Indian IT: Gloomy road ahead?

Wed, 22 Sep Pre-Open

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The June 2010 quarter brought a sigh of relief for Indian IT companies. Despite negative headwinds from Europe, these companies were seeing a recovery in volumes thanks to their US businesses. It was thought that this marked the turnaround for the IT sector which was going through bad times post the global recession.

However, the recent policy initiatives taken in the US are making the dream run appear what like the name suggests – just a dream. Let us take a look at what these policies are and their possible impact on the Indian IT sector. The US President recently proposed a migration bill that seeks to increase the visa fees for workers sent by countries like India to work on projects in the US. While it may not impact the margins of IT companies in the next couple of quarters, it might have an impact in the long term. TCS has already estimated a possible impact of 0.3% on its margins due to the visa fees hike.

The US has also proposed to remove tax benefits for companies that offshore their activities to countries like India. The main question in this would be to understand if the tax impact would outweigh the cost savings from outsourcing. If the tax impact is more, then there is a possibility that US companies would hold back from outsourcing their projects to Indian IT companies. This may lead to 'reverse offshoring' wherein the outsourcing company would send the projects back to the home country. If this were to become a new trend, then in the long term, Indian IT companies may see a fall in volumes of work that they receive from their US clients. While most IT majors have denied the likelihood of this, they have however stated that many of their US clients are holding back on business.

Some Indian officials have stated that the US is adopting such practices only to win votes in the congressional elections scheduled to be held in November. Obviously if the US politicians propose these policies to a country reeling under high unemployment rates, it would make them look good to the voter community. While political gimmickry cannot be discounted, such views and initiatives have definitely caught the attention of the Indian government. And it has decided to take up these issues in the next WTO meet and has stated that the US is adopting 'protectionist' measures which will hamper world trade and consequently global recovery.

The Indian IT industry on its part has also been vociferous on these issues and has also sighted the number of jobs that it creates each year in the US. All we can do in the meantime is to hope that such policy initiatives are just political games and do not become a reality. For if they do, the Indian IT industry may continue seeing gloomy days.