A day after US President Barack Obama reiterated his plans for creating new jobs, amid rising double-digit unemployment in the US, India’s nearly $60-billion outsourcing industry remained hopeful that its top export market will continue to grow with more companies seeking to cut costs by outsourcing work to low-cost locations.
On Wednesday, Mr Obama vowed in his first State of the Union speech that he will make creation of local jobs his top priority in 2010, and hinted that his government could end tax breaks for companies creating jobs overseas.
This is not the first instance of Mr Obama upping his anti-outsourcing rhetoric. In May last year, he had said American companies’ shipping jobs overseas will be required to pay more taxes, and that tax-deferral benefits for such companies will be ended. “It’s a tax code that says you should pay lower taxes, if you create a job in Bangalore, India, than if you create one in Buffalo, New York,” Mr Obama had said.
Som Mittal, president of Nasscom, the country’s association of software exporters, said Mr Obama has several short- and long-term pressures to cope with, but that does not mean any significant impact for the outsourcing industry. “We will be their solution and not the problem,” he said in an interview.
The proposed ‘jobs bill’, which is aimed at creating more local employment in the US, is focused at reviving manufacturing, retail and construction jobs. Last year, Mr Obama had suggested that his government would end tax incentives for American companies creating jobs overseas by removing ‘deferred tax’ on foreign income for these companies. However, no specific proposal has been brought forward to outline the execution of this move.
Mr Obama also mentioned that his government would double America’s exports and also work on the bilateral trade agreements. “These cannot be achieved by following protectionism,” said Mr Mittal.
Experts argue that such protectionist measures are short-sighted because many US companies derive significant revenues from outside the country, and any protectionist stance could lead to a backlash in other markets. Some of the top outsourcing customers, include Citigroup, GE and JP Morgan.
For instance, Citigroup in 2007 generated 52% of its revenues outside the US, and over 60% of its workforce operated from abroad, as its banking business spanned 100 countries. Citigroup’s international revenues stream kept pace through 2008, despite the financial crisis, and amounted to a whopping 74% of the total revenues. Outsourcing experts such as Rodney Nelsestuen, senior research director at US-based TowerGroup said with top US banks seeking to reduce their operational expenses outsourcing could rise, and not contract as feared.
“Outsourcing will increase as a measure to reduce operating costs to offset other cost increases such as a (still not approved but only proposed) new tax,” said Mr Nelsestuen. “The pass-through of an additional cost of business will likely be distributed throughout the customer and supply chain, resulting in higher cost financial services, lower margins, strategies to reduce operating costs, here is where outsourcers will see an expansion of outsourcing, not a contraction,” he added.
Indeed, when Mr Obama proposed that he will attempt to recover over $100 billion from top US banks by introducing new taxes, local sourcing experts said there was no clarity on such proposals to analyse any impact on offshoring. “Increased tax could lead to generally lower investment and greater cost reduction initiatives (such as offshoring),” said Andy Efstathiou, director of US-based research firm NelsonHall’s banking sourcing program.
“Actual bank behaviour would depend on the nature of the tax, the administration has not stated how it intends to implement the tax, it has stated the tax would only last for a few years,” he added.
