India vs US: The outsourcing debate

The World Economic Forum debates in Davos are over but US and India have begun a new one on outsourcing that could last for almost a year. On January 25, US President Barack Obama called for discouraging outsourcing of jobs to help shore up US economy. Finance minister Pranab Mukherjee was quick to react saying protectionism ultimately does not help. With presidential elections in the US in November 2012, the Obama speech is part of the election rhetoric we could hear for the next 11 months.

US President Barack Obama began his State Of the Union Address in Washington (the last one for the 4-year term) by making a pitch for economic fairness and outlining a series of proposals for creating jobs, discouraging outsourcing of jobs and improving the economy.

Obama said that those companies who preserve jobs in the US would get a bigger tax break than those outsourcing jobs.
India's finance minister Pranab Mukherjee warned against protectionist moves by the US, terming such measures as self-defeating and unacceptable.

"Protectionism ultimately does not help the country that resorts to protectionism,” Mukherjee said while on a two-day trip to US.

“There is no denying the fact that despite some aberrations, uninterrupted flow of goods and services and removal of tariff and non-tariff barriers have yielded results for all." Mukherjee added.
In August 2010, Obama spoke of bringing back jobs and industries of the future going to Germany, India or China. This was at a party fund-raising programme.

India is a leading destination for business process outsourcing.

Of the total global spend of $158bn, India's share is 10.7 per cent, according to estimates of industry body Nasscom.

Hiring an employee is 20 per cent cheaper than Philippines, the nearest competitor for India in the segment.

The rupee depreciation makes India even more attractive for outsourcing, Japanese bank Nomura said in a report.
Of the total revenue contribution across geographies of India's overall IT exports, 60% is to the US, 30% to Europe and 10% to the rest of the world, according to Nomura, a Japanese bank.

This explains why US rhetoric matters for India and its IT services companies.
Pascal Lamy, Director-General of World Trade Organization (WTO) said there has been very little impact of protectionism on international trade as such policies have impacted the world trade by just 1 per cent.

However, he adds that removing tax benefits for off-shoring firms is not a trade violation under WTO.

Reacting to the speech, N Chandrasekaran, MD and CEO of TCS said, "Job creation is on top of US president's agenda in an election year. Obama's speech on protectionism is a bid to woo voters."
S D Shibulal, managing director and chief executive officer, Infosys said that the society in US witnesses a lot of debate and discussion and both views are always heard.

“So I clearly believe that whatever decisions will be taken, they will be balanced decisions,” he said.
Obama's speech is seen as a boost to the already healing job market in the US.

The market ended 2011 better than it began. The number of people applying for unemployment benefits each week dropped by 10 percent since January.

The unemployment rate, 8.6 percent in November, stood at its lowest level in nearly three years.

Still, 25 million Americans remain out of work or unable to find full-time jobs.

Most analysts forecast a stronger economy and job growth in 2012 — and rule out a second recession — but they caution that could change if Europe's debt crisis worsens or consumers pull back on spending.

Around 7.2 million people are receiving unemployment benefits in the US.