Unwarranted Restrictions on Competition

The decision of the President of the United States, Barack Obama, to end tax concessions given to U.S. multinational companies involved in outsourcing is disappointing, but not surprising. Obama and his associate, Hillary Clinton, had been vocal about their opposition to outsourcing much before the election. In the context of outsourcing, their fresh proposal is not only adverse to the current global economic condition, but there are also doubts of whether they will actually create new jobs or increase tax revenues. The interests of some U.S. companies are affected by IT-related work being sent to outsourcing companies in India and other countries, but on the other hand, their own multinational companies are also benefiting from this.

U.S. governments have always been committed to two issues: the first, protecting the global economic interests of U.S. companies, and second, creation of new jobs. But here there is a contradiction between both goals, and to make one happy it is required to upset the other. The U.S. president is ‘shocked’ by the present tax structure that gives more benefits to companies creating jobs in Bangalore than those that do the same in American cities. Obama has the right to think about and take the right steps in the economic interests of the country, but he is forgetting that outsourcing is actually a beneficial deal for the U.S. in these times of recession. Outsourcing is the source of its business intelligence enterprise and national savings.

This issue is not just limited to creating jobs. The issue is also about maintaining the competitiveness of U.S. companies. The advantage of getting cheap services from India provides them with the ability to compete with IT companies of other countries. Through the medium of outsourcing, they are able to hire the services of well-educated and skilled Indian IT experts at extremely low costs. If this was not true, then India would not have been so popular in this case.

In the U.S., many misconceptions have been created about outsourcing to India, such as most of the work in this area is taken by Indian companies. However, the truth is that India’s contribution to the world’s outsourcing business is not more than five to six percent. And anyway, outsourcing has not been created as per the wishes of Indian companies or for creating jobs in India. This idea was born and developed in the Western world and it is the Western world that has received the most benefits from it. Employment for Indian youth is only a related development of this process. If there are any interruptions in this process, then Americans will face more losses compared to Indian companies because the process of outsourcing is based on the pure business profit-loss principle.

Whether the business is in America or Asia or in the area of IT or manufacturing, decreasing expenditure and increasing profit is its priority. And it will remain the same in the future.

There are some things that we can study in Obama’s statement. Firstly, he is keen in increasing tax revenues. This he has indicated by deciding to remove tax concessions being given to the top two percent of the richest people in the U.S.

In the U.S., the expenditure on outsourcing is counted as normal expenses and there is no corporate tax on it. This means a saving of 35 percent. These are the tax savings that Obama wants to end by 2011 and it will increase the expenses of companies by 35 percent. Barack Obama believes that this will discourage U.S. companies involved in outsourcing, although this is not going to happen.

If we compare the 70-75 percent savings that are achieved with Indian services, even after paying this tax, U.S. companies will still profit. If the Indian government offers new economic concessions and benefits, then this loss can further be reduced. Obama’s message to companies that park their huge profits in foreign countries is also clear. He wants this money to also be brought under the purview of U.S. taxes. His concern is genuine. If U.S. companies are enjoying tax-free concessions in foreign countries and are evading payment of U.S. taxes, then he has the full right to repair the corporate tax structure and stop tax evasion. Obama should not forget that if U.S. companies lose their competitiveness or limit their foreign investments, then the benefit will go to its European rivals.

As a result of these new developments, the chances of immediate adverse effects on the business of Indian IT outsourcing companies are doubtful. However, Obama through this has given a message about his long-term policies that the thinking of his government is definitely not as flexible as that of the Bush government. To deal with the recession, he is even ready to take protective measures that are not favorable for the globalization of an economy.

Indian companies also need to increase their scope. After all, why should we restrict ourselves to U.S. and British companies? Why shouldn’t we expand our businesses to Japan, Australia and other European countries? Why shouldn’t we try to focus on expanding our domestic markets? Why should outsourcing be only limited to IT? Why should we not expand it to other areas like manufacturing, health, engineering, cinema, education, marketing, media, finance, law, etc. If our government and our IT companies want, they can deal with this problem by taking it positively and using it as an opportunity.

[Balendu Daaghich: The writer is an independent commentator]