US vs India – The Outsourcing Controversy

Recent hike in H1B visa fee by the US Government was a token measure to pacify the growing anger towards Outsourcing. In reality, this move is more of a token measure as it only affects the employees of the Outsourced companies deputed to the US. There is very little the US Government can do to influence the Outsourced work being carried out outside the US.

The Outsourcing controversy has become an emotional issue after thousands of people in the US lost their jobs since the Global Financial Crisis in 2008. Public sentiments do not care for business logic. Governments, all over the world, have to respond to public sentiments as the same may have an impact on the results of future elections. When public sentiments and business logic are at loggerheads with each other, the government has to delicately balance its actions. In such situations, Tokenism is taken to a different height.

If the jobs have dried up due to the economic downturn what should be the right approach to address the issue? Bringing the economy back to track is the only sustainable solution. This would mean taking measures to restore the profitability of the business entities. Discouraging outsourcing would work in the wrong direction. It may have a temporary effect but it won’t last long. If the companies are forced to bear higher cost, this would only delay the recovery process. Some, if not most, companies may not survive this hardship and would get pushed into liquidation. What would be the end result? Even fewer jobs in the market!

If companies have to incur higher cost, they will naturally pass on the additional burden to the end users in form of costlier products and services. What would be the result? Higher inflation, reduced demand, dropping bottom lines, more liquidations and finally fewer jobs in the market.

Finally, let’s break this myth that Indian Labour is horribly cheaper than its US counterpart. At a first glance, it does appear to be significantly cheap if we consider the exchange rate between the USD and Indian Rupee (INR). Presently the exchange rate is 1 USD to 45 INR. This means that a person earning say INR 45,000 per month would cost USD 1,000. However, applying exchange rate conversion to compare salaries in two countries is not the best way as it does not take into account the respective cost of living in the two countries. Best conversion to use is the PPP (Purchasing Power Parity) conversion. As per IMF, in 2010, India’s per Capita GDP (Nominal) was USD 1,176 while the same in PPP terms was USD 3,290. Based on this, the PPP equivalent of INR 45,000 p.m. would be approximately USD 2,800 p.m. This is a win-win situation for the both the sides. Continuing with the same example, it costs only USD 1,000 p.m. to outsource the work while the person employed gets an equivalent of USD 2,800 p.m. It keeps the costs of services down in the US at the same time providing decent employment opportunities in India.

Most people in the US would say that this is indeed the crux of the problem and Indians are getting employment at our cost. My answer to them is that this is not a one-way traffic. How?

During the recent visit of Obama to India, nuclear power deals worth USD 10 Billion were signed. According to the statement issued by Obama, this deal would generate around 50,000 new jobs in the US. Do people opposing outsourcing take this into account?

Another common misconception is that Indian IT companies like Info Sys, Wipro, TCS and HCL etc. are mainly responsible for the large scale outsourcing. Not many Americans know that American front-line companies Microsoft and Intel have huge offices in India which employ hundreds of thousands of people. Not just IT companies, but other major US Engineering & Construction companies like Bechtel and Fluor have significant presence in India for outsourcing detail engineering work. Additionally, these companies also employ thousands of Indian construction workers and send them to their construction sites in Middle East and Africa. There is nothing wrong in this practice. If the American companies have to remain cost effective and competitive in the international market, they have to optimize their resource management.

Employment generation normally precedes economic growth. Government has to encourage economic growth to generate real and sustainable jobs. Constraining businesses based on short-term and emotional populism is neither good economics nor good governance.

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