Article

Bogey Outsourced

Pramit Pal Chaudhuri February 22, 2012

US President Barack Obama, facing a tight election, used no less than this year’s State of the Union address to call for an end to supposed tax breaks rewarding US firms who export jobs overseas. Indian finance minister Pranab Mukherjee, whose government is no less embattled, declared a few days later that outsourcing was a benefit for both the US and India. “Protectionism ultimately does not help the country that resorts to it,” he declared.

Someone should measure the spike in outsourcing rhetoric that occurs when electoral campaigns take place. And the rhetoric, on both sides, is largely hot air suffused with bombast.

Consider these supposed corporate tax breaks for outsourcers. I can remember John Kerry raising them, Bill and Hillary Clinton raising them, and Obama raising them at each and every presidential election campaign over the past decade or so. Why did nothing happen, even when the Democrats controlled the Congress? Because there are no such tax breaks. The only thing that anyone can find is differential corporate tax rates across countries. These have no relationship to outsourcing, they’re just different tax structures in different countries. Ireland charges a 12 per cent corporate tax to attract investment. It doesn’t get much outsourcing because its wages are high. India charges a corporate tax rate that is about the same, if not higher, than the US, but gets plenty of outsourcing because its wages are low. Notice the key determinant here is not tax rates, but wages — which are beyond Obama’s power to control.

Mind you, India lecturing on protectionism is a bit rich, given the trade barriers it maintains against many imports.

India’s outsourcing sector is, in any case, changing its spots to reflect a new business environment. As reported by the New York Times, the Philippines does more call centering for North America than India does. Indian wages have risen and the pool of English proficient workers has shrunk.

Lesser known is that Indian firms have shifted outsourcing operations to the US, as wages in small town America are now competitive with metropolitan India. But there are problems: a Tata Consultancy Services representative once described how Tata, India’s largest software firm, had tried to hire Americans in a depressed part of the Northeast. The applicants snaked around the block, but the number who could qualify for even a basic call centre job was so low that the company could not fill the vacancies.

What always strikes me as ironic is that so many of the biggest call business process outsourcing firms in India are either US-owned or US-headquartered. Thus Genpact, IBM Daksh, WNS Global and EXL Service Holdings are normally in the top ten business process outsourcing firms lists each year, but are either registered in the US or owned by American investors.

So I’ll wince a bit through this year as the political rhetoric spills over and steadily diverges from the economic reality.