'Not goods, but services at risk': Raghuram Rajan warns HIRE Act could hit India harder

Former RBI Governor Raghuram Rajan has warned that India should be more concerned about the proposed U.S. HIRE Act, which could impose tariffs on outsourced services, than the recent $100,000 H-1B visa fee hike. He said the new legislation under debate in the U.S. Congress poses a more significant threat to India's service exports and global talent pipeline.

The economist said that while higher H-1B visa fees would cause short-term disruptions, the potential expansion of tariffs under the HIRE (Help In-sourcing and Repatriating Employment) Act could have a far more lasting impact.

"One of our biggest concerns is not so much the goods tariffs but if they try and find ways of imposing tariffs on services. This is a threat. There's the HIRE Act, which Congress is debating, which will try and put tariffs on outsourced services," he said in an interview with DeKoder. "How that'll be implemented is anybody's question, but this creeping of tariffs beyond goods to services to Indian visitors into the U.S. through the H-1B route - these are all concerns."

He noted that India has already been hit by record 50% U.S. tariffs, compared to 47% for China, affecting key industries such as textiles. "It certainly is a very big issue for India for certain industries - textiles for example - where we probably are losing festival season in the U.S.," Rajan said. "Going forward, what we don't want is the supply chains we've built up and that we've integrated into to be permanently disrupted."

Rajan emphasised that India must push for lower tariff levels during ongoing negotiations. "It's extremely important for India that our tariffs be brought down quickly, especially in these areas where we have labour-intensive industries which have made a certain amount of headway into the U.S.," he said. 

On the H-1B visa fee hike, Rajan said the overall impact might be less severe than initially feared. "Over time, the need for H-1B visas for Indian companies has been diminishing because a lot more can be done through virtual networks rather than by physical presence," he said. "More than H-1B, it's a question of whether this outsourcing will be tariffed - and that would be a bigger concern."

He added that existing H-1B visas and STEM graduates transitioning into employment would not face the new fee, and companies might adjust by hiring differently. "Indian companies can still have personnel in the U.S. - they may recruit more from Indian students who acquire degrees in the U.S.," Rajan said. "But finally, it may well be that Indian companies decide they don't need to send somebody there. Let me hire a couple of people there to do that front-end job, but I will do much more on the virtual side."

Rajan said such shifts could accelerate the development of India-based operations for global firms. "When we think about U.S. companies like Microsoft that hire on an H-1B basis, many more of those people will be hired directly in India but kept in their GCCs and transmitting their work across," he said. "There will be adjustments. The net effect will be less H-1B immigration into the U.S., but it doesn’t look as bad as it seemed at first glance. I think the HIRE Act is much more important for us."