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Mainstream, Vol XLVIII, No 46, November 6, 2010

‘West is West’: New American Protectionism and the Indian IT Sector

Wednesday 10 November 2010, by K M Seethi


Globalisation is often understood as a process that is identical with liberalisation or the opening up of the local and national borders to the global market. But the process as it has been underway is much more complex than this simple or mechanical linkage between globalisation and ‘open door’. Even as there has been very significant liberalisation in recent years, this has been paralleled by the continuation or even the intensification of protectionism in some countries, including the major developed countries. For instance, the internationalisation of intellectual property rights (IPR) regime through the WTO has led to increased monopolisation, especially by transnational corporations, that are better able to charge higher prices for their products than if there were greater competition. Also, the high subsidisation of and high tariffs on agri-cultural products constitutes the continuation of high protection of the agriculture sector in the rich countries. Evidently, the policies associated with the globalisation process are a strange blend of liberalisation and protectionism. The incongruity is even more heightened by the fact that in some important instances developing countries are asked to undertake more intensive liberalisation, whilst the developed countries are determined to retain or even increase protectionist policies.

What techno-capitalism promoted for long has been the lifting of all controls and the eventual ‘rollback’ of the state in every sphere of human activity. Protectionism has been detested as something like a ‘hangover’ from the Keynesian welfare capitalism. However, the global meltdown has taught them many bitter lessons. The countries in the European Union and the United States have now ‘legitimate’ second-thoughts—again at the expense of others. The Obama Administration’s latest policy legislation entitled “Border Security Bill” is a clear case. It was only recently that the American Congress passed the $ 600 million dollar ‘Bill’ and President Barack Obama signed it amid protests from India’s $ 50-billion outsourcing industry, which would have to fund the programme with more-than-double increases in work permit fees. The new legislation raised
H-1B visas fees for skilled Indian workers from $ 320 to $ 2320 and raised fees on L-1 visas (for employees of multinational companies transferred to the United States), from $320 to $ 2570. The fee money is slated to go toward 1500 new border agents and new unmanned drones along the US-Mexican border. India’s National Association of Software and Services Companies (NASSCOM) forewarned that the new law would cost the Indian IT sector, expected to be the most affected sector, $ 200 million-$ 250 million a year and that it violates WTO conventions. NASSCOM intimated in a statement that New Delhi may fight the measures with the WTO.

Senator Charles Schumer, who piloted the Bill, said that it would be a “cost effective” way to pay for immigration control and aims to end exploitation of US visa laws by private companies—such as Wipro, Tata, Infosys and Satyam. “This is a historic investment in the safety and security of our country, and it is bipartisan and fully paid for,” said Schumer in a statement. The Indian IT companies argue that the law unfairly discriminates against Indians seeking US work visas. Many agree that the law reflects an overwhelmingly protectionist frame of mind and would promote protectionism and flout international trade practices.

India lodged a formal protest against the legislation that sought to raise funds for the Mexico border security by raising the visa fees by more than double for Indian tech professionals. In the absence of a social security agreement with the US, Indian industry already bears the brunt of double taxation while operating in the US economy. The hike in visa fees will obviously make the business climate worse. According to the Indian business community, while the need to secure greater funding for strengthened security along the US-Mexico border is well understandable, illegal immigration issues are not linked to the temporary movement of skilled professionals especially when India contributed nearly $ 105 billion in revenues and created over 3,00,000 jobs in the US during the last several years. In a letter to the US trade representative Ron Kirk, Union Commerce and Industry Minister Anand Sharma said that the legislation would have huge cost implications for Indian companies that send professionals to the country to execute projects. It was estimated that the legislation would have an additional cost implication of over $ 200 million annually and adversely impact the competitiveness and commercial interests of Indian companies sending professionals to undertake projects locally for customers in the US.

THE new American law is seen as reflecting the political misuse of security concerns to appease local workers in the run-up to the Congressional elections in November by penalising foreign companies using legitimate means to deliver IT or IT-enabled services. America’s stated concern is to strengthen security along Mexico’s border with the United States by hiring another 1000 border patrol agents and 500 immigration and customs officials, besides deploying additional drones to monitor the border. With this drive against illegal Mexican immigrants at the border estimated to cost around $ 600 million, the legislation seeks to finance the cost of strengthening border security by hiking visa fees paid by companies employing more than 50 people in which more than half the work force consists of temporary migrants holding H-1B or L-1 visas.

According to C.P. Chandrashekhar, the legislation has political aims. It seeks to appease two constituencies in the run-up to elections in November this year. The first is related to the local population in states like Arizona which used to complain that illegal immigration across the southwest border has gone out of control. Secondly, the US workers who having just come out of a recession are faced with inadequate employment recovery, and see foreign workers as outcompeting them by underselling themselves. It is true that the employment scenario is so compelling for the Obama Administration. Reports say that nearly 30 million Americans—one out of every six workers—are either unemployed or underemployed. Long-term joblessness has reached levels not seen since the Great Depression, with nearly half of the officially unemployed without a job for more than six months. Of these, 1.5 million have been out of work for 99 weeks and have exhausted all their benefits and extensions. In September 2010 alone, the US lost 95,000 more jobs, up from 57,000 jobs lost in August and the fourth straight month of net payroll reduction. The combined job losses for July and August were also revised upward by 15,000. Separately, the US Bureau of Labour Statistics said it will revise upward the number of job losses by 366,000 for the year lasting from March 2009 through March 2010.

Obama’s new legislation is undoubtedly protectionist in nature since foreign firms would be employing a high share of temporary skilled workers brought from abroad and therefore would be more affected by this particular levy. Curiously, the legislation was passed by unanimous consent and signed into law very quickly, pointing to the political consensus around the issue. President Obama is apparently more determined than many Republicans on bringing jobs he sees as diverted abroad or to foreigners back to Americans.

For India, the new measure does not augur well. The Indian IT industry has, in recent times, been characterised by a much faster growth of the BPO segment. The downturn in 2008-09 signalled the beginning of a new world order and a paradigm shift in the way IT-BPO industry operates. The industry viewed this crisis as an opportunity, by not only exhibiting resilience but also sustaining its growth. The revenue aggregate of IT-BPO industry is expected to grow by over five per cent and reach US $ 73.1 billion in 2009-10 as compared to US $ 69.4 billion in 2008-09. The Indian software and services exports including ITeS-BPO exports is estimated at US $ 49.7 billion in 2009-10, as compared to US $ 47.1 billion in 2008-09, an increase of 5.5 per cent. The IT services exports is estimated to be US $ 27.3 billion in 2009-10 as compared to US $ 25.8 billion in 2008-09, showing a growth of 5.8 per cent. ITeS-BPO exports is estimated to grow from US $ 11.7 billion in 2008-09 to US $ 12.4 billion in 2009-10, a year-on-year (Y-o-Y) growth of six per cent.

The Information Technology Annual Report 2009-10 of the Ministry of Communications and Information Technology, Government of India says that the US and UK continue to be the largest export markets (accounting for about 61 per cent and 18 per cent respectively) making the industry extremely vulnerable to developments in specific markets. Over the past few years, revenue growth from US has lagged other geographies, but in 2009-10, the trend has reversed, with this geographic region driving revenue growth. Historically, US has displayed increased IT spending. The impact of the recession has been felt the most in the US, and consequently cutting costs and increasing competitiveness through outsourcing is once again the focus here. The Continental Europe and the UK have lagged overall revenue growth as companies based out of these regions are yet to firm up growth plans post recession. Indian vendors are actively developing the Asia Pacific region with a growth rate of 10 per cent in 2009-10. Japan and Middle East offer significant untapped potential. However, Obama’s new legislation will considerably affect the prospects of Indian IT sector. And as is perceptible from the present controversy over the visa fee hike, the IT sector is still dependent on onsite delivery of services using cheap Indian staff rather than more expensive local workers, making it vulnerable to changes of the recent kind in rules governing the movement of temporary workers. The developing world has finally come to realise that globalisation creates its own inner contractions the consequences of which will have to be borne primarily by the countries in the ‘periphery.’ That’s why many countries (like India) are now “Looking East”.

The author is Professor and Chairman, Centre for Cross-National Communication in South Asia, School of International Relations and Politics, Mahatma Gandhi University, Kottayam.

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