The Hindu Business Line : India's not the only winner

Here's one more instance to show that the offshoring wave is actually set to benefit the US and its people. It's up to India to present its case convincingly.

WHEN praise and support for global offshore outsourcing comes from an economist and a Nobel Laureate at that, it is an opportune time for supporters and bashers of offshore outsourcing to sit up and take notice. Early this month, the Nobel Laureate, Dr Lawrence Klein and Global Insight, the economic consultancy, released a study titled "The Comprehensive Impact of Offshore IT Software and Services Outsourcing on the US Economy and IT Industry."

This study assumes greater significance as it reiterates and expands on conclusions reached in a study by the McKinsey Global Institute done last year. The latest study reiterates the `economic benefits' argument spelt out by the McKinsey study, which claimed that the US economy gains $1.12-1.14 for every dollar of business services offshored in terms of cost savings and repatriation of profits, among other sources. Secondly, in debunking the `loss of jobs' argument, the latest study goes further than the McKinsey Global Institute study by estimating the total number of new jobs created by different States in the US.

The latest study from Dr Klein sponsored by the Information Technology Association of America highlighted the economic rationale and benefits underlying offshoring of software services. It is important to highlight that this study focussed purely on software services, rather than IT-enabled services or call centre-dominated activity. The key findings of this study reflect a telling impact on the US economy, namely:

All-round economic impact: The cost savings and use of offshore resources will lower inflation, increase productivity and lower interest rates in the US economy. This will help boost business and consumer spending and increase economic activity.

Real GDP increase: The real Gross Domestic Product in the US increased by $33.6 billion in 2003 and is expected to be $124.2 billion higher by 2008 than it would be in an environment in which offshore IT software and services were not to occur.

Reason for jobless recovery: Though union workers in the IT and communications industry have attributed `jobless recovery' in the US to offshoring of jobs, most of the lost jobs were due to the bursting of the dotcom and telecom bubble.

Employment gets a leg-up: The offshoring effect is increasing the total employment in the US as its economic effects ripple through the economy. The incremental economic activity that followed offshore IT outsourcing has created over 90,000 net new jobs as of 2003 and is expected to create 3,17,000 net new jobs by 2008. There are several industry groups that are likely to gain from these incremental jobs.

Real wages will rise: Exploding the popular myth that offshoring will lead to jobs which will be lower paying, this study states that offshore IT software and services outsourcing will actually increase the average real wages of US workers by 0.44 per cent in 2008. This will be on account of lower inflation and higher productivity.

Eeconomic logic, however compelling it may be, will not make much headway in an election year in the US, so India will have to demonstrate its willingness to engage in `bilateral negotiations' with the US. Since India also stands to gain immensely from the `offshoring wave,' the Indian Government, with private sector IT companies and Nasscom, will have to work simultaneously on three fronts:

Urge a globalisation debate: India will have to repeatedly show that there are three factors which are playing a key role in making offshore outsourcing happen: round-the-clock-service, high-quality English-speaking engineering professionals and lower wages. The globalisation of `white collar jobs' seems an inevitable process as software multinationals who have set up operations or outsourced to India have repeatedly said that they were attracted to India by lower wages, but have stayed on account of high quality.

Removal of trade and services barriers: In order to improve its credibility in pushing the globalisation argument, the Indian Government will have to remove whatever trade and service barriers it has imposed so far.

Or at least, it will have to articulate a time-bound plan to do so. Speaking to eWorld at the Nasscom 2004 conference at Mumbai in February, Jeff Lande, Vice-President, Information Technology Association of India, said that if globalisation has to thrive, there has to be a level playing field. "India has not opened up its markets fully. There has been some progress made, but more has to be done there. The US markets are about as open now than anywhere in the world. So, we need that level to be established," he said.

This is an issue the Indian Government will have to work on immediately.

And the earlier it removes the barriers, the more bargaining power it will gain in international negotiations.

Protect security, data privacy and intellectual property:

Even as offshoring becomes a mainstream activity, there are three areas on which greater attention will have to be devoted going forward: security, data privacy and intellectual property.

Increasingly, as multinational companies hand over critical contracts to Indian companies, they will call for greater comfort level on these aspects.

Any laxity on this account may cost the Indian software companies dearly in the long run. And the ripple effect of this will be on the entire Indian economy. The sooner the Indian second and third-rung IT companies wake up to this reality, the better it will be for the industry at large.

maverick@thehindu.co.in

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