So Obama’s in power, and the world has applauded America for honouring the black man – and the Black Man – with an ideological victory the likes of which the country has never seen before. And most of America (excepting the Republicans, of course) celebrates him as a sort of Superman-demigod born to save their nation. But Obama’s election to President isn’t all milk and roses for everyone. For those of us whose livelihood depends upon ridding a couple of thousand Americans of their jobs, Obama isn’t the easiest person to get along with. I’m talking about the half a million workers in India working in the BPO sector.
One of the main focuses of Obama’s election campaign was outsourcing. He had made outsourcing an election issue, and has brought it up repeatedly since he got elected. Why? Because it is a crowd-pleaser with the American public, much like the roti-kapdaa-makaan campaigns of our desi politicians – you can’t go wrong with it. U.S. voters have always responded to the fear that the best American jobs could flee to India, where wage differences are tempting and the young, trained labour pool is virtually limitless. Nobody ever lost a popularity contest by calling outsourcing or offshoring bad names.
And now that he’s been appointed as the President, true to his promise, Obama has brought up the subject with a view to reducing the job deficit. His seven-minute speech recently decrying America’s 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,” prompted numerous frenzied press reports that started pouring out. Headlines referred to the President’s plan to close overseas business tax loopholes as a ‘tax on outsourcing’ and proclaimed that he was taking direct aim at Indian offshore outsourcing firms – and the American companies who hire them. The papers were filled with financial analysts adding in their two cents’ worth of gloomy predictions, and confusion was rife with conflicting opinions and contradicting viewpoints about what Obama’s intentions could mean for India.
So what is outsourcing? It’s the equivalent of your parents shifting the chore of walking the dog from you to your younger brother, because your brother demands less money for the job. Except you are actually the American workers, and your brother is the poor, underpaid Indians in the BPOs and walking the dog is actually providing IT services to American corporations. The money is about the same, though.
And even at one fifth of the salary of the American workers, Indian workers in the IT and BPO services still account for 5-7% of India’s GDP, bringing about a huge impact on cities such as Bangalore, the centre of the industry. Needless to say, losing this source of income would be a crippling blow to the Indian economy, which is why the Indian media reacted with righteous – if somewhat premature – goggle-eyed horror at Obama’s stated intentions.
During Bush’s term, industrialists were being courted extra hard by the politico. The policies during his Presidency allowed for U.S. companies to be able to “defer” paying corporate tax on income earned overseas until they brought it back to the U.S., either as dividends or as retained profits on their balance sheets. They got a tax credit for whatever tax they paid overseas already, and paid the difference to the U.S. Government. Which came down to this: these companies would have to pay only the lower taxes of India, and could put off paying the difference to the U.S. government indefinitely. Now, Obama wants to change the policy so that U.S. companies must pay the U.S. corporate tax immediately. That was what Obama meant when he proclaimed that he will “restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas.”
Even I suffered from the same misconception as everyone else – that if Obama lifts the tax breaks, he will make it unattractive for US companies to outsource jobs to India, and the resulting pull-outs could crumble our IT sector. But as I slowly learnt, Obama’s anti-outsourcing measures aren’t as injurious as everyone imagines. The truth is – the difference between U.S. and Indian corporate tax rates is pretty low already – no more than a few percentage points. In fact, in India, the corporate tax for foreign companies can actually be higher than the U.S.’s – as much as 44% in some cases.
So first, the offshoring company continues to save a huge amount of money due to wage differences, and then, it pays a marginal amount of extra tax (or no extra tax at all) because of this change. That’s not going to be enough to stop offshoring, at least to India. After all, IBM didn’t hire nearly 75,000 employees in India to save tax dollars – it hired them because they cost as little as 1/5th or 1/6th of their American counterparts and often produce the same quality of work.
The scope of Obama’s tax measures is also rather limited. His plan addresses only those U.S. companies who operate their own subsidiaries overseas. That would include, for example, IBM and Accenture. But it would not impact U.S. companies like AOL, Verizon and Hewlett-Packard who “ship jobs overseas” by hiring an offshore company, such as Tata Consultancy Services or Wipro to deliver their services in India. What this effectively means is that Indian companies, such as Wipro, Infosys and TCS will not be impacted by Obama’s proposal. If there were any remaining confusion, Som Mittal, president of India’s National Association of Software and Services Companies (NASSCOM), tried to clear it up in remarks to reporters last week: “It has nothing to do with India.”
In fact, the only economy the tax measures seem to be hurting is that of America. Amit Mitra, Secretary General, FICCI, summed it up best when he declared that the Americans were “cutting their own nose to spite the phase.” For one thing, even if companies had to pay a higher tax, how could that possibly lead to greater number of jobs for Americans? Most American multi-nationals set up shop overseas to access cheaper labour, not to dodge taxes. Surely it would not be feasible for these companies to make it harder for themselves by increasing American hiring and paying five or six times more for labour.
All things considered, it seems unlikely that the Indian economy will have much to fear from Obama’s proposal. No companies with offshore subsidiaries have indicated that they would decrease their foreign presence if U.S. taxes on those operations increased. In fact, some experts say if the U.S. government does seek more tax revenue from U.S. multi-nationals, the outcome could be more offshoring, not less, as those corporations use labour arbitrage to offset the bigger tax bill. In the end, it could inadvertently encourage technology companies to relocate entirely overseas and either merge with an Indian multi-national or move their headquarters to Bangalore in order to put their foreign income out of the reach of the U.S. Treasury. This would spell bad news for America, but very good news for India. Obama’s preoccupation with populist sound bites could benefit India much more than America in the long run.
Looking at the bigger picture, it isn’t wise for India to get worked up about this one issue. Obama’s announcement should not be focused on to the exclusion of most other issues because it indicates a worldwide trend. The U.S. is not alone in this increasing aversion to foreign labour and to outsourcing. As the pain of the global economic crisis intensifies, countries all around the world are adopting policies that make it tougher for foreigners to get their jobs. In the Gulf countries, where several million Indians are employed in jobs ranging from construction to banking, governments have cut down on work visas and sent unemployed Indians home by the planeload. In early March, the British government started an inquiry into whether immigrant workers should be restricted to sectors of the economy that have documented worker shortages. The U.S. itself has changed its rules for H-1B visa hires, cutting down sharply on the number of Indian workers travelling there for jobs. The recession has been a difficult time for every country, including India, which in any case has been least hit, but the BPO sector will continue to bail us out of trouble long after the echoes of Obama’s new tax policy will have faded.