CIRC in MEDIA - May 2011

Moving work and people
Live Mint, May 26, 2011

Suparna Karmakar

Getting trade and labour movement negotiations right can help offset vulnerabilities in the external sector

Two seemingly unrelated news items were featured in the media recently. The first one noted, “Indian work visas for US citizens equal H-1Bs, L1s,” and the second, “Worldwide IT services revenue returns to growth in 2010”. The latter in particular is of interest to companies and policy analysts in India, what with our dependence on the information technology (IT) sector for balancing the national payments accounts. The article reported a collective growth of 18.9% for India-based vendors, with their market share increasing from 4.8% in 2009 to 5.5% last year, while the market itself grew by a modest 3.1% in 2010. India’s dominance as the most preferred global service provider in the sector seems to have solidified in the aftermath of the recent financial crisis.

When coupled with the first piece of news, this seemingly favourable condition poses a different kind of challenge for India-based domestic IT vendors. One may not be wrong in concluding that much of the near 20% growth reported above came from wholly owned units of foreign IT-services providers based in India, largely servicing the home (developed) country market demand.

Certainly, a detailed analysis of the IT services exports from India is necessary before one can come to any conclusive determination of the kind of break-up implied above. But data reported by the Indian embassy in the US at least makes it clear that India is not only creating substantial jobs for US nationals in this country, with more than 42,000 Americans working here by the end of 2010, but the scale of engagement between the two countries is also going up (demonstrated by the rising numbers of work visas issued to US citizens in the past few years). That India’s visa regime offers flexibility for businesses helps matters.

In fact, contrary to perceptions evoked by the “doing business” reports published by international organizations, foreign firms in the IT sector have found the business environment in the country convivial, particularly in the tax regime that the country offers.

Sector executives say the fee structures for issuing work visas for US nationals in India are low compared with those that Indian companies face in the US, which puts the latter at a disadvantage. Some have gone on to suggest that the fees should be rationalized (read enhanced) in the interest of maintaining parity, and the proceeds used to fund higher education in the country.

Though services trade and remittances are a key source of income for the country and the people, the bulk of Indian migrant labour is in low skill sectors that have limited multilateral commitments under them. Thus, there is a need to support progressively higher skill levels among service sector workers to help them move up the value and income chain.

This is not a novel idea by any means. The US has in recent times hiked the fees it charges from the foreign employees working in American companies (H-1B and L1 visas), with the proceeds ostensibly earmarked to fund security improvements along the porous US-Mexico border. In a political environment where getting US visa fees reduced for Indian companies will find little traction given the high (near 20%) rate of unemployment in that country, Indian companies appear justified in demanding that the playing field be levelled lest domestic service providers lose out to foreign vendors.

This has immense significance for the country’s small and medium enterprises in services, and self-employed/venture capital start-ups. In the interest of maintaining parity, for example, it can be argued that the finance ministry should consider imposing an additional income tax/corporate tax surcharge as “country development cess”. A back of the envelope calculation suggests that a 20% surcharge would bring India’s applied tax rates in line with those in the US.

Nonetheless, while the above visa numbers should not be extrapolated to suggest a deluge of foreign employees into India, it is true that with the growth pole of the world having shifted to the Asia-Pacific, there is an increasing interest among the youth and middle-level executives in the West to gain some Asia experience. We should hope that Asia, and in particular India, will make the most of the developed world’s interest in the region. And for that, given its demonstrated comparative advantage in services trade, India would do well to focus its negotiating might on bilateral agreements on movement of people/service providers (outside of the General Agreement on Trade in Services Mode 4), perhaps even as standalone agreements a la bilateral investment treaties or double taxation avoidance agreements.

There are critical known unknowns that threaten to widen India’s current account deficit over the next couple of years. The food and commodity (read crude) prices, for example. These are vulnerabilities beyond the control of policymakers. The external sector, however, can be partially insulated from these by getting on with reforms. Increasingly, the deficit is being bridged by volatile portfolio flows. It might also help if policymakers get their act together on the trade and labour movement negotiations to help partially offset India’s vulnerabilities in the external sector.

Suparna Karmakar is senior fellow, CUTS Institute for Regulation and Competition, and research adviser, CUTS International, Jaipur.

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