India: A Tempest Over Tech Outsourcing

American legislators are accusing India of stealing tech jobs

It has been a rough few months for India's IT-services companies. With a slow global economy and increasing competition from multinationals on their own turf, their profit margins have been sliding. So the last thing they need is a trade spat with the U.S. But that's just what they're getting. Alarmed by the loss of jobs to foreigners, American lawmakers are trying to limit the outsourcing of tech services and other white-collar work abroad. Says a top IT executive in Bangalore: "When bad news starts coming, it comes in truckloads." The U.S. accounts for 70% of India's software services exports.

The momentum against the export of white-collar U.S. jobs has been building for months. Congress in early June began considering bills to close an immigration-law loophole where foreigners can service U.S. clients using guest worker visas. Representative Nancy L. Johnson (R-Conn.) has asked that large insurance companies disclose how much of their IT work is being done by foreign workers in the U.S. At the state level, legislatures in Maryland, Washington, Connecticut, Missouri, and New Jersey are considering laws banning outsourcing of government tech-services contracts to low-wage developing countries. Even if they don't pass, though, they might make a U.S. company think twice before outsourcing more work to India and elsewhere.

The Indians are fighting back by taking the moral high ground on free trade. N. Narayana Murthy, chairman of the premier Indian software company Infosys Technologies (INFY ) Ltd., points out that India opened its markets to U.S. consumer goods and services, so it's unfair for Washington to erect protectionist barriers. "When you have these kinds of noises, it creates the impression that you preach these things when it suits you," he says.

India's software association, Nasscom, has launched a major lobbying effort in Washington with help from U.S. public relations firm Hill & Knowlton Inc., while New Delhi has appointed a representative in its embassy there as part of India Inc.'s campaign against the protectionist wave. They are talking up India's software prowess, with the goal of convincing Americans that both countries gain when they cooperate. Nasscom Vice-President Sunil Mehta argues that while India sells $6.75 billion worth of software services to the U.S., the industry contributes more than twice as much to the American economy by way of hardware and software purchases, customer savings, and U.S. taxes paid by Indian workers. "The Indian IT industry is making U.S. companies globally competitive," Mehta says.

The industry also argues that it's actually creating jobs, not stealing them. As they expand into the higher-end tech-consulting business, India's top three IT companies, Wipro (WIT ) Tata Consultancy Services, and Infosys, are hiring more U.S.-based marketing and consulting executives. Nasscom claims Indian IT has been especially kind to New Jersey, having created 1,600 jobs there in the past four years. Of course, as the Indians admit, if they hire too many high-priced American workers, they could erode their cost advantage.

Indian executives are betting that simple economics ultimately will prevail. Indian software services deliver cost savings of more than 60% to U.S. companies, says C. Srinivasan, who heads offshore operations in India for Electronic Data Systems (EDS ) Corp., the consulting and outsourcing company based in Plano, Tex., which plans to employ 2,500 in India by yearend. And despite the potential political heat in the U.S., he expects the outsourcing trend to continue. "In the next three to five years, the India solution will be a critical part of every portfolio," he says.

But as long as the U.S. IT industry remains in the doldrums, New Delhi will come up against U.S. protectionism. U.S. Rep. Jay Inslee (D-Wash.), who supports India's free-trade argument, says the politically charged issue won't be resolved anytime soon. "You'll hear an ongoing debate for the next decade," he says. India's new tech powerhouses better gird themselves for a long fight.

By Manjeet Kripalani and Bruce Einhorn in Bangalore, with Paul Magnusson in Washington

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