Obama, Satyam won't spell outsourcing doom

INDIA--Newly sworn-in U.S. President Barack Obama may not be a fan of outsourcing, but the Indian IT market has little to fear as the industry becomes a business need in the globalized world, say experts.

Inaugurated Tuesday as the 44th President of the United States, Obama had said during his campaign that if elected, he will stop giving tax breaks to corporations that outsource jobs and reward those that create jobs in America. The recent Satyam accounting scam, too, has scarred the Indian IT, potentially shaking market confidence.

Do these two events mark the end of the outsourcing boom in India? No, say industry experts.

"If economy is the focus of Barack Obama, then he cannot overlook outsourcing," Diptarup Chakraborti, principal research analyst at Gartner, told ZDNet Asia in a phone interview.

Vivek Wadhwa, executive in residence at Duke University's Pratt School of Engineering, noted: "What you heard during the election campaigns was campaign rhetoric.

"I don't think the Obama administration can devise a tax policy that makes companies do what is not in their economic interests," Wadhwa said in an e-mail interview.

Ameet Nivsarkar, vice president of Nasscom, concurred, noting that businesses will turn to emerging economies in search of resources they may not have in their domestic markets. Nasscom is the trade body and chamber of commerce for India's IT-BPO (business process outsourcing) industry.

Nivsarkar told ZDNet Asia in an e-mail: "Due to skills shortages and declining population growth in some developed economies, companies in the West will continue to outsource in order to tap the supply of talent from countries such as India."

Outsourcing to aid recovery
As the world waits on Obama to unveil his strategy to help pull the United States out of the economic rut, the U.S. president said during his campaign trail that outsourcing had stolen several thousands of well-paying jobs from Americans and handed them over to cheaper Indian and Chinese labor.

However, an economic recovery plan that does not include outsourcing as a component may not be plausible.

Gartner's India-based Chakraborti, said: "Outsourcing is a necessity. Today, American companies are coming [to India] not just for cost savings, but also for better [service] quality.

Milan Sheth, Ernst & Young India's partner of business advisory services, noted: "Industries or utilities in the U.S. that have not started offshoring jobs to countries like India, such as [those that involved] defense equipment and the oil industry, may be affected during Obama's term, if a new tax regime that discourages outsourcing is brought into effect.

"But the Obama administration can't change policies applicable to multinationals," Sheth told ZDNet Asia in a phone interview.

Pradeep Gupta, founder, chairman and managing director of India-based media house CyberMedia, agreed: "High taxation has never worked in the past." In a phone interview with ZDNet Asia, Gupta said high taxes are "against the spirit of globalization".

Nivsarkar added that outsourcing spillover effects in the United States were more apparent in manufacturing than in the high-tech sector. According to the latest figures released by the U.S. Bureau of Labor Statistics' Current Employment Survey, the high-tech industry grew by almost 35,000 jobs in 2008. In comparison, "factory job losses totaled 791,000 in 2008", the bureau said, with nearly half of the decrease occurring in the fourth quarter.

According to these statistics, Nivsarkar said, the high-tech industry was one of the few sectors in the United States that added jobs in 2008, while most sectors lost jobs.

Wadhwa said: "The U.S. economy can recover without more outsourcing, but outsourcing will accelerate because companies are desperate to cut costs and increase efficiency."

Satyam impact short-term
The Indian outsourcing industry suffered another shock when Ramalinga Raju, then-chairman of Satyam Computer Services, the country's fourth largest IT firm, confessed his involvement in a US$1.5 billion accounting fraud. The revelation sent shockwaves across the local, and global, business communities.

However, Chakraborti said the impact will be "short-term". "This is not the first time a fraud has taken place anywhere in the world," he said.

He added that new companies that come to India to do conduct business will do more scrutiny and negotiate harder, due to the Satyam scandal.

Gupta said: "Just as one Enron does not reflect the entire U.S. industry, one Satyam does not reflect the entire Indian industry."

However, much still depends on how the scandal is handled in India.

Wadhwa explained: "The Satyam scandal has already done significant damage, but this may not be permanent or long-lasting. It all depends on how this is handled in India, and how much it impacts Satyam's customers."

The Indian government has already initiated several steps to curb the impact of the scandal, including creating a new board at Satyam and opening enquiries into the scam.

Nivsarkar added: "When Enron collapsed, the entire energy sector did not collapse. When WorldCom went bust, the whole telecom sector did not fall. Similarly, it is highly unlikely that the entire IT sector or the image of India as [an outsourcing] destination will get tarnished by this isolated incident."

According to Nasscom, every crisis throws an opportunity and the current setback is no different. "Our next US$50 billion in revenues would come very differently from the way the first US$50 billion came," Nivsarkar said. "The next wave of growth will have to be inclusive of the world at large and will have to be meticulously planned, for which the seeds have to be sown now."

But, once the global economy picks up, India's IT-ITES (IT-enabled services) market is likely to pick up at an even faster rate. "In the short-term, IT companies and BPOs in India are struggling as growth rates have dropped," Wadhwa said." But so have salaries, turnovers and costs. Therefore, these companies will come out much stronger and are likely to grow substantially as the world economy recovers."

Swati Prasad is a freelance IT writer based in India.