issue will be a concern only if it becomes a trend with other US States and more so if private players are also penalised for outsourcing. Till then this doesn?t seem to be a major concern,? says Parakala. Going forward will there be an impact on the Indian IT companies? The answer is difficult to quantify, and may be the US government?s annual IT spending of $85 billion will no longer remain a target market for the Indian outsourcing industry and focal point will have to be shifted.
To insulate from such moves and anti-offshoring sentiment in the future, India needs to leverage its strength by moving up the value chain towards high end knowledge services offerings. India has competition not only from China, but from a host of other countries that are slowly emerging as preferred outsourcing destinations.
While countries like China, Philippines and Sri Lanka are emerging as strong competitors in the voice-based transactions, Latin America and Africa are competing on the pricing front. ?It is essential that Indian companies expand their footprint to diverse geographies, focus on generating more employable talent and on the domestic market,? says Aggarwal of Intelenet.