U.S. Onshoring: Is There Cause For Worry?

The much-awaited US jobs’ data was released on Friday and it caused a stir in markets across the world with the U.S. Labor Department saying that the country generated only 80,000 new jobs in June against the forecasted 90,000, resulting in no reduction in the unemployment rate which stands at 8.2 per cent. This ends up at an addition of 75,000 jobs per month on average over the April – June quarter which when compared to the January – March quarter average of 2,26,000 additions a month defines the impact.

The weakening of employment data combined with the upcoming elections has resulted in an anti-offshoring sentiment across the U.S. The Democrats, under U.S. President Barack Obama, recently launched a 30-second TV campaign to promote onshoring. Two recent government contracts also caused much talk after the inclusion of a mandatory clause for no offshoring. The U.S. Congress is also set to vote on a bill called the ‘Bring Jobs Home Act’ that will end the tax breaks given to firms moving jobs overseas and will instead provide incentives to those moving jobs back to the U.S. They would be provided with a 20 per cent tax credit linked to the cost of moving jobs back home.

The question is what is the likely impact of these factors on the Indian IT industry? Indian IT firms are heavily dependent on the U.S. and Europe for revenues, with over 60 per cent of the revenue for Infosys and HCL coming from North America while TCS is lesser reliant with North America contributing to 29.62 per cent of its revenues. Of this, not a large proportion of revenue comes from work carried out for the government. So, on purely the government front, the impact is likely to be minimal.

As far as the private sector is concerned, companies will carry out a viability check to calculate the benefits of a 20 per cent tax rebate against the value benefit of offshoring. According to a recent media report, the value benefit for firms would be larger on outsourcing and that the incentive provided would not be enough to trigger a major shift in the offshoring model. Moreover, the clause implies that vendors present there are entitled to get the business but the delivery has to happen from the same place. This would result in higher costs for IT firms but the effect again would be less.

Looking at very basic issues, first, there is a severe shortage of highly skilled people in the U.S. Moving jobs altogether would be highly restrictive and constraint-based. Secondly, for big companies in the U.S. that employ 75,000 or more people in India, working on North American operations and the feasibility of moving the way business is carried out stands against gallantly before the other factors.

Overall, there doesn’t seem to be a reason to worry about in the short term, especially with the industry confident about this being more of a pre-election routine that has been witnessed earlier as well. Considering the magnitude of the implications of the execution of such a shift and the duration it would demand, in case it gets to the execution point, it gives IT firms enough room to act on it and maintain the projected doubling of the industry in the coming years.