OUTSOURCING India readies to state its
case By Sultan Shahin
NEW
DELHI - India is particularly concerned over the demands
being made in Europe and the United States over
outsourcing. Labor unions in the US, have, for instance,
demanded that India should compensate or retrain US
workers rendered redundant by business shipped abroad.
Several politicians have demanded that Indian companies
invest in their constituencies. And US trade
representative Robert Zoellick, in New Delhi recently,
suggested that India reduce its US$9 billion trade
surplus with the US.
In response, leading US
think tanks are advising India to keep a low profile
while combating backlash against outsourcing, which has
become an issue in the runup to the presidential US
elections scheduled for November. But Indians, as well
as US-based non-resident Indians (NRIs) are beginning to
get angry. If it is an election year in the US, it is
also in India, with staggered polls due in April and
May.
An overwhelming majority of American voters
are of the opinion that outsourcing will be an important
issue in the November presidential elections, a new
survey has indicated. As many as 68 percent of
respondents said that American jobs and foreign
competition will a major determining factor, and another
22 percent consider it somewhat important, according to
a poll released by the news magazine, Newsweek. Asked
which candidate would do the best job of protecting
American jobs and creating new ones, 35 percent said
President George W Bush. But the Democratic frontrunner,
Kerry, was close behind with 31 percent, and John
Edwards, whose campaign is picking up, a distant third
with only 18 percent.
But the bad news for Bush
is that 55 percent disapproved of the way he is handling
American jobs and foreign competition, with just 32
percent showing their approval. As many as 80 percent
said a major reason for the loss of American jobs to
foreign competitors was that people in other countries
were willing to work for lower pay, and 77 percent said
a major reason was that investors and chief executive
officers wanted to make profits.
Interestingly,
the economy and the government's performance on the job
front have emerged as main election issues in India.
Prime Minister Atal Bihari Vajpayee's Bharatiya Janata
Party (BJP) had promised to create 10 million jobs a
year in its last election manifesto. While the exact
number of jobs actually created remains lost in the
controversy over government claims and opposition
counter-claims, there is little doubt that jobs
outsourced from developed countries to urban middle
class India has resulted in a genuine feel-good factor
on which the BJP is banking to return it to power.
Over the past few years, new jobs have been
created in the information technology (IT) and business
process outsourcing (BPO) sectors. Informal estimates
suggest that the job addition in the urban centers has
been a total of 300,000 to 400,000 since the year 2000.
These outsourced jobs are the most visible and credible
achievements of the government, and if it appears that
soon much of it will no longer be available, this is
bound to create gloom that would negate the feel-good
slogan of the ruling party. The stakes are clearly high
for the BJP.
Deputy Prime Minister Lal Krishan
Advani, therefore, has tried to assuage feelings on this
issue. He accused the US of adopting "double standards"
by stopping outsourcing to India, but said that India,
which was on the path of rapid progress, need not worry
about the US decision.
Speaking in his
parliamentary constituency, Gandhinagar, in the capital
of Gujarat state, Advani said that many countries were
feeling concerned over the rapid progress made by India.
Expressing confidence that India would emerge as a
developed country by 2020, he said that while job
availability was decreasing the world over, the
opportunities were increasing in India because of the
rapid progress made by the country. The US felt so
concerned that it passed a law to stop outsourcing,
which helps create more jobs in India for the services
provided in the US.
Admonishing developed
countries, Advani said that while the US and other
developed countries insisted on globalization of the
economy, they also wanted to stop outsourcing, which was
a part of the globalization process. The people in the
country need not be worried about the decision in the US
to bar government work from being outsourced. But
"certainly we want to tell the US that such double
standard is not appreciated".
A rather unusual
tetchiness was also apparent in commerce and industries
minister Arun Jaitley's answer to Zoellick's demand that
India should open up all its services sectors, as well
as its agricultural sector, and remove all agricultural
subsidies: "On the one hand you talk about opening up
our markets. On the other, you want to ban business
process outsourcing. Our agricultural sector is fragile
as it is not subsidized like in the US."
US-based NRIs have also reacted with anger. For
the moment the main target of their ire is Kerry. He is
being called in NRI circles the "BPO party spoiler" for
the strong speeches he has made decrying the practice of
outsourcing and blaming it for job losses in the US.
Some of the US-based top executives of Indian IT and BPO
firms are boycotting fund-raising dinner parties for
Kerry. "I sent a stinker to the invite for a
fund-raising dinner party for Kerry in California," said
the CEO of a leading IT company. Another CEO was quoted
in the press as saying: "Kerry is trying to spoil the
BPO party with his election rhetoric. He must understand
that outsourcing makes the US corporates competitive."
But even as the politicians make jobs, the
economy and outsourcing a major campaign issue, Bearing
Point, PeopleSoft, Bank of America, among other
companies, announced last week that they would be hiring
thousands of people in India in the coming months.
Senate minority leader Tom Daschle, supported by
senators Hillary Clinton and Edward Kennedy, have
introduced the "Jobs for America Act". This would
require detailed disclosures by US companies outsourcing
overseas. Then on February 18, Democratic senator
Christopher Dodd introduced the "United States Workers
Protection Act". This would prohibit US federal and
state governments from buying goods or services produced
by overseas workers or by US companies using foreign
sub-contractors. New Jersey, Maryland, Indiana,
Michigan, Colorado, Ohio, Minnesota and Washington have
also introduced bills in their legislatures to prevent
local corporations from outsourcing abroad.
The
strong remarks made by Democratic leaders, and a growing
feeling that they have begun to resonate with voters,
has forced the Republican administration to go on the
defensive. Even Bush has started talking about the need
to preserve and create jobs for Americans. This is
despite the fact that several reputed and influential
economists have given a very different view of the
situation.
Gregory Mankiw, head of Bush's
Council of Economic Advisers, told reporters recently
that "outsourcing" of jobs is beneficial to the US
economy as it lowers costs to the consumers and makes
the corporations more efficient (even though he hedged
his comment with a "perhaps"). The Economist recently
carried a series of articles proving that outsourcing
was a win-win activity benefiting both countries. A
study by McKinsey Global Institute found that for every
dollar of work outsourced by the US, it got back $1.14
in income, and the countries doing the work gained 35
cents.
Several influential analysts are indeed
dismayed by the protectionist stances being taken as
well as the futility of the "remedies" on offer - such
as offering tax breaks for domestic hiring. Many
analysts believe that anti-outsourcing bills in the US
are likely to be ineffective and could end up costing
more US jobs than they save. "Outsourcing is not an
economic problem, but an economic opportunity," says
Charles E Morrison, president East West Center. Backlash
against outsourcing in the US was the talking point at
the Confederation of Indian Industry-East West Center's
Asia-Pacific executive forum, which deliberated on the
changing world order and India, in a regional and global
context.
"Jobs lost to off-shoring were less
than a quarter of all jobs lost in the US in 2002. The
rest were lost to corporate restructuring. The current
debate in the US on off-shoring is informed by lack of
facts," says Michael T Clark of US-India business
council. He added that a legal framework protecting
intellectual property and grievance redressal measures
were required in India. Indian industry body Nasscom,
too, has been advocating a low profile strategy to deal
with outsourcing.
Management science professor
Ralph J Tyser of Maryland University, however, in a
recent article, stressed that India needs to think
beyond the glamorous IT and high-tech sectors and pay
attention to the needs of the non-elite strata of
society and use manufacturing as a means for providing
jobs, goods and services for them. He suggests in a
recent treatise in the Indian media that the jobs
generated by IT and BPO would be paltry compared to the
manufacturing sector in India. Also, creating employment
in manufacturing would impact the labor strata of Indian
society, and not simply the educated elite.
In
an op-ed piece in the New York Times, Jagdish Bhagwati,
a senior fellow at the Council on Foreign Relations and
professor at Columbia University, explained "Why Your
Job Isn't Moving to Bangalore". According to Bhagwati,
the panic is misplaced and jobs are not being "taken
away" from America. What is happening, instead, is that
technological change is affecting labor-intensive
services: "... when jobs disappear in America it is
usually because technical change has destroyed them, not
because they have gone anywhere. In the end, Americans'
increasing dependence on an ever-widening array of
technology will create a flood of high-paying jobs
requiring hands-on technicians, not disembodied voices
from the other side of the world."
The author of
In Defense of Globalization, Bhagwati takes issue
with Kerry: "In objecting to moving service jobs
overseas, Senator Kerry is wrong on two counts. First,
his economics is faulty: the practice only adds to the
overall economic pie and improves the competitiveness of
American companies. In a world economy, firms that forgo
cheaper supplies of services are doomed to lose markets,
and hence production. And companies that die out, of
course, do not employ people.
"Second, Mr Kerry
is making a political error. By playing to the
understandable but incorrect fears of American workers
that outsourcing is taking away jobs from Americans, he
is painting the Democratic party into the wrong corner
on trade issues. As [former president] Bill Clinton
showed the country, there is a way for politicians -
even Democrats - to explain the benefits of free trade.
They could start by explaining that service imports fall
broadly into two types. The first is made up of the
simple, labor-intensive services like answering
complaints, solving basic computer problems by taking
customers through defined steps on the phone, or
interpreting results of routine medical tests."
Bhagwati tries to calm American fears by
pointing to the backdrop in which this debate is taking
place: "Putting these jobs overseas is, in economic
terms, no different than importing labor-intensive
textiles and other goods. In the eighties and nineties,
labor unions warned that imported cheap goods from the
Far East would depress our wages and labor standards.
But, as virtually any economist who has studied the
empirical evidence of the last two decades knows, the
overwhelming cause of wage stagnation in manufacturing
has been automation within America, not pressure from
cheaper imports. The same dynamic applies today - with
the technological change affecting service jobs rather
than manufacturing.
"The second, newer type of
outsourcing involves American companies that do highly
skilled research and development work abroad. Craig
Barrett, chief executive of Intel, has said that
American workers face the prospect of 300 million
well-educated people in India, China and Russia who can
'do effectively any job that can be done in the United
States'. But such concerns seem exaggerated. There is
little evidence of a major push by American companies to
set up research operations in the developing world. I
have taught hundreds of fine foreign students in the
last few years, but only a small fraction are at the
level of proficiency that Intel looks for in its
research programs. And a cursory look at American
immigration shows that the best students in high-tech
fields come from just a handful of world-class
institutions in those countries."
In a similar
vein, Saurabh Srivastava, president of Indo-US
Entrepreneurs commented: "The US stand is hypocritical.
The issue is not about job loss but about free trade."
He cited the past experience of the US when it witnessed
Japan emerge as a manufacturing hub and wean away around
3 million jobs. But the same trend witnessed over 50
million jobs being created in the US in the services
sector. This was in addition to employment generated
with several Japanese companies shifting manufacturing
base to the US. "The essence of free trade, as promoted
by the US, does not allow for legislation to be brought
to protect domestic interests while urging other
countries to open up," Srivastava said. "Jobs are lost
in areas where you cannot compete, as it has been
witnessed in India, and gained in areas where you can
compete," he said.
Take it on the chin, or
not Some major US think tanks are advising India
to keep a low profile while combating the outsourcing
backlash. They have expressed confidence that American
firms will continue to benefit from outsourcing to India
and the current uproar will die down after the US
presidential elections. "India should keep quiet and
should not exaggerate much. What's important for India
is to continue doing the good job," says Clyde
Prestowitz Jr, president of the Economic Strategy
Institute.
Up to now, India does seem to be
taking this advice, despite the rather irritable
comments by Advani and Jaitley quoted above. However,
the Vajpayee government has established an
inter-ministerial working group to mount a worldwide
public relations campaign and lobby politicians from G-8
nations. This group has representatives from the
ministries of commerce and industry, finance, external
affairs and communications and IT; as well as from
Nasscom.
In addition to protectionist
legislation, this group has identified visa restrictions
and discriminatory taxes as two additional non-tariff
barriers. The US reduced the number of H1-B visas from
195,000 to its old level of 65,000, and proposed to
tighten norms for L-1 and B-1 visas. Indian software
companies currently pay $300 million in social security
taxes in the US, which is likely to rise to $1 billion
by 2008. EU countries also impose social security taxes
on Indian companies. In Japan, the 20 percent
withholding tax on both onsite and offshore services
makes Indian companies uncompetitive.
A
well-known consultant in information technology and
telecommunications, Ravi Visvesvaraya Prasad, recommends
that India should immediately negotiate "social security
totalization treaties" with the US and the EU. In his
view, other tasks that this working group should
immediately perform are:
Publicize the numerous research reports by eminent
economists that outsourcing benefits G-8 economies.
Commission experts to write articles in prominent
journals in favor of outsourcing.
Issue rebuttals to negative features in the mass
media about Indians stealing jobs. Instead encourage
positive features with a human interest angle in the
mass media about how outsourcing benefits the common man
in G-8 countries by lowering costs to consumers.
Lobby politicians in G-8 countries.
Get Fortune 500 companies to publicly explain the
rationale behind their outsourcing.
Ally with free-trade proponents in academia, think
tanks, political action committees and industry
associations in G-8 countries.
Encourage Indian companies to open front-end offices
in G-8 nations and hire local personnel.
In
other words, far from sitting back, India needs to mount
a pro-active response.
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