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Actions against Outsourcing: Missing the Wood for the Trees

Cherian Samuel is Research Fellow at Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile.
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  • March 03, 2009

    The related issues of H1B visas and outsourcing have once again come to the fore and could prove to be a troublesome issue in India-US relations. In his address to the Joint Houses of Congress on February 24, 2009, President Obama declared that he would nullify tax benefits for American companies that outsourced their services. The same day, the US Citizenship & Immigration Service (USCIS) released data showing that four Indian outsourcing companies, Infosys, Wipro, Satyam, and TCS, accounted for more than 10,000 of the 65,000 H-1B visas issued by the US in 2008. In a recession-hit US economy, these statistics provide sufficient fodder to re-ignite the debate over outsourcing.

    The H1B visa programme, started in 1990, was envisaged as a mechanism to enable American companies to source the best and the brightest to fill gaps in skill sets and overcome scarcity of trained manpower. The success of this mechanism is reflected in the growth of the US tech industry over that period, even in the face of competition from other parts of the world. Outsourcing was another child of the nineties, as American companies sought to reduce costs by shifting operations to cheaper destinations. While manufacturing shifted to China, companies like General Electric shifted services to India. In course of time, Indian companies like Infosys came to specialize in this rapidly growing space. Outsourcing has become synonymous with globalization, which has continued with its onward march because pains of globalization pale when weighed against the net gains.

    The criticism of the H1B programme and the related L1 programme revolves around accusations that they are being used by companies based in India and elsewhere to bring non-American nationals into the country where they replace American workers. Even American blue-chips are accused of engaging in this practice; Microsoft, the fifth largest procurer of H1B visas has recently been castigated for retrenching over 5,000 employees while at the same time asking for an increase in the H1B cap. It is also alleged that workers brought in by outsourcing companies are made to work on a pittance in order to maximize profits.

    Thus, the H1B issue and the outsourcing controversy are inter-related but require different solutions. With regard to the issue of the misuse of H1B visas, it is doubtful that major companies would run the risk of falling foul of American laws through such methods, and in any case, these allegations have remained unsubstantiated insofar as Indian companies are concerned. Such malpractices can be countered through closer supervision. Controversies over H1B notwithstanding, the fact remains that outsourcing is an integral part of globalization and exists across companies, sectors and countries. It takes advantage of new technologies to maximize efficiencies and is a part of the business innovation cycle necessary for economic growth. Therefore, if the H1B programme did not exist, it would, in all probability have had to be invented for the good of the US economy. So also with outsourcing. Though outsourcing began as a way to cut costs, it has evolved into a business model centred around a global manufacturing chain where businesses source brainpower wherever it is available.

    From India’s perspective, the value of ITES-BPO exports lies not so much in the revenue they bring in (about US $6.3 billion in 2005-06 out of total software exports of $23.6 billion), but rather in the fact that these companies employ highly skilled professionals and showcase India’s prowess to the world at large. As has been noted elsewhere, the information technology and BPO industry employs only one-third of one per cent of India’s total workforce. (Similar statistics show that jobs filled by H-1B visa candidates each year represent less than one-twentieth of 1 per cent of total US employment.)

    In earlier years, there was migration by highly skilled professionals because the local economy was not advanced enough to absorb them in large numbers. Though the situation has changed substantially, any artificial choking of demand would have an eventual impact on supply. The law of economics would apply here as well; if demand slackens, then one of the end results of the current restrictive actions would be that students in India would shun the technical sector and shift to other professions. The numbers of students coming to the US to study in its higher institutions of learning would also decline substantially. This could well result in a skills shortage as well as set back the crucial R&D function of the universities by the time the world economy regains its growth pattern. This would put paid to President Obama’s pious vision, as enunciated in his message on the occasion of India’s Republic Day, of Indians and Americans working together to “offer benefit to all the world's citizens as our scientists solve environmental challenges together, our doctors discover new medicines, our engineers advance our societies, [and] our entrepreneurs generate prosperity…”

    By engaging in protectionist and populist measures with doubtful short-term economic and political benefits, the Obama Administration is showing an inadequate understanding of globalization and people flows and is essentially throwing the baby out with the bathwater.

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