Obama’s State of the Union Address : How it impacts Outsourcing

   US President Barack Obama highlighted his anti-outsourcing view again at the state of the union address on the day before yesterday. He stated that this is the time to end tax break to US firms that outsource their jobs to overseas and allow fresh tax breaks to those firms that create jobs within USA. The latter part of the last statement is an indirect threat to the outsourcing destination like India, Phillipines etc. Obama emphasised his previous comment in May, 2009 that job creation within US is his topmost priority and he advised outsourcing company to choose “Buffalo over Bangalore”.

“To encourage … Businesses to stay within our borders, it is time to finally slash the tax breaks for companies that ship our jobs overseas, and give those tax breaks to companies that create jobs right here in the United States of America,” Obama said.

Although, most of the countries recovered from recession, the post recession period is still making a big dent in USA in terms of the single biggest issue like unemployment. That’s why US president made this statement. However, outsourcing saves cost for many US industries , but, it creates an issue of unemployment within US. As a result of this, recession is further aggravated.

As per the report of Indian software services industry body NASSCOM, the revenue from Indian IT sectors accounts 5.8% of Indian gross domestic product in the year 2008-09. Since, US contributes major share for revenue generation of Indian IT industry, any move from the part of USA to restrict outsourcing is going to impact Indian IT industry.

But, Gartner senior research analyst Diptarup Chakroborty stated that US companies have to outsource their job to overseas to achievc further business growth even if US govt. takes away the tax benefit from them.  His falling popularity, string of losses in the elections for the democrats might have prompted Obama to make this type of comment.

Analysts further said that the outsourcing cost is going to rise by 50% if the new tax proposal is implemented. That’s why Indian companies like Infosys, Wipro are already hiring locals due to increase their business in USA. But, the cost of hiring an individual in US is much higher than their counterpart in India. Avinash Vashista, managing director, Tholons, said, if you bring all of them into account, still there is 15-20 % difference between low cost India and USA and that is a very significant margin for BPO industries.

Additionally, IT service body Naascom insisted “the proposals appear to be aimed at addressing the tax rate differentials that exist across the world and if implemented, this would impact American headquartered companies with overseas operations”.

Uday Ved, head of tax at KPMG further outlined that the proposed bill will not be able to deter Indian companies from getting overseas clients, this is only impact those companies that have huge captive centres in India or anywhere else in the world as they outsource work in the real sense. But, I think that the outsourcing as a business strategy is too critical for cost effectiveness that it can’t be ignored and is here to stay forever.