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Outsourcing: Foreign policy issues - Views on News from Equitymaster

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Outsourcing: Foreign policy issues
Jun 28, 2007

The rapid rise of the Indian IT Industry and offshoring in particular has long term and deep economic impact on the Indian society. This also ultimately affects foreign policy considerations. The following would be some of the issues that will have some foreign policy relevance when we consider the rise of India as an increasingly important destination for the outsourcing of software services. Firstly, the economic weight of India within Asia has been on the rise since 2002. It will continue to be an important player in software outsourcing sector with major Indian IT companies moving up the value chain. China and Philippines have started competing with India in outsourcing, but India’s significant lead-time, estimated at 5 to 10 years, is a major advantage. What will also help India has the maximum concentration of the highest level of certification for software companies in the world. This implies a certified and internationally accepted high quality level from these companies.

The Indian climb up the value chain is indicated by the large R & D centres opened by many major western software producers. The IT sector in general and outsourcing in particular has been the major driver of the economic rise of India in the world. This enhanced visibility to the Indian IT sector helps give it more weight in international forums.

Secondly, in the run up to the US Presidential election due in 2009, outsourcing of jobs to India has been a matter of great debate. There is a legitimate worry on the part of Indian companies about a slowing down in outsourcing that could hurt them in the near term. However, the US data shows actually a rise in employment, economic theory suggesting the farming of labour-intensive grunge work being passed on to the low-cost countries has actually helped the US economy to grow faster than what it would have. Thus while there is a lot of noise in the US over ‘losing’ jobs, the Indian government would probably be tested hard on its ability to be diplomatic.

The third looming concern given the projected growth rates in the Indian IT sector and outsourcing, is the expected huge shortfall in the human capital. The entry of foreign universities will stir up a number of controversies (example: case of CFA Institute Vs. ICFAI). The developed world is interested in the export of universities in India to exploit the Indian resource crunch. The Indian education policy needs to be urgently beefed up to take into account the increasing privatisation as well as quality issues in higher education.

Fourthly, the handling of IT professionals wanting to reverse the ‘brain drain’ by our ham handed government leaves much to be desired. Recently two small IT companies in Bangalore closed down operations and returned to ‘high cost’ Silicon Valley thanks to cost overrun and unfavourable government policies in India!! One of the most important reasons for the success of the software industry and outsourcing in India has been the network of Indian IT professionals in Silicon Valley having kept their contacts with their counterparts in India. A sizeable number of them have come back. How well the Indian government uses these networks to anticipate any unfavorable legislation and how well this mobile pool of labor is utilised for the seeping of technology inside India is another aspect that merits consideration.

Fifthly, the Indian government and private sector have just begun to understand the importance of lobbying in the US (example: Indo-US nuclear deal). Well over US$ 1m was spent in the recent efforts to convince the Senate to pass the nuclear agreement. Having learnt the usefulness of lobbying, how the government and private sector utilise it to ensure non-passage of legislation detrimental to outsourcing as well as to raise the limits on H1B visas would be a relevant issue.

Conclusion
While Indian IT companies will continue to survive this negativism surrounding them, the larger companies will benefit over the smaller start-ups. It is worth remembering that India accounts for 3%, a tiny share as yet, of the global software market. Despite that its visibility and the impact in both economic as well as foreign policy terms is so large. As this share rises, the impact is going to be much larger and the current problems are going to keep pace or newer ones are going to emerge. How well India tackles the foreign policy issues related to offshoring while protecting its domestic talent will be important. IT and the productivity gains it spawned have helped India almost double its growth rate in real terms over the last few years. But there are miles before we sleep on these issues and the Indian government will have to be more pro-active on issues concerning the IT industry for it to continue contributing the country’s overall growth.

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