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Look beyond the obvious

India's IT sector should worry more about rising labour costs than US protectionism.

india Updated: Sep 09, 2010 23:03 IST

The US state of Ohio bans contracts that lead to jobs being outsourced overseas. Déjà vu anyone? In 2005, five states, led by New Jersey, passed or proposed similar legislation. What is the same about these two incidents is that the US was heading for a tight election during an economic turndown. The 2005 laws went nowhere and had no impact on India's infotech services industry. The question is whether the present protectionist sentiment in the US, which includes an earlier increase in H-1B visa fees, will follow previous bursts of anti-outsourcing into oblivion.

A calm assessment of the drivers behind outsourcing seem to indicate India has little to worry about. One, the US private sector is the primary source of outsourcing to India and the recession has only increased the search for cost-cutting. Recent surveys have shown that even in more protectionist Europe 40 per cent of firms plan to increase outsourcing. This is also why calls for India to retaliate by not buying US products are foolish: US corporations are the loudest voice in favour of outsourcing. Two, the specific logic of government outsourcing has only been partially diluted by the recession. Namely, US voters still want better public services without higher taxes and, increasingly, higher government deficits. The most effective way to square this triangle? Outsourcing. Three, the truth is that despite record US unemployment there has been relatively little action against outsourcing. President Barack Obama may take a verbal dig at Bangalore every few months, but his words have translated only rarely into action. Ohio's action affects a handful of jobs going to Central America. The visa hike will take a very small bite out of the $ 50 billion India earns from outsourcing.

The greater worry for India lies at home. Despite millions of underemployed, Indian labour costs have risen so rapidly that it is losing its competitiveness in lower end outsourcing. Firms have said that because of the recession places like small town Ohio can now compete with Bangalore when it comes to outsourcing costs. This is a telling sign of the failure of India's educational system. In the long run, it is not US protectionism but Indian uncompetitiveness that should worry the infotech industry.

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