India: Worries Grow About Obama Outsourcing Policies

If Obama makes it difficult for U.S. companies to send jobs overseas or hire using H-1B visas, India's huge IT sector could suffer

By Mehul Srivastava

After a decade of outsourcing helped transform India into much of the world's back office, Indians are worried that President Obama's new Administration—and the slowdown in the global economy—will cast a shadow over one of the fastest-growing sectors of their economy. Obama's $787 billion stimulus plan will make it increasingly difficult for U.S. companies receiving bailout money to hire foreigners on temporary work permits known as H-1B visas. The budget the President recently presented may also make it harder for U.S. companies that send jobs overseas to receive tax benefits.

In India, where the $63 billion IT sector makes up almost 7% of the national GDP, the moves are worrying government officials. Acting Finance Minister Pranab Mukherjee groused about it over the weekend in an interview with CNN-IBN, a content partnership with Time Warner's (TWX) CNN owned by India's TV18. "We will have to address this issue," said Mukherjee, whose ministry has spent the last five months trying to restart India's slowing economy with tax cuts and spending plans. "We are opposing protectionism, not only here but at every forum."

WHAT'S NEXT?

Even more vexing for India's outsourcing industry is the lack of clarity about what might be coming next from the U.S. During a Feb. 24 speech to Congress, Obama said the Administration will eliminate "incentives for companies that ship jobs overseas," but the White House has not provided additional details. A line item in Obama's budget titled "Implement international enforcement, reform deferral, and other tax reform policies" is the only hint tax experts in the U.S. and in India have had about the policy. The estimates for tax revenues generated by that budget change start at $15 billion in 2009 and go up to $25 billion in 2012. Those inexact estimates, says Rosanne Altshuler, co-director of the Tax Policy Center (a joint venture of two Washington think tanks, the Urban Institute and the Brookings Institution), is an indication that the changes in tax policy have not yet been worked out, and likely will not become public until April.

Indians with a stake in the outsourcing industry are now waiting and watching. "Of course we are concerned," says Mohandas Pai, a board member and director of human resources at Infosys (INFY), India's second-largest IT company by revenues. "But nobody knows what the devil is being referred to [in the Obama statement]."

At a time when nearly 5 million Americans have applied for unemployment benefits and another 1.7 million are working part-time jobs because they can't find full-time work, immigration and outsourcing have become key political issues in the U.S. As he did during his campaign, Obama has made clear during the first weeks of his Presidency that he intends to pursue policy changes to discourage outsourcing and the use of U.S. work visas—especially H-1B visas—that could cost American jobs. At no time has he made the exact policies clear, says Altshuler. Even within the government, the changes remain a mystery. Edward Kleinbard, the chief of staff for Congress' Joint Committee on Taxation, was forced to offer up a guess about the cryptic item in the budget during a meeting with a group of international lawyers last week. "Deferral will certainly be at play," he said, according to a report in Tax Notes, a publication of the Tax Policy Center. He was referring to how corporations are able to defer paying tax on income earned overseas until they bring that money back to the U.S.

That may not do enough to discourage outsourcing, says Andrew Kokes, vice-president for marketing at Sitel, a Nashville-based outsourcing firm with 4,000 employees in India. Even if the U.S. proposes a punitive tax on companies doing work offshore or offers a tax break for those that do not, the changes wouldn't be large enough to offset the 20% to 30% benefit companies get in lower labor costs when they do certain work offshore, he says. "A tax break can't compete with that kind of arbitrage," says Kokes.