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India's outsourcers fight to block trade barriers

Joe Leahy | March 30, 2009

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Ameet Nivsarkar, the Indian technology industry lobbyist, has had a lot of time on flights between New Delhi and Washington lately.

Mr Nivsarkar, who handles international affairs for India's outsourcing industry group, the National Association of Software Services Companies, is running a campaign to try to head off protectionism in the US as the recession there bites.

 "We understand that the US has lost 4m jobs in just one quarter and the economy there isn't showing signs of bouncing back any time soon, so there is tremendous pressure on elected representatives to show they are doing something on unemployment," Mr Nivsarkar says.

While most companies in developing countries that export to the west are worried about protectionism, the stakes are high for India's outsourcing industry.

India's total export income from providing software and other outsourcing services to clients in developed markets is expected to be worth $47bn in the fiscal year ending this month, compared with $40.4bn a year earlier.

The India-based staff of companies such as Tata Consultancy Services [Get Quote], Infosys Technologies [Get Quote] and Wipro [Get Quote], the nation's outsourcing industry leaders, provide services for clients in foreign countries ranging from writing software to handling their mortgage processing operations.

The industry has delivered annual growth of up to 30 per cent in the past decade.

But this year it has been caught in a pincer effect from the woes of the financial sector in the US and the UK, coupled with rising unemployment in developed markets, which has revived the political debate about whether outsourcing steals people's jobs.

This debate threatened to blow up into an international trade issue last month when the US government signed off a $787bn stimulus package that included a 'Buy American' clause for some US public works and building projects.

The move added to concern in India over a speech in which President Barack Obama said he would seek to end tax breaks that benefited companies that outsourced jobs overseas.

The US measures were "not in keeping with the spirit of global co-operation", Pranab Mukherjee, India's finance minister, said this month.

The move has added to negative market sentiment over India's information technology sector, which even before the downturn was under pressure from rising costs and growing competition from global outsourcing companies.

Some financial services groups have also been seeking to "on-shore" or "near-shore" support functions in UK regional cities.

Stocks in India's IT sector fell 46.1 per cent in 2008 compounding losses from the previous year. They were hit again in January when B. Ramalinga Raju, the former chairman of Satyam Computer Services [Get Quote], the industry's fourth largest operator, admitted manipulating his company's accounts.

Rajiv Mehta, analyst with Mumbai-based brokerage India Infoline [Get Quote], forecast the sector's revenue would be flat in the year ending March 2010, compared with about 10 per cent growth in the present fiscal year and 25 per cent the previous year.

In addition, Indian outsourcers would likely have to sacrifice some of their margins, which usually average between 20 and 30 per cent. "You will have to share with clients that are struggling some of your gains by sacrificing margins and offering lower prices," Mr Mehta said.

Nasscom's Mr Nivsarkar, however, argues that while times are tough, too much has been made of the threat to Indian outsourcing from the Obama administration.

The threat to tax breaks, he argues, is not against those companies that use outsourcing services but against those that invest outside the US to avoid tax - a different issue altogether.

The main problem for Indian outsourcing companies is moves by US politicians such as Senator Chuck Grassley to curb the "H-1B" visa programme that lets US companies hire up to 65,000 foreigners a year.

American politicians argue that the programme, which is heavily used by Indian technology companies to provide "onshore" support to their clients in the US, is contributing to unemployment among Americans.

Mr Nivsarkar said the concern was misplaced given that the visas benefit primarily technology workers while most of the job losses in the US are in other sectors, such as manufacturing.

Copyright The Financial Times Limited 2009

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