No winners, only losers

The US plans to end tax breaks for firms that outsource work. Such barriers are unhealthy.
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Updated on Feb 25, 2009 09:32 PM IST
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Hindustan Times | By

‘we 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.’ A fragment of a sentence of an hour-long speech by US President Barack Obama has sent a frisson across India’s information technology industry that has just clocked its worst quarter in living memory. The markets, though, had a different take: the Bombay Stock Exchange’s infotech index closed 2.52 per cent up within hours of the chilling reminder of the Democratic Party’s doctrinaire position on offshoring. There are, per se, no tax breaks specifically for American companies that outsource business processes. Mr Obama will have to back up the political rhetoric his Democratic predecessor Bill Clinton paid lip service to with legislative changes in order to punish US firms that stand to make productivity gains of up to 50 per cent by “shipping jobs overseas”.

Principally to India, where 2.23 million people are employed in infotech and outsourcing services, an industry whose revenue is expected to grow 24 per cent in the midst of a global recession. Industry body Nasscom’s latest projection is the industry, including hardware, will bring in $71 billion by 2009-10. Weaning “offending” US companies off the tax incentives available to all of US Inc would, ultimately, depend on the relative benefits. According to some estimates, the tax breaks would have to be of the order of 10-13 per cent for offshoring to lose its compelling business logic. These American companies would then be competing with European rivals that face no such curbs at home. Over the past four years, Europe has been the fastest growing market for the Indian infotech-outsourcing industry as the share of the US has steadily declined to just 60 per cent in 2008-09.

An economic crisis being talked about in the same breath as the Great Depression is likely to provoke atavistic economic impulses. The call for protectionism is gaining unhealthy currency in economies that have supped most off the fruits of globalisation. The world’s reaction to the oil shock in the 1970s should be ample evidence that barriers do more damage than good. This time too, the best hope is that we all get out of this mess together.

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Tuesday, July 05, 2022