Mainstream backlash

The legislation by the US Senate, outlawing the 'offshoring' of federal government work by contractors, represents a setback for the Indian information technology (IT) and business process outsourcing (BPO) industries.

The immediate impact of this will be negligible because, as Nasscom has indicated, not more than two per cent of exports by Indian IT companies to the US represents federal government work.

The bill may not become law and even if it does so, the provision may lapse by the end of the year, but it will be shortsighted to expect things to sort themselves out.

The move can set a bad example to US state legislators, as those concerned are not from a relatively obscure state like, say, Indiana, which had been contemplating similar measures, but from the US Congress itself.

The legislation is also likely to have an impact across the Atlantic, as various West European governments, already cagey about 'offshoring', will find it easy to follow the US lead.

Private IT business far outweighs government business in North America and West Europe but, taken in its entirety, is by no means insignificant.

The development bodes particularly ill for the future as governments are slower to adopt IT and the share of government business in total business is likely to increase over time.

It is true that such restrictions on 'offshoring' are not likely be permanent and may be relaxed once the US elections are over but this is a problem, which is likely to get worse before it gets better.

The Indian IT industry and the government have a lot of homework to do in order to come up with suitable long-term plans to combat this phenomenon.

The action plan should be two-fold. Indian companies should acquire US and European IT companies far more aggressively than they have been doing till now. Leading Indian companies, sitting on piles of cash, have been unduly conservative so far.

Now, they have to aggressively become truly global players instead of thinking in terms of exports from India. There are plenty of small and medium IT companies in the developed economies, which are not doing too well. So, acquiring them should not be a very costly proposition.

These companies will not be able to 'offshore' federal government work to India but Indian ownership will be able to change their cost structure, both through the induction of on site workers from India (they work harder) and reduction of corporate expenses through the top management shifting to India.

It is clear that the next battle will be fought over visa rules and the action plan requires the Indian government to play a positive role. Visa rules are likely to be tightened and the issue is likely to land up before the World Trade Organisation.

Countries like India will demand a new type of visa that will make the movement of skilled workers easier, like the movement of goods.

In response, there will undoubtedly be pressure from loped countries on the government of India to make it easier for foreign law and accountancy firms and their employees to freely work and do business in India.

If the government of India is serious about helping the IT sector then it will have to take a more mature and holistic view.