Turning inward

Print edition : March 12, 2004

In a move that can help the Republican administration win political plaudits in an election year, the U.S. Senate approves a Bill whose provisions on curbing outsourcing are likely to have a direct impact on India, especially its software industry.

in Washington

A call centre in Bangalore. Critics of outsourcing in the U.S. have been arguing that the country had become somewhat complacent in the 1990s about the loss of jobs to overseas markets. According to one estimate, at least six million jobs from North America could move to India before the end of the decade.-INDRANIL MUKHERJEE/AFP

EVEN the most ardent of India-backers on Capitol Hill could not have done much about it. The Senate has given its final consent to an omnibus spending Bill whose provision on outsourcing will directly hit India.

No one expected President George W. Bush to veto such a massive spending Bill just because there was a small paragraph that could hurt countries such as India. Although the Democrats were quite annoyed with some of the provisions of the $328-billion spending Bill, they felt that bringing the government to a standstill in an election year might not be the smartest thing to do.

The Bill states that "an activity or function of an executive agency that is converted to a contractor performance under Office of Management and Budget Circular A-76 may not be performed by the contractor at a location outside the United States except to the extent that such activity or function was previously performed by Federal government employees outside the United States".

The law will affect only contracts that are outsourced by U.S. federal agencies; it will not impact private sector "offshoring". Technically, it will remain in effect only until the end of the current U.S. fiscal year. But if current sentiments are anything to go by, there is a strong possibility that the period will be extended.

The provision on outsourcing was introduced through an amendment in spite of the fact that the Chambers of Commerce and the private sector had misgivings that it would undermine the ability of American companies to compete with rivals overseas.

According to informed observers, the amendment, spearheaded by Ohio Senator George Voinovich, was clearly a political move and the direct damage by way of economic loss to India could be "very little" - between 2 per cent and 5 per cent of the country's total software exports.

But if there was uncertainty on the value of federal-level contracts going "offshore", there was no doubt about the bad precedent that has been set by the amendment. The real apprehension is that the eight State Assemblies, which failed to get some kind of anti-offshoring Bills passed in 2003, might try their hands again. The State Assemblies could take the cue from Congress and say that contractors getting federal funds ought to use those funds within the State.

Last year States such as Connecticut, Florida, Indiana, Maryland, Michigan, New Jersey, New York and North Carolina tried to curb outsourcing, but failed. Indications are that some of these States will make yet another attempt and could be joined by others who are part of the anti-outsourcing bandwagon.

It is pointed out that cash-strapped States could benefit enormously from outsourcing, but politicians at the federal and the State levels are keen on having it both ways - savings without job movement. In a presidential and congressional election year, the focus is more on the districts and constituents.

At the federal level, there is a danger that the debate on outsourcing might enter the realm of the private sector. While the argument has been that Congress cannot specifically tell the private sector how to go about its business, it can give out incentives or tighten the existing tax regimes to force them to act in a particular fashion.

It is being pointed out that in an election year, when the President, 435 Members of the House of Representatives, 34 Senators and 11 Governors are in the electoral fray and the job scenario is particularly sensitive, outsourcing will remain a serious issue. All sensible economic arguments are likely to take the back seat.

In the immediate context, the question being raised is whether India could have done anything at all to prevent the amendment from coming through. One assessment is that official India did all it possibly could to ensure that the amendment was not India-specific. The point made in some circles is that relevant administration officials were informed about its effect on India and its long-term implications for the U.S. Law-makers at the House of Representatives and the Senate were fully briefed. According to senior diplomats, the notion that the Indian Embassy was not aware of the going on or was somehow caught flat-footed is "totally wrong".

Critics of outsourcing have been arguing that the U.S. had become somewhat complacent in the 1990s about the loss of jobs to overseas markets and that if the present tendency continued, more than three million white-collar jobs would have moved out of the country by 2015; according to one estimate, at least six million jobs from North America could move to India before the end of the decade. It is being acknowledged that private sector jobs are not moving to India for nothing - the costs are about one-third and the country has a "tech-savvy", English-speaking workforce. Even within the year it is said that offshore outsourcing to India will rise by about 30 per cent as executives in the private sector look for ways to develop facilities in low-cost countries, which include China, Russia, Brazil and those in Eastern Europe.

There are some who argue that the negative implications of outsourcing are exaggerated and are largely a part of media-driven campaign characterised by "horror" stories of Americans thrown out of their jobs by the very persons whom they help train. In fact, some economists and researchers point out that by seeking lower software prices overseas, American companies are becoming more productive and are able to hire more workers; and if low-cost countries such as India and China develop, they will become more sought-after markets in the long term. Further, it is pointed out that if American companies are able to save money through outsourcing it would lead to the freeing of additional resources for high-tech research. The bottom line, according to those favouring outsourcing, is that one cannot have it both ways - argue about the imperative of making globalisation work and then say that outsourcing is not good for America.

The warning against America turning inward came from none other than the Chairman of the Federal Reserve Board, Alan Greenspan, who recently made the point that measures to protect domestic industries would not only impact American living standards but also have a debilitating effect on the world economy. "The evidence is simply too compelling that our mutual interests are best served by promoting the free flow of goods and services among our increasingly flexible and dynamic economies," Greenspan noted. The consequences of the U.S. moving in the direction of protectionism "in today's far more globalised financial world could be unexpectedly destabilising," he said.

In fact, there are no precise figures on the number of service workers who have lost their jobs. Politicians in the U.S. who talk passionately about local job losses cannot put a finger on any kind of statistic. "I don't know the figures but many people are losing their jobs to outsourcing," Congressman Frank Pallone was recently quoted as saying in India Abroad. A recent report in The Wall Street Journal says that the estimate of service workers' loss in the U.S. over the past three years is between 250,000 and 500,000. According to Brenden Barber, Secretary-General of the Trade Union Congress, a British labour confederation, an estimated two million service jobs could be outsourced from wealthy nations over the next five years.

For all its lectures to the outside world on the virtues of free trade and globalisation, the Bush administration has not been able to come to the defence of India in this particular instance. In fact, many senior officials of the Republican administration have been making all the right noises on the issue of outsourcing, but opposing the Voinovich Amendment in an election year would have meant sending the wrong signals to Ohio, which George W. Bush is keen on winning this November along with other States in the midwest and the northeast.

The same goes for the Democratic presidential hopefuls, and at least one of them, the current frontrunner Senator John Kerry, has had some serious thoughts about outsourcing. He has said that he is not against the phenomenon per se, but would look at tax changes to discourage the shifting of jobs overseas and would require overseas call centres to identify themselves.

Outsourcing is only one of the issues that India will have to grapple with. Agenda-makers in the U.S. have also managed to place curbs on highly qualified and skilled persons from India entering the U.S. on H-1B visas. From a peak of 195,000 visas that used to be granted, the number fell to 65,000 last year.

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