Sunday, May 9, 2010


US President Barack Obama is back to bashing outsourcing. Amid talk of

fading allure and promises not kept, an embattled Obama,

bruised by economic, political, and foreign policy crises in

his first year in office, has pledged to stop US companies

from taking jobs overseas and warned Americans about

increasing competition from India and China.

Incidentally, this is not the first instance of Mr Obama

upping his anti-outsourcing rhetoric. In May last year, he

had said American companies' shipping jobs overseas will

be required to pay more taxes, and that tax-deferral

benefits for such companies will be ended. "It's 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," Obama had said.

However, for once Indian IT companies, who get over 50% of their

revenues from the US, are not rattled by Obama comments. The IT stocks

too don't seem to have suddenly caught `Obama flu'. Here's over to the

nine reasons which analysts and industry honchos believe will keep

outsourcing going strong tax breaks or no tax breaks.

Indian IT cos not direct target

IT industry body Nasscom said it's unlikely to have any direct

impact on Indian IT companies. "We think the target, if at all,

could be subsidiaries of American companies that book profits

in low tax regions, and do not repatriate the same to the US,

where tax rates are higher. A measure like that won't affect

Indian companies.

Outsourcing can't be reversed

A widespread belief is that outsourcing has become

mainstream and it will be impossible for Obama to reverse

it. As the overall market would be growing the problems of

tax breaks will be overlooked by the firms. All the recent

data shows that cost and competitive pressures are

increasing on American companies. In such a scenario, they

are bound to be compelled to offshore to destinations like

India to bring costs down.

Obama's healthcare reforms an opportunity

Obama wants to improve healthcare coverage. In fact, he wants to bring

40 million new people into it. Indian IT companies have an

excellent track record in offering solutions to financial

services, telecom, IT enabled services, etc, but it is still

evolving when it comes to providing healthcare solutions. If

they can develop expertise in this area and offer innovative

solutions to the US insurance companies to improve

efficiency by avoiding wasteful expenditure, it would be a

great opportunity for them.


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Trade is two-way process

Confidence also comes from the fact that the Obama

administration has so far not introduced any significant legislation

that has been protectionist.

"Besides, he has been talking of increasing US trade with other

countries. And trade is a two-way street. If one country places

restrictions on trade, partner countries are sure to react similarly ,

and the US is unlikely to want that.

Advantage India

India had flourished not because of any tax advantage, but

because of its cost and quality advantage, its huge, young

labour market and its time zone and demographic

advantage. Some said they could understand the pressures

that Obama was facing, given the unemployment levels in

the US. So long as this situation remains, there will be

pressure on US companies to not be aggressive on off

shoring. Indian providers will have to be agile enough to

adapt to new engagement models.

Markets beyond US

If the tax breaks are taken away, it is not going to impact the

Indian IT industry adversely. With the global economy looking up, a

lot of emerging markets are opening up. The contribution from

those markets is going to offset the impact of tax breaks if any.


Protectionism cannot work

Experts argue that such protectionist measures are short-sighted because

many US companies derive significant revenues from outside the country,

and any protectionist stance could lead to a backlash in

other markets. Some of the top outsourcing customers,

include Citigroup, GE and JP Morgan.

For instance, Citigroup in 2007 generated 52% of its

revenues outside the US, and over 60% of its workforce

operated from abroad, as its banking business spanned 100

countries. Citigroup's international revenues stream kept

pace through 2008, despite the financial crisis, and

amounted to a whopping 74% of the total revenues

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