India's IT-BPO industry warily cheers Obama's victory, fears cut down in outsourcing

US President-elect Obama is a staunch supporter of the growing India-US strategic partnership but has strong views about outsourcing of US jobs overseas, especially at a time when the US economy is reeling from a financial crisis and companies are handing out pink slips or cutting wages by the thousands to curtail costs and deal with the economic slowdown.

Obama feels that it is "only natural" that the world's oldest and largest constitutional democracies should enjoy "strong relations" but has put his foot down when it comes to outsourcing.

"When I am President I will give tax credits to companies that hire in the United States and end tax breaks for companies that ship US jobs overseas," he had said during an election rally in Cleveland, Ohio, hinting that outsourcing is the cause behind the slump in the US economy.

Obama's viewpoint has triggered concerns among Indian IT-BPO firms that are already witnessing decline in outsourcing business from the US as clients there are either delaying or cutting down on IT spending.

In a report based on a global survey, investment bank Goldman Sachs has also warned that IT budgets of US companies could decline by 5 percent in 2009 compared with 2008 with concerns growing that the US economy is on the threshold of a recession, probably the worst financial crisis since the 1930s.

Indian IT firms depend on the US clients, especially those in the banking, financial services and insurance (BFSI) sector, for major portion of their revenues, but the Goldman Sachs survey has revealed that chief information officers (CIOs) of companies in this sector are preparing for a cut of 10-20 percent or in some cases, even higher, in their IT spending budget.

"Our conversations with CIOs across many verticals, as well as with management teams in our coverage, have emphasized the broad-based nature of the current downturn, both by vertical and geography," the report noted.

However, this "cost-constrained IT budget scenario" is not restricted to the US alone. The survey also forecasts negative growth in IT spending in other key developed markets like Western Europe and Japan in 2009. The telecom segment, which was not affected significantly in the current year, is forecast to show a 7 percent decline in capital spending. Manufacturing is expected to show flat growth to 10 percent lower growth, while government spends are also expected to soften quite a bit.

More scary is an IMF report which warns that advanced economies would slip into recession next year, while the growth rate of Asian nations would come down.

In its World Outlook Report, IMF said advanced economies, including Germany, France, Italy, Spain and Japan, would see a negative growth of 0.3 percent while the US and the UK could witness contraction of their economies by as much as 0.7 percent and 1.3 percent respectively.

Decrease in demand and contraction of activity globally have already made their effects felt in the Indian IT-BPO industry with leading IT firms like TCS, Infosys and Wipro reporting muted earnings during the September fiscal quarter and preferring to remain conservative in their outlooks. India's software and services exports stood at nearly $40.4 billion during financial year 2008, up from $31.4 billion in the previous year, with the US as its largest market. The revenue of overall IT-BPO industry, including the domestic market, recorded 28 percent growth to touch $52 billion in financial year 2008.

To dispel the gloom, Som Mittal, president of National Association of Software and Service Companies or Nasscom, the consortium that serves as the apex body of the Indian IT software and BPO industry, said on Thursday, on the sidelines of the release of the Nasscom Animation and Gaming Report 2008 in Hyderabad, that the the Indian IT-BPO industry should not worry about the ongoing economic downturn in the US as it contributed to just 3 percent of the IT business market globally.

"I don't see any negative impact of [Obama's] victory on Indian IT-BPO industry. What I see is more opportunities for us as Obama's priority is to bring the US economy back on track. Indian IT and BPO industry will play a crucial role in it," Mittal said.

"It is a globalized world. It is not just that Indian companies are operating in the US or are getting outsourced jobs. Many leading Indian companies and professionals have helped transform big US companies. Many studies have showed and people in US also know that outsourcing has rather helped protect their jobs then lose them by improving their competitiveness and productivity," he added.

According to Mittal, the fundamentals of the Indian economy were very strong but he acknowledged that the IT-BPO industry needed the government's support in the form of reduced taxes and providing infrastructure to help it tide over the ongoing financial crisis.

Echoing similar views, Dr. Ganesh Natarajan, chairman of Nasscom, said Obama's win the presidential election would not mean death of outsourcing business for India. His triumph, Natarajan said, would in fact spur the growth in outsourcing business as a strong US economy would result in huge opportunities for India.

"America will charter a new course for itself in history which will give opportunities for all of us in India," he said.

"With the global economy stressed, it is more important than ever that India and the US find ways to partner together to spur innovation, foster economic growth, develop an educated and skilled workforce and create jobs for the modern global marketplace," a press statement issued by Nasscom said.

According to Girish Paranjpe, president of Wipro, India's third largest IT consultant and softwar services exporter, the comments of Obama should not be misconstrued because as long as the US government is pro-business, creating jobs in the US should not mean minimizing outsourced jobs.

"I think people are reading too much into the elections. As long as we have a healthy business and a pro-business government I do not think we should worry too much," he said.

However, Paranjpe feels that decline in companies' IT spending would continue for a couple of quarters of before the situation improves.

Agrees Samir Chopra, president of Business Process Industries Association of India (BPIAI). According to Chopra, Obama's statement on outsourcing is nothing more than an "election rhetoric."

"When you are outside the government, you have a perception; but when you get into the system, you face the reality. Obama will also realize that outsourcing is profitable for their economy," Chopra said.

Terming the "recession" in the Indian outsourcing industry as a "short breakdown," Chopra said the current lull would only be momentary.

Venugopal Dhoot, chairman of India's largest consumer electronics maker, Videocon Industries, feels the Democrat win would not curtail Indian employment as the US requires Indian brains. "This is a very good time for India," Dhoot said.

Agrees Phaneesh Murthy, CEO, iGate. "President Obama's talk has shifted during the past two-three months as he has stopped talking about entire outsourcing and started talking a lot more about trying to create those kinds of jobs in the United States which cannot be outsourced," he said.

However, T.V. Mohandas Pai, member of the Board and head (HRD and Education & Research), Infosys, feels Obama's victory "could mean slightly more restrictions in [H1B] visas."

"They already have comparable wages and that could be tightened up. It could mean little less flexibility but on the whole it will be marginal," Pai said.

Indian IT professionals depend heavily on the US work permit or H1B visa to work onsite. The US government had capped the visa at 65,000 after increasing it to 1,95,000 during the peak of the tech boom.

According to Shashi Tharoor, former UN Under Secretary-General, Obama's views of outsourcing should not be taken too seriously as, with the world on a brink of a financial catastrophe, the last thing US needs is to erect protectionist trade barriers.

"To some degree, we have to be conscious that more and more things will be done in America if they can be done in America. At the same time, when economic times are bad, it is difficult for companies and the government to spend more money on some thing that can be done cheaper in India," Tharoor said, adding that protectionist measures such as the one suggested by Obama will be hard to implement.

Even India's Finance Minister P. Chidambaram feels the same way.

Congratulating Obama on his victory, Chidambaram said the president-elect's comments on outsourcing will not affect India-US economic ties.

"I am confident that the US India relations will only strengthen in the future, a comment about outsourcing etc shouldn't bother us. Once he is in office, he will realize that in this interconnected world, countries have to work together and the US is the world's largest economy and India is the world's largest free-market democracy."