Obama Effect on Outsourcing

President Obama finally said what he has been saying for a while - that US companies will not receive tax breaks if they ship American jobs abroad. He is speaking for many democrats, who favoured such a measure for a long time. They are hoping that this will dampen outsourcing, at a crucial time when the politicians need to be seen doing something to stem the job losses. It will tickle the economic nationalists the right way, and indeed, every recession sees them in ascendancy. So, President Obama has said the right thing, at the right time, for the Americans.

The comment dominated the discussions in India. We traditionally favour democratic candidates, but usually got raw deals from successive democratic administrations. The reviled George W. bestowed us with a nuclear deal, whereas the enormously popular Clinton clubbed us with Pakistan and tried to put sanctions on us. Obama, and Kerry before him, has been saying uncomfortable things for a while, but now this has become a policy statement and will soon become a legislation. This is precisely the bad thing that could happen to India at the worst possible time - the tech cities of Bangalore and Hyderabad are reeling under the downturn already. So, unless someone is pathologically jealous of the landlords in Bangalore and Hyderabad, it is impossible to be happy about what President Obama is setting out to do.

Except that, it seems a completely meaningless gesture, and based on a dated understanding of how the world works. And, instead of being bad for India, if we act fast and decisively, we can turn this into our advantage. Instead of becoming the obituary of Indian BPO, this could usher in a new era of Indian competitiveness.

So, what did the President mean? Global American companies, there are more than 1000 of them, earn profits in different countries. Now, the United States tax codes allow a tax break for companies repatriating the profits earned abroad. President Obama is saying that this tax break will not apply to companies if they ship American jobs abroad. Sounds nice, but so what?

Let's take, for example, a company like Microsoft. It earns billions in profits outside the United States, by employing thousands of people across the globe. Under Obama's scheme, they will not get the tax break if they repatriate their profits to the United States. The question really is - whether Microsoft needs to repatriate the profits and at what cost?

There is a fundamental misunderstanding among political circles about outsourcing. It is not done for philanthropic reasons. Microsoft employs brilliant Indian graduates not because it wants to employ them to alleviate poverty or do good to India, but because if they don't, they will not remain competitive. For all the talk about American jobs, these are not American jobs, for these will not exist if an US administration legislate the companies to only employ people in America. These are global jobs, necessitated by the competitive pressures of the globalized economy, and President Obama is fooling himself by thinking that he can bring the jobs, body for body, back to America.

I think there are a number of possible outcomes of this policy initiative. Let me list them here:

(a) American companies will stop repatriating offshore profits to America. They will find another nation more willing to let them keep their money. It could be India, or any other nation, in the need for capital. This is a very likely scenario, and the American government needs these profits more desperately than anyone.

(b) American companies will stop employing Indian/Chinese/ Filipino workers and will become less efficient. This will allow Indian companies compete better against American firms, and get the jobs back in India. This is unlikely, as American firms are not dumb, but if such a thing happens, this will only allow Indian companies move up the ladder. In an even more unlikely scenario, the administration may legislate that Americans must buy goods and services from companies with American production base, robbing the country of economic choice and undermining its competitiveness even further.

(c) If situation b happens, this will mean that there will be easing of the competition for global talent, which will benefit local companies in India and other countries, and if they are ready to take the advantage, it will spawn entrepreneurial ventures in these countries which will compete with the US companies. It is almost as if when Americans try to take their jobs back home, they export their competitiveness and innovativeness, and most countries will welcome that.

Yes, that's the end of the list. I do not think the possibilities that the US lawmakers have in mind, that outsourcing will stop and US jobs will be back, and those which Indian doomsayers can see, that Indian outsourcing industry will be over and we shall all go back to farming, are likely scenarios.

Next few months will indeed be crucial, as the effects of recession and such short-sighted policy measures play out fully. But it indeed seems that President Obama is trying to be a populist president, and if he tries to do that, he will find himself in the wrong job at the wrong time. He will harm America's long term competitiveness, push the economy to a greater crisis and do harm to global economic recovery by ushering in protectionism, precisely the wrong thing to do in the middle of a global recession. In the meantime, if Indian business community and policy-makers are alert and adaptive, Indian economy will benefit enormously - by getting access to better talents, and by getting favourable terms to compete with US firms.

At the end of Round 1, then, Obama 0, India 1.


Anonymous said…
Anonymous said…
Good post! Very well said! Hard truths! Would like to see these turning into reality! :)
Thanks. We are all watching to see what happens. But, prima facie, it seems things are not going to be as bad as was predicted, and some BPO outfits are doing better than ever.

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