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Outsource to India, without compromising US interests

April 01, 2004

The raging debate on outsourcing of high-tech jobs to India misses the most important point: national interests and security.

The problem with outsourcing is not with the efficient invisible hand guiding the economic decisions of individual corporations or governmental units. The American economy is resilient and will eventually replace these jobs with new and better ones.  That is not the main issue.

The main issue here is the particular type of functions being outsourced predominantly to one specific country (India), which makes this a phenomenon of national importance, even national security to the United States. Outsourcing could become a blind race to the bottom, one that could potentially compromise American interests.

First, some important disclosures:  I have significant investments in the stocks of GE, Intel and IBM, companies benefiting from 'outsourcing' high-paying technical jobs from the US to countries like China and India. Two of my siblings are senior professionals in large American corporations, directly engaged in outsourcing of technology jobs to India. I live in New Jersey and shop at Walmart and Dollar Stores without bothering to see where the merchandise is produced. I am a free-market supporter, a former investment banker and teach a course on bond markets at New York University. My teaching job at NYU is not threatened by outsourcing. I am an American who leans towards the Republican party on economic issues.

All this should make me a wholehearted supporter of Outsourcing. Right? Not quite. 

Our national interests must be aligned and synchronised with countries which supply products and services to us. After all, we don't outsource medical services to Cuba. On principle, without regard to economic costs, we boycotted South Africa during its apartheid years. Recently, we refused to use our tax dollars to outsource Iraq reconstruction contracts to French, German or Russian firms. We didn't buy oil from Libya. Our oil dependence on sheikdoms turned out to be a disaster.

In the same vein, as we careen forward on the freeway to creative destruction, we must take a closer look at India, the nation contending to supply us with everything from call centres to computer security.

Superficial observers like Tom Friedman of The New York Times gush about young Indian women newly 'empowered' by call centre jobs. Indian women, in jeans and eating pizzas, are supposed to make us feel good.  Sure. 

But, a closer examination reveals the potential perils of appointing India as the sole supplier of vital software and services to our business and government. 

First, let's deal with the cost saving arguments. The cost advantages claimed are neither permanent nor fair.  The Indian government lavishes generous tax-breaks on outsourcing and IT industries, (zero income tax on most IT outsourcing operations) tax-breaks of a magnitude neither deserved nor needed by the IT industry.

Also Read: Subhash Kak on Globalization and the Knowledge Industry

These tax subsidies from the Indian government come at the expense of the most basic governmental services critically needed by the two-thirds of India that is mired in shameful poverty, samples of which can be readily seen in the silicon gullies in Bangalore, just a few miles from the glittering offices of Infosys and Intel.  In Chennai, another major Indian OutSourCity, no drinking water is available even to vast sections of the middle class. 

More importantly, these cost advantages are not guaranteed to last. India's labor is free and mobile; American and foreign purchasers of this labor compete in a free market, which means there is no ceiling to Indian wages except those set by world markets.  

You might ask: What's wrong with exploiting these cost savings as long as they last; we can always move these operations to other countries or even back to the United States when cost advantages narrow? 

Not so easy. 

These types of service jobs, even those involving call centres, cannot be shuffled around.  Indeed, the types of jobs going overseas are not limited to simple coding but increasingly involve higher-level design and development tasks.  These skills, especially those customised for specific customer applications, are not likely to be readily available in Indonesia, Philippines or elsewhere once these jobs become entrenched in India.

This means that the current outsourcing stampede could make American government and businesses permanently beholden to critical technology services and support from India, just as we have become dependent on energy from the Middle East. 

Outsourcing and India: Complete Coverage 

But, you say, India is not Saudi Arabia or China. India is a democracy. Indians speak English; they eat pizza and wear jeans. Once we get past these superficialities, however, we find that India is not a country we would readily pick as our strategic business partner. 

Although India has been coddling up to the West in recent years, Indians have long been inimical to Western ideas, technology, liberal principles and modernity. Allying itself with the Soviet Union, India labeled itself the leader of the so-called nonaligned movement, and habitually hectored the US at the United Nations. 

India continues to tolerate large-scale piracy of intellectual property, from books to movies to high technology products. 

India is praised for its English-style laws, but the Indian government blatantly reneged on its contract with the largest power plant built by American investors. The Indian government has failed to distribute equitably among its own citizens the large extortive penalty collected from Union Carbide for the Bhopal accident. In the 1970s, India drove IBM and Coke out of the country for refusing to pay political ransom. 

If you dismiss all this as irrelevant baggage from India's past, the current Indian government shows no clear principles either.  The leading party in India's governing NDA coalition is the Bharatiya Janata Party, which rose to power by blatantly exploiting and advocating virulent and fanatical Hindu-first sentiments. The people of India are poised to give this party a larger mandate at national elections scheduled this month. 

Having started a non-winnable nuclear-race in the sub-continent with Pakistan, India continues to refuse to sign the nuclear non-proliferation treaty. 

Indian politicians are trying shake down Coke and Pepsi through 'investigations' of contamination in beverages marketed by these American corporations in India. 

Just last year, when the US sought international support for action against Saddam Hussein, India went AWOL, hiding behind domestic politics. The Indian parliament went so far as to pass a resolution condemning the US-led action in Iraq.  Even after the fall of Saddam Hussein, the Indian government would not offer even token support to the Coalition's peace-keeping efforts in Iraq. India is much more closely aligned with the French and the Germans than you'd guess. 

This is the India that we are outsourcing our guts, lungs and brains to.  

Whether we are buying oil or software, the principle remains the same. We must make sure our suppliers' interests are closely aligned with ours. Let's not kid ourselves. If we went looking for business partners, India would not be the ideal choice.    

As critical functions of the American economy are outsourced to this antagonistic nation, Americans will grit their teeth, and bear the costs and consequences of keeping global markets free. But, as citizens of the only nation championing democracy and free markets, should Americans just shut their mouths and march to the unemployment office? I think not.

We must make vigorous investment in our own educational system and keep our borders open to immigrants to restore critical skills and capabilities. Meanwhile, we can do more. We could demand that our government ask India to change and reform its ways. 

First, we should demand that India must send a meaningful contingent of troops to help the coalition in Iraq and Afghanistan, meaningful in size and commensurate with the global power Indians think India is becoming. 

Second, the US government should demand that the Indian government must source preferentially from American contractors and manufacturers for the ambitious infrastructure building effort under way in India. India's roads, ports, power and water facilities are woefully underdeveloped. American technology and know-how can help speed India's development process while strengthening the commercial ties between the two countries.

Third, the US must demand that the Indian government level the playing field between American and Indian technology firms.  This means India must phase out its tax subsidies to the IT industry and agree to subjecting Indian firms to the same consumer protection laws and other legal liabilities governing American firms in like businesses.

Finally, the US must demand that the Indian government will sign the nuclear non-proliferation treaty if Pakistan agrees to sign the treaty, paving the way for a more peaceful subcontinent. 

A peaceful Indian subcontinent, aligned closely with American interests, is vital if we are going to rely increasingly on Indians providing services to the American economy.     

John Laxmi teaches a course on bond markets at New York University. He is also a board member of the South Asian Journalists Association. The views presented in this article are his own and do not represent those of NYU or SAJA. 

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Number of User Comments: 298

Sub: Keep the ravers out please!

Really Mr.Laxmi, are you so naive to still believe that the rest of the world looks at USA as the 'benevolent big brother'? Kindly refrain ...

Posted by R

Sub: Americans deserve their jobs

I personally don't give a damn about some Indian woman and her new found wealth and don't want anyone to go fight for American unless ...

Posted by karen

Sub: not at US expence

outsourcing is a business deal to maintain the secrecy of the jobwork. secrecy is maintained by US MNC's - they have to otherwise they will ...

Posted by venkatram naidu

Sub: what BS !

Well Mr. Laxmi or Mr John ..... i am amazed by your one sided story. It is a pathetic attempt by an indian-american to project ...

Posted by Abhi

Sub: Outsourcing and american interests.

this article stinks of a superiority complex. The ariter assumes that all the crying about outsourcing is about govt jobs. Wrong. They cry about any ...

Posted by buzz


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