US protectionism could lead to trade war, says Nasscom

U.S. protectionism targeting Indian outsourcers may be met by retaliatory measures such as blocking access to Indian markets, India's National Association of Software and Service Companies (Nasscom) said on Tuesday.

Describing the U.S. tax system as "broken", U.S. President Barack Obama said in May that it's a tax code "that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York".

Though the changes proposed to the tax code are not likely to impact the Indian outsourcing industry, the statement by Obama has been widely interpreted in India as targeting the country's large outsourcing industry which gets over 50 percent of its revenue from the U.S.

Legislation introduced in April by Senators Chuck Grassley, (R-Iowa), and Dick Durbin, (D-Ill.) aims to put curbs on the use of H-1B visas, so that the visa program "should complement the U.S. workforce, not replace it".

As unemployment goes up in the countries to which Indian's outsourcing industry exports services, there are likely to be increasing demands for creating jobs in those countries, said Som Mittal, president of Nasscom.

"Once you take protectionist measures, it doesn't stop there," Mittal said. India is a large market for a variety of products including defense equipment, and there could be a trade war, he cautioned.

Nasscom is focusing on conveying to the U.S. and other countries that Indian outsourcing companies can help their companies get more efficient and cut costs in the economic downturn. It wants the Indian outsourcing industry to be identified as "part of the solution and not the problem", Mittal said.

Indian outsourcers are also taking steps to increase services delivery closer to customers, which will mean creation of jobs in countries like the U.S., said Pramod Bhasin, chairman of Nasscom.

Indian business process outsourcing (BPO) companies will have to change their business model in the future to deliver services from multiple locations worldwide, so that they deliver from where the customers want it, he said.

Profit margins will not get affected by the higher costs in those locations, because the work done there will be high-end, he added.

The Indian BPO industry is expected to post a revenue growth of about 15 percent this year, despite the global economic downturn which appears to have bottomed out, Bhasin said.

Copyright © 2009 IDG Communications, Inc.

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