The Hindu : Braving the BPO backlash

Online edition of India's National Newspaper
Sunday, Feb 29, 2004

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Braving the BPO backlash

Despite the outcry in the United States, business process outsourcing is here to stay and India will continue to retain its competitive edge for obvious reasons, writes Sushma Ramachandran.

THE FLAG-BEARERS of globalisation and free trade have found their creed coming back to haunt them. The United States, one of the most aggressive countries in support of free trade, is now echoing many developing countries as it says globalisation is fine as long as the jobs in the domestic economy are not affected. These arguments have a familiar ring to them as many countries have similarly resisted the American drive to open up markets pointing to jobs being lost due to cheap imports. For the U.S., such responses have never been acceptable in the past, since the credo of globalisation is that inefficient industry should close down and give way to more efficiently and cheaply manufactured goods from elsewhere in the world. In fact, one of the main tasks of the U.S. Trade Representative's office has been to monitor the rest of the world and assess which markets are opening up and which remain "closed" through high tariffs and quantitative controls on imports.

Suddenly, these votaries of free trade are worried about employment issues, an aspect of globalisation that has never been of much concern to them in the past. The issue is assuming grave proportions in the U.S. with public concern mounting over job losses due to the outsourcing of a wide range of services, from financial to telecom, to India. The worry is justified from the point of view of American white collar workers who are finding their desktop jobs literally pulled out from beneath them as multinational information technology, telecom and financial service companies set up huge call centres in India. The shifting of such centres to India and other countries such as China is purely based on price factors as services in these countries cost a fraction of those in either the U.S. or Europe.

While the creation of call centres is offering employment to thousands of the educated unemployed in urban areas of India, it is creating massive unrest in the U.S. as job losses are taking the shine off the economic revival there. A true blue free trader, U.S. President George Bush initially stood his ground last year when several American States were considering banning outsourcing of government contracts to other countries. The present USTR, Robert Zoellick, even privately told the Commerce Minister, Arun Jaitley, that the Federal Government was opposed to any such legislation. This was before the American presidential elections got into full swing. The U.S. administration has now reversed its position and even passed a law banning outsourcing of government contracts to foreign countries. The bogey of outsourcing and loss of jobs to countries such as India is thus snowballing and even threatening to become an irritant in Indo-U.S. bilateral ties.

In fact, the recent visit of Mr. Zoellick saw a decided chill descend on relations between the two countries as Mr. Jaitley minced no words in pointing out that the U.S. cannot be protectionist on services and expect other countries to offer access to manufactured goods. The outsourcing of services from the U.S. is simply a move to shift industries to countries where operations are efficient, he noted. The U.S. thus had to accept its own argument that inefficient operators will have to close down, giving way to more globally competitive operators. Mr. Zoellick insisted, however, that free trade meant job creation on both sides — a position it has never taken in the past.

The sudden reversal in the U.S. administration's stance has everything to do with politics and nothing to do with economics. The loss of jobs to business process outsourcing (BPO) to India comes close on the heels of closures in the U.S. manufacturing sector as cheaper products from China have been flooding the market for years. The likely Democratic presidential candidate, John Kerry, has made these job losses an emotive issue, though economists in the U.S. are still trying to convince worried citizens that outsourcing will ultimately boost the economic revival. Besides, according to the U.S.-India Business Council, most job losses have come through corporate restructuring and only one-fourth has been due to the outsourcing of services.

In contrast to the hysteria being generated in the U.S., the U.K., which has also been hit by the shifting of jobs to India, has given the assurance that it will not pass any legislation on banning BPOs. This is in spite of pressure on the U.K. following the shifting of key services such as the British Rail enquiries to India, despite complaints that the Indian accent is proving to be a problem for many consumers. Job losses notwithstanding, the U.K. is firm on its stance that outsourcing merely means India has a competitive edge. Similarly, other European countries have accepted that services will gradually be outsourced to other countries where the operations are much cheaper. Reacting to the issue during a recent visit, the European Union President, Romano Prodi, said telecom enquiries in Italy were being diverted to countries like South Africa for servicing but viewed it as an inevitable part of the globalisation process.

Interestingly enough, despite the outcry over outsourcing, the American ban imposed on outsourcing of government contracts has had a minuscule effect on Indian industry, according to the IT industry association, Nasscom. Even so, it is clear that developed countries continue to have double standards on free trade and globalisation. In the case of agriculture, where countries such as India need to protect millions of subsistence farmers from cheap imports, the U.S. argument is that opening up the market will help middle class consumers. Yet opening up of the U.S. market to services from India is viewed in a different light and protectionist legislation passed to curb outsourcing and protect Americans from losing jobs. It is thus essential for Mr. Jaitley to take a combative position on the issue, since the U.S. protectionist posture needs to be highlighted in the give and take of global trade talks. It was also evident from Mr. Zoellick's meandering replies to questions on the issue during his visit that he is well aware that the reactions in America to outsourcing will impact on his efforts to seek more concessions from developing countries when talks revive under the aegis of the World Trade Organisation (WTO).

It must be noted in this context that the actual loss of jobs in the U.S. has been estimated at 2.3 million since 2001 but the actual numbers that have gone offshore are estimated at only 200,000. In other words, the reduced employment in the U.S. appears to be due to a host of other factors but the outsourcing issue has simply been put high on the political agenda thereby obscuring the facts.

As for the reaction of Indian industry, there appears to be little concern over the decline in outsourcing as reports from the software capitals of Hyderabad and Bangalore show that the ambit of such services is actually broadening. From becoming merely call centres handling back office work, the scope of activity is now covering a much wider range including marketing, and companies are now becoming strategic suppliers. Bangalore-based companies are even looking at the BPO backlash as a back-handed compliment, giving them a brand equity which they never had in the past. Besides, venture capitalists are back in a big way seeking to make investments in varied areas. Some software companies are concerned over the long-term impact of the proposed U.S. legislation banning outsourcing but are clear that the existing ban on government contracts has barely had any impact on them. Reports from Chennai indicate that software companies are aware of the concern that their competitive edge has caused in the U.S. as well as the anxiety of American business to continue to outsource to reduce costs.

What could be of greater concern are reports from Washington that the opposition to outsourcing may not end with the presidential elections. With a whole host of American States considering bans on giving government contracts abroad, the possibility looms of outsourcing issues lasting beyond an election year. Much depends, however, on the performance of the U.S. economy and the feel good factor of consumers in that country next year. Better growth could wipe out much of the concerns voiced in recent months on the decline in employment.

At the same time, there is no doubt that the outsourcing phenomenon is here to stay. As long as India remains far more cost effective for companies from the U.S. and Europe, they will continue to flock here and establish service facilities for clients back home. Market forces have gained a tsunami-like momentum on the BPO front with global industry turning to India as probably the most competitive services market in the world. The advantages have been enumerated time and again — a large and highly skilled workforce with good knowledge of the English language and extremely low wages by European and American standards. As long as these positive factors continue in its favour, it seems India will retain its competitive edge and bans could end up having little effect on the burgeoning BPO industry.

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