Commentary: Ban Outsourcing? Bad Idea

Such legislation in the U.S. could derail India's moves to open its economy

The uproar in the U.S. over the outsourcing of jobs to India is deafening. On Mar. 5, California state Senator Joseph Dunn greeted an application for a tax exemption by Infosys Technologies Ltd. (INFY ), India's premier software-services company, with an accusation that such companies "want to steal jobs" and "taxpayer dollars." On Mar. 10, U.S. Trade Representative Robert B. Zoellick chastised India for demanding that the U.S. keep the door open to Indian information technology services while still being "one of the world's most closed economies." And Democratic Presidential hopeful John F. Kerry, an erstwhile free trader, has labeled outsourcers "Benedict Arnold" companies after the Revolutionary War traitor.

But U.S. politicians better watch out they don't invoke a backlash, India-style. Just as jobs are a crucial issue in the upcoming U.S. election, jobs are an issue in India, too, which is facing its own national elections from Apr. 26 to May 10. India, in fact, is trying to change its approach to creating jobs, and the U.S. could ultimately benefit if it plays its cards right.

To put everything in perspective, it's important for outsiders to note that this is the first national campaign in India where one party is openly campaigning on a platform of economic reform and development. Until recently, socialist Indian governments -- and the labor unions that backed them -- thought the best way to protect jobs was to impose high tariffs and other barriers to foreign investment.

Now the ruling Bharatiya Janata Party (BJP) has learned from India's IT-services companies what a fantastic job-creator free trade can be. The government never protected Infosys or Wipro Ltd. (WIT ) with tariffs; they had to compete with global rivals on a level playing field. The result has been a thriving new sector for India, which, though small -- some 3% of gross domestic product -- has started to convince India's policymakers that lowering barriers is the way to go.

Thus, outsourcing is the vanguard that's transforming the world's second largest country from a closed economy into an open one -- to the great potential benefit of U.S. corporations. Since January, New Delhi has cut tariffs on IT-related hardware such as PCs in half, to 18.5%, and to 0% for microprocessors. It also raised the ceiling for foreign equity investment in Indian banks from 49% to 74%. And when New Delhi decided to computerize its tax and revenue departments, the first $150 million contract was won on Mar. 5 not by an Indian company but jointly by Hewlett-Packard (HPQ ) and Microsoft (MSFT ). That's the biggest government contract ever snagged by multinationals. "Given the huge market potential of an economy of 1 billion people, India's globalization should be of special interest to the Western world," says Kiran Karnik, president of the National Association of Software & Service Cos.

But if U.S. politicians keep trying to legislate a ban on outsourcing, they run the risk of driving India back into the protectionist shell from which its pro-reform leaders have pried it over the past five years. So far, there's no sign of anti-Americanism. But bellicose tirades, frets Arun Shourie, India's Communications & Information Technology Minister, threaten to revitalize Indian opponents of reform at a time when they are diminishing in influence but still vocal enough to be taken seriously. It would benefit no one -- least of all the U.S. -- to turn India's clock back to the 1980s, when even local investors could not start a company or expand existing operations without a government license, when there were strict foreign-exchange controls, and multinational corporations were not welcome.

Better instead to give India's reformers a chance. The ruling BJP is promising a host of changes, including the privatization of many industries and the deregulation of power plants and airports. Some of the money the government plans to spend to modernize India is likely to go to multinationals. The last thing critics of outsourcing want is for those opportunities to melt away. With their attacks, U.S. politicians may get more votes. But in the long run, both India and the U.S. could end up as losers.

By Manjeet Kripalani

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