The Hindu Business Line : A stormy passage to India

The outsourcing of jobs by American corporates in pursuit of cost cuts and better efficiency has provoked a backlash in the US and become part of the Presidential electoral campaign. These rumblings have implications for India's macroeconomic policies.

ONE of the manifestations of globalisation is the outsourcing of IT-based jobs from the US, the UK and Europe to India, China and the Philippines. Outsourcing is the process by which certain jobs are done outside the company or the country.

This has been made easier in respect of many services, such as telephone enquiries, accounting and financial security analysis, thanks to the coming of Internet and easier access. The corporates of America, in their efforts at cost-cutting, are trying to get some of their services performed efficiently at offshore locations. This has naturally provoked considerable anxiety in the US, which faces the threat of jobs being lost.

The backlash against outsourcing has become part of the Presidential electoral campaign in the US. Candidates have made no secret of their opposition to continued outsourcing of jobs. This has become particularly "opportune" as the US has been recently having jobless growth.

The issue has become so serious that the US President, Mr George Bush, recently signed a Bill restricting the availability of government funds to contracts involving offshore arrangement. This followed similar Bills in certain States.

It is a truism that free trade in goods and services inevitably means export of jobs in return for import of goods and services. When, for instance, we buy capital equipment from the US or Europe, we are not only importing the raw materials embedded in it but also the labour expended on it. So, when the US preaches the virtues of free trade in goods and services to the rest of the world, it should have been aware that a certain number of jobs would be lost in developing countries which open their markets to goods and services. Laws of free market should operate in both cases.

If the Indian software/BPO sector provides services cheaper and more efficiently to the US consumer, so be it. Jobs will have to disappear in the US and appear in India. While of course there is the pain of transition, it is no less so when India faces large-scale imports from developed countries.

The politics of the loss of jobs is, of course, unsettling. The increased number of unemployed causes a "negative" reaction. Hence, the flurry of legislation and protests. In all this, the voice of the US corporate sector in defence of outsourcing is relatively muffled.

While corporates do increase their profits by outsourcing, they have, however, been relatively less vocal in rising to the defence of the cause. A clutch of economists has, however, pointed out that outsourcing is in the ultimate analysis beneficial to the US itself. It enables the delivery of services at a cheaper price to consumers. The savings so made are available for reinvestment, which can create more jobs and also create greater competitive strength.

A recent statement to this effect by Prof Gregory Mankiew, Chairman of the Council of Economic Advisers, stirred a hornet's nest. Dr Mankiew, a brilliant economist, was hectored for having told the Congress that if a thing or service could be produced more cheaply abroad, then Americans 8

were better off importing it rather than producing it at home.

To quote him: "When a radiologist in India analyses an X-ray sent to him via Internet, the patient benefits by virtue of lower costs at equal efficiency". Prof Mankiew was only endorsing the elementary principles of comparative advantage enunciated by the famous economist, David Ricardo. This brought on Prof Mankiew the fury of the Speaker of the House of Representatives, Mr Jennis Bastart, a Republican himself.

In the controversy that followed, Mr Bush himself was lukewarm in his support of his own Chief Economic Adviser. This proves the validity of the statement made by a famous Governor of the Bank of England that he had recruited his economic adviser to justify the decisions he made and not to provide the rationale for decisions to be made.

Obviously, in this connection, appropriately remembered here is the statement attributed to one of our own Finance Ministers, who is supposed to have put a notice board outside his office saying, "Men at work, economists stay away". Politicians want to keep a polite distance from economists when the advice offered is unpalatable politically, as it happens in Prof Mankiew's case.

One Democratic candidate went to the extent of calling corporates that resort to outshoring "Benedict Arnolds", referring to the traitor who had betrayed the American revolutionaries in the war of independence. Feelings run so hard that if the Democrats do return to power, the fate of BPO may be in jeopardy.

The hype about a 40-50 per cent annual rate of growth in BPO earnings has to keep this in mind. Let us not put our "forex" plans in jeopardy by keeping them solely linked to the US.

How did China handle the similar problem faced by Americans who lost their jobs as a result of manufacturing imports? The "hollowing out" thesis as a counter to Chinese imports was strongly opposed by US corporates themselves, who had turned a neat profit from their outsourced venture in China.

Although there has been anger at the loss of jobs, the difference between China and India is that in outsourcing in respect of services, US corporates are not involved too much. US corporates outsource services through mostly Indian-owned entities, unlike the Chinese case. The Chinese are also admittedly better at lobbying the US-elected representatives than the Indian side has been.

The recent visit of the US Trade Representative was an eye-opener in regard to this controversy. He pointed out quite frankly that free trade was a two-way street. If outsourcing advantages were to continue to come India's way, India should also reduce its tariff and non-tariff barriers to imports.

The Commerce Ministry has a difficult task on hand when it wishes to square the circle — meet the growing ambitions of Indian BPO operators, while countering the objections of US politicians and job-seekers. We have to consciously strive to meet the US demands for reciprocity at least half-way. There is no point, for instance, in our Ministry of Civil Aviation tilting in respect of aircraft purchases to the French side when it could have easily been given out as an order to American aircraft manufacturers.

India's purchase decisions in respect of aircraft, if directed to Boeing, could have created quite a few jobs n Seattle US, Boeing's headquarters even as we draw more BPO offerings from US corporates. This would have been an effective counter to the critics of outsourcing.

The problem about outsourcing is at heart political. It has to be solved by imaginative political and economic decisions on the Government of India's part. It is not right to dismiss the threat posed by US legislation as a cloud no bigger than a man's hand.

The recent rumblings in the US political scene should give us a warning as well as sounding a note of caution. We have simultaneously to formulate our macroeconomic policies, so as to insulate us from the threat of a possible downslide in BPO activity.

An obvious way out is to resort to more manufacturing exports. This is, however, easier said than done. Further, our software technicians should also explore alternative markets. They should also try to ascend to higher levels of technical skill than what they now specialise in.

Call centres are alright as a beginning. But they still amount to the very bottom-end of the services chain and not to value-added services of the top end. We should aim at higher levels of services, including R&D outsourcing, where our skill-set is definitely an advantage — both distinctive and attractive to the developed nations of the world.

Some people have argued that the loss of jobs as a result of outsourcing is in insignificant proportion to the total number of jobs at stake in the US. It has also been pointed out that jobs that are being outsourced now are not of a character for which an American employee will come in at competitive rates. Perhaps, there is also some justification for this view since the jobs being outsourced are mostly routine but that also enforces the need for upgrading our own offerings. The pain of the job losses cannot be denied whether it is a routine job or a high level one.

We have to recognise the political reality that an addition to the unemployed pool creates a problem for the governments of both the outsourcing country and the destination, in this case, India. It has to be solved on the basis of a holistic approach, using our purchasing strength as well as political persuasion.

The passage of jobs to India will, of course, continue. And it should continue on our own terms if India is to keep shining. This requires a careful strategy that will keep in mind the acute sensitivity of US political parties and the economic interests of their corporates.

A sustained effort is well worth it considering the high value of the BPO nest-egg that is at stake and the contribution it makes to our macroeconomic strength.

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