India's
IT industry does protest too much. Its latest peeve
is that the US has decided to steeply hike from $2300
to about $4300, the cost of a H-1B visa required for
entry into the US of temporary skilled workers from
abroad. The new Border Security Bill passed by the US
Senate and signed into law by the President, which incorporates
the relevant provisions, is in its view protectionist
and discriminatory. It 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.
The industry is also peeved because Charles Schumer,
one of the Senators who piloted the bill through Congress,
referred to Indian IT outsourcing companies as ''chop
shops'' – derogatory slang for sheds in which stolen
cars are stripped of their parts for subsequent sale.
The Senator has subsequently clarified that what he
meant was that they were ''body shops'', and has apologised
for his error. But, with the debate referring to the
fact that the largest users of H-1B visa are IT ''giants''
such as Infosys, Tata Consultancy Services, Wipro and
Mahindra Satyam, the ''body shop'' label is also an indictment
of an industry that sees itself as a technology leader
and a symbol of India's post-reform success. It suggests
that the Senator has not retracted his view that foreign,
especially Indian, IT companies ''outsource good, high-paying
American technology jobs to lower wage, temporary immigrant
workers from other countries.''
But the Indian government too has come out in defence
of its post-reform, poster-child. India's Commerce Minister,
Anand Sharma, has reportedly written to the US trade
representative, Ron Kirk, protesting the new legislation,
describing it as ''inexplicable'' and stating that it
would have ''an adverse impact on the competitiveness
and commercial interests of Indian companies sending
professionals to undertake projects locally for American
customers in the US.'' An estimate, of uncertain reliability,
doing the rounds is that the US move would increase
visa costs for Indian companies by as much as $200 million.
To clarify, the bill while having an impact on the Indian
IT industry is not directed solely at it. Its 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
bill 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.
It is obvious that the Bill is political in nature in
that it seeks to appease two constituencies in the run-up
to elections in November. One is a section of the local
population in states like Arizona which feels that illegal
immigration across the Southwest border has gone out
of control. The other is American 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. The Bill is also protectionist
in intent, since foreign companies would be employing
a high share of temporary skilled workers brought from
abroad and therefore would be more affected by this
particular levy. Interestingly, the bill was passed
by unanimous consent and signed into law very quickly,
pointing to the political consensus around the issue.
What is surprising is that the Indian industry expected
the US government, Democrat or Republican, to act differently.
In fact President Obama is possibly more intent than
many Republicans on bringing jobs he sees as diverted
abroad or to foreigners back to Americans.
Part of the reason the industry refuses to recognise
that it is prone to actions of this kind is possibly
the fact that it has been pampered too much at home.
More than 10 years after it was first granted special
tax benefits, the industry, which sees itself as being
in the forefront of an emerging knowledge economy, as
having pioneered a global delivery model, and could
perhaps boast that it has delivered the largest number
of first generation millionaires in the country, fights
hard to keep those concessions. In doing so, it is not
above board. It constantly demands that the government
''keep-off'', arguing that its rise has been driven purely
by private initiative, when actually implicit subsidies
(tax concessions), liberal trading rules and infrastructural
support from government agencies have been crucial in
delivering large profits and driving market valuations.
Nothing is more revealing than the fact that an Annexe
on revenues foregone in the papers relating to Budget
2010-11 estimates that in 2008-09 the ''effective tax
rate'' on 8166 firms identified as ''Software Development
Agencies'' was 11.8 per cent and that on 6493 firms identifies
as ''IT Enabled Services, BPO Service Providers'' was
13.1 per cent. The effective tax rate is the ratio of
total taxes paid [including surcharge and education
cess but excluding Dividend Distribution Tax and Fringe
Benefit Tax] to the total profits before taxes [PBT].
This compares with statutory tax rate of 33.99 per cent
which should have applied if no concessions were being
provided. Since input and capital costs are low in this
service industry, and cheap skilled labour is its strength,
profits do constitute a high share of per worker incomes.
This concession is therefore a bonanza, which even today
the industry zealously lobbies for.
The industry is also privileged relative to the IT hardware
sector. While the early thrust of information technology
policy in the country was to build a strong hardware
industry, at least in the area of small computers where
the domestic market was bound to be large in course
of time, since the 1990s regulations on access to imports
of hardware have been completely liberalised and duties
have been slashed to extremely low levels to support
software and services export units. In the event, the
domestic hardware market has been swamped by foreign
players importing complete knocked down machines. Domestic
demand is largely serviced by foreign brands, with a
few stray domestic players accounting for a declining
market share, while the domestic ''industry'', including
players who started in hardware such as Wipro are focused
on the services export market.
Given these special privileges granted over a prolonged
period, one question that has constantly been posed
is whether there are adequate reasons to justify their
provision. One ground on which it can be justified is,
of course, the fact that the industry is an important
foreign exchange earner. With manufacturing having failed
to live up to the government's claims on what liberalisation
would do to India's industrial competitiveness and export
success, this is indeed a contribution that cannot be
belittled. But that definitely does not warrant a set
of tax concessions that make the effective tax rate
less than half of the statutory rate and remain in place
for as long as they have. Further, if a visa fee hike
can be labelled a protectionist measure that violates
trade rules, a tax concession of this kind can be attacked
for amounting to an export subsidy that does the same.
The other ground on which prolonged and generous government
support can be justified is that the industry is a technology
leader and furthers India's push into high technology
exports. This is an area where both evidence is thin
and unanimity lacking. The industry argues that even
though it is a services exporter, it has over the years
moved up the value chain and into higher margin, high
technology areas, rather than surviving on the legacy
of cheap skilled labour that the Nehruvian import-substituting
strategy has left behind. However, while all of the
industry cannot be dismissed as a high tech sweat-shop
exporting cheap skills through actual (H-1B visa-based)
or digital migration, there are a number of features
of the industry that are disconcerting given its lifespan
and the support it has garnered from government.
To start with, while the technology issue remains unresolved
and the claims of high- or low-technology dominance
unproven, it is true that there are very few software
product markets where the Indian industry has found
a foothold and even fewer proprietary products in which
it commands significant market share. India is a service
provider and matters in products only as a supplier
of hired engineering support. Secondly, the industry
has in recent times been characterised by a much faster
growth of the BPO segment, which on no account can be
considered a high technology area. Third, the US still
accounts for around 60 per cent of the industry's exports
and the UK for around 18 per cent, making the industry
extremely vulnerable to developments in specific markets.
And finally, as is evident from the current controversy
over the visa fee hike, the industry is still significantly
dependent on onsite delivery of services using cheap
Indian staff rather than more expensive local workers,
making it susceptible to changes of the recent kind
in rules governing the movement of temporary workers.
Put these together and the weaknesses of an industry
that has received privileged treatment for more than
a decade seem to be one too many. Rather than using
its lobbying strength to conceal these weaknesses so
as to continue to be favoured, the industry could look
inwards and address some of these problems. It obviously
has the clout to still influence domestic government
policy. But to believe it can pressurise the government
of a foreign country which is its main market to ignore
its own domestic compulsions is to be overcome by hubris.
Maybe the problem is too much protection and pampering
at home. Depending less on government support at home
could possibly encourage the industry to adopt strategies
to meet the rising competitive challenge abroad without
having to pay workers less than the going wage.
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