Font size: 
Succumbing to mounting job losses and pressure from taxpayers, several Western and European nations are looking to adopt stringent protectionist measures to save their local businesses and jobs. Experts say that in a bid to generate jobs, the United States and the United Kingdom are resorting to protectionist policies on the issue of outsourcing, and many more European nations could adopt even stricter protectionist measures.
Europe and the United States combined constitute over 90 percent of India’s annual US$47 billion IT sector revenues.
Although the sector is already facing budget cuts from its global clients, it hoped that tough economic times would create added incentives for clients to move work offshore and keep the sector’s offshore outsourcing – famous for its “value for money” model – on the roll. Instead, it is facing its biggest challenge.
“Almost every government in Europe that has injected taxpayers’ money for bailing out companies is under pressure to offer protection,” said Peter Redshaw, the U.K.-based vice president of IT consulting firm Gartner.
“That means two things; one is that every government will have to introduce more regulations, and then, try to protect jobs. So it will be difficult for the bailed-out companies to say that to be efficient they will need to outsource, and that could have at least a severe short-term impact on India’s IT sector, which derives most of its revenues from providing outsourcing and off-shoring services,” Redshaw said.
According to Gartner, a series of negative events including the global recession, the financial sector crisis, the terror attacks in Mumbai and the Satyam scandal has already slowed down the global IT and business process, or back office, outsourcing from India.
The sector, which grew by 10 percent in 2008, is expected to grow less than 2 percent in 2009. But the protectionist steps that the U.S. and European governments are already mulling over could bring global IT spending further down to a negative 0.7 percent in 2009.
To India, protectionist rhetoric is not a new phenomenon. Each time the United States faced elections in the last decade India, along with China, has been at the receiving end of the outsourcing backlash. Over the last few years, anti-foreigner or anti-immigrant xenophobia has raised its ugly head in the United Kingdom as well.
Nevertheless, until now protectionist rhetoric remained just that – rhetoric. But what’s drawing worry lines across the Indian IT sector is the fact that protectionism is suddenly dominating the policies of almost every government.
“The threat of protectionism for the Indian IT sector comes almost from everywhere,” said Rodney A. Nelsestuen, research director at the U.S.-based IT consulting firm Tower Group.
“Nations across the world are looking at supporting their industries and as a part of that, you will suddenly see taxpayers and stakeholders and all those who contribute to support the government, regardless what the government structure is, will also want to see that the industries are held to account,” he said. “So what we see happening is potential for protectionism, because as a condition for support the governments are saying that we need not only to restore financial wellbeing but also to contribute to domestic job growth.”
Protectionism is indeed widespread and real. In early February, the U.S. Senate voted to impose strict conditions on companies that receive federal bailout money, limiting the hiring of foreigners with H-1B temporary-work visas. Although the final version was watered down from the original, which had called for a blanket ban on H-1B visas, it was still a big blow to the Indian IT sector, which termed the restriction as “irrational.”
An even bigger blow came two weeks later when U.S. President Barack Obama, in his first address to the Congress, said that there would be no tax breaks in outsourcing. “We will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas," Obama said.
The U.K. government too is walking a tightrope between maintaining its global image as “anti-protectionist” and appeasing rising anti-foreigner sentiments against a backdrop of peaking unemployment. Last week British Home Minister Jacqui Smith announced that, for the first time, the government would tighten the rules governing the entry of highly skilled workers.
“We recognize that migration continues to play an important role in the U.K. at the same time as we are giving greater support to domestic workers so that we can all come through the recession stronger,” she said.
According to Nelsestuen of Tower Group, the economic pressures faced by Germany and France “could create an internal pressure to show some protectionism,” while the rest of Europe may offer protection as well to their labor with “some variations.”
Ganesh Natarajan, chairman of the National Association of Software and Services Companies, India’s IT and offshore business services lobby, said, “We are facing an unprecedented situation in the global economy, where short-term emotion rules over long-term pragmatism. And that is a cause for concern for us.”
According to Arjun Malhotra, chief executive officer and chairman of Headstrong, a U.S. and India-based global consulting firm, “The Indian IT and IT-enabled services are facing slowdown, and protectionist measures from the U.S. and Europe are going to make things more difficult for Indian IT.”
Already, according to NASSCOM, the global financial crisis, deepening recession in key regions and currency fluctuations are slowing down India’s IT sector growth. The group said the industry’s exports will grow by 16-17 percent in 2008-09, a neat 8 percentage points lower than the 24 percent growth it recorded in 2007-08.
IT and back-office services exports comprise over 90 percent of the total Indian IT revenue, with the United States and Britain accounting for over 80 percent of the revenues of most Indian IT service firms.
That is why, says Natarajan, “Indian IT has to be watchful and take a mature approach and ensure that no ultra-protection steps come in.”
According to Natarajan, a high-level team from NASSCOM is already talking to top politicians, think tanks and foreign governments to convince them of the benefits of outsourcing. “We are trying to tell them that imposing restrictions may help an economy immediately but dampen economic growth and dampen competitiveness in the long run,” he said.
