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BPO: Bureaucracy bigger threat than US backlash

April 19, 2004

Last week, I had argued that the economic logic of offshoring services is strong. A recent paper co-authored by Nobel Laureate Lawrence Klein argues that offshoring of IT work actually adds to the jobs in the United States. The paper quantifies the net addition at about 150,000 in the current year and projects it to double by 2008.

Also, US multinational companies added some 5.5 million jobs at home between 1991 and 2001, while creating just about half the number in their overseas operations; more importantly, their job creation is proportionately much higher than that of the purely domestic companies.

But turning specifically to the current debate on offshoring services, the biggest benefit is in terms of cost saving to US industry and correspondingly lower prices for US consumers.

According to one estimate, the US financial services industry alone recorded savings of $8 billion over the past four years by offshoring work to India.

In short, the economic logic is so compelling that once the election rhetoric is over, business process outsourcing work transfer to India will keep growing. No wonder companies like IBM, Citigroup, EDS, ECE and so on are adding to their investments in the sector in India.

BPO, of course, benefits us significantly. As Jagdish Bhagwati argues in his recent book In Defense of Globalisation: "Trade enhances growth and...growth reduces poverty...I have always argued for freer trade, not as an objective but rather (in the context of the poor nations such as India, from where I come) as an often powerful weapon in the arsenal of policies that we can deploy to fight poverty."

Whatever the economic logic of offshoring, the bigger worry about its prospects is not the political backlash in the US but whether we ourselves will nip the growth in the bud through our foolish policies and actions.

If this happens, it would not be the first time that we manage to snatch defeat from the jaws of victory. We did that once in textile exports in the 1950s -- a field in which we then had natural advantage -- and then later the manufacturing industry had to suffer because of reservations and labour-insensitive businesses. (Incidentally, we may repeat our performance in textiles once again even as the quotas are about to be abolished, through an exchange rate which makes us uncompetitive with China.)

We should not forget that whatever our current advantage in BPO, there are other contenders in the field. To quote just one example, China is on an English education drive on a massive scale.

There is also the possibility of India-specific prohibition on offshoring as a retaliation against our policies on direct foreign investment, for example, in the retail sector.

Most Asian countries welcome foreign investment in retailing that we continue to ban. The travails of Metro Cash and Carry in Bangalore, about what it can do and cannot, are a case in point.

Ironically, even as we agitate against Metro, we are happy and proud of Indian Oil Corporation's forays in the retail sector in Sri Lanka and Africa.

The retail sector apart, we also have our Institute of Chartered Accountants lobbying hard to prohibit foreign accountancy firms from offering auditing services in the country.

With what logic can we argue with the US that the recently imposed ban on offshoring of government services is unfair when we refuse to allow even onshore foreign firms from offering auditing services -- that too, when 99 per cent of their employees in India are Indians? Such stances will only strengthen the backlash against offshoring of business processes to India.

However, the biggest danger to our success comes not so much from these policies as from our bureaucracy. Former GE Chairman Jack Welch, after whom its research centre in India is named (currently employing 1,500 researchers, a third of them PhD-holders), had this to say in a recent interview to BusinessWeek: "India is a great intellectual place, but it never got rid of the British bureaucracy. China, on the other hand, is going to be a fierce competitor."

Take the recent issue of taxation of BPO work in India. Reports convey that several BPO transactions have been held up because of the worry on taxation issues. Nor would the recent experience of Ten Sports about the sanctity given to its contractual rights by our legal system be reassuring to people who would like to transfer work to India.

Does the public's interest in seeing the cricket match make it a matter of "public interest" on which the court based its decision? Would the same logic apply to Amitabh Bachhan's new film and the rights of the distributor? Frequent bandhs, paralysing business life, also damage our reputation. So does sloppy work. The recent cases of withdrawal of contracts from Indian companies by Lehman brothers, Dell and Capital One are hardly an advertisement for India.

Two thoughts come to me on our long-term concerns: How long will, say, the call centre business survive with improved Internet-based communications? And will the changing demography in Japan and Europe mean far greater need for importing services? What will they choose between increased immigration (and all that it means to the ethnic mix) and far greater recourse to offshoring? 

What the current offshoring scenario does evidence, however, is the applicability of the law of unintended consequences: remember, we opposed, not so long ago, free trade in services as part of the World Trade Organisation's treaty negotiations?


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