India and the U.S. remain tense about outsourcing

Secretary of State Hilary Clinton’s visit last week has been dubbed by some the High Technology Cooperation Dialogue. Pressed by Indian governmental and business leaders about what it sees as an increasingly protectionist stance in the U.S., Clinton pledged support for working with India for better high-tech relations, but offered no specifics.

"Outsourcing is a concern for many communities and businesses in my country, so how we handle that is something that we’re very focused on doing in a way that doesn’t disrupt the great flow of trade and services that go between our countries," Clinton said in an interview on Indian television.

Fears that President Obama will move the U.S. in a more protectionist direction have been high for some time due to his rhetoric, most notably a May 4 speech in which he discussed wanting to change a tax code "that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York."

Although some experts say the tax policy changes proposed by Obama would have little effect on either outsourcing or offshoring, with IT making up 7 percent of India’s GDP according to BusinessWeek, any effect can have serious repercussions.

Another issue is a proposed bill in the U.S. Senate which would restrict the number of workers using H-1B visas in a company to half the workforce. The vast majority of Indian firms with operations in the the U.S. have a higher percentage of workers on visas.

One possible solution proposed would be for Indian firms to increase their operations in Mexico, and then have those workers come into the U.S.

"We will probably utilize a higher growth in our Mexican center by having more people come from Mexico to the U.S., where they don’t need the H-1B because of being part of NAFTA," said Phaneesh Murthy, president and CEO of IT services firm iGate Corp to the financial site Seeking Alpha. "So, I think our business models will change and we are ready for those changes in business model," he said.

The pressure isn’t coming just from the U.S., either. Many countries are feeling political pressure to restrict jobs sent overseas. The Economic Times reports that major outsourcing firms in India remain in the dark about millions of dollars of contracts for software applications, development and maintenance from European banks. Meanwhile in March, JP Morgan Chase announced it would increase its outsourcing to India to nearly $400 million in the country during 2009.

The growth of the outsourcing industry in India is expected to slow drastically from the dizzying heights it once had. The fiscal year ending in March 2008 saw 29 percent growth in the outsourcing industry, and the fiscal year ending 2009 is expected to register as 14-16 percent growth. According to PC World, experts are predicting single-digit growth for the fiscal year ending March 2010, perhaps as low as 7 percent.

How much of this drop is due to more protectionist policies in the U.S. and Europe, which make up the bulk of India’s outsourcing exports, and how much is due to the general worldwide economic slow down is uncertain.

Siddharth Pai, a partner at outsourcing consultancy firm, Technology Partners International, told PC World that the previous high growth rate was unsustainable, reflecting the rush for companies to get the advantages of outsourcing their work.