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Ohio ban on outsourcing upsets IT cos

India's IT industry reacted with anger and concern to a move by the US state of Ohio to ban all outsourcing of government projects.

Mail Today Bureau | September 21, 2010 | Updated 17:53 IST

India's IT industry reacted with anger and concern on Wednesday to a move by the US state of Ohio to ban all outsourcing of government projects. The $50 billion (Rs 233,400 crore) IT sector gets more than 60 per cent of its revenues directly from outsourcing.

The fear is that Ohio governor Ted Strickland's populist move may spread to other states, with less than two months to go for the US Congress elections in November. The Ohio ban follows on the heels of a controversial move to restrict the number of H1- B and L1 visas and doubling their cost. This was also seen as being aimed directly at the Indian IT industry, the largest user of these categories of visa.

The move has generated sharp criticism from India Inc which has dubbed it " discriminatory" and " against the spirit of free trade". Som Mittal, president of Nasscom, an apex body for the Indian IT and ITEnabled Services (ITES) companies, said the move was more damaging  in spirit" as more such electoral rhetoric could be expected in the next few months.

These twin issues are likely to be irritants during US President Barack Obama's November visit to India.

"No public funds should be spent on services provided offshore," Ohio Governor Ted Strickland said in an executive order issued on August 6 asking state officials to " remain passionately focused on initiatives that will create and retain jobs in the United States in general and in Ohio, in particular". The order came into effect from Aug 31.

" We must do everything within our power to prevent outsourcing jobs because it undermines our economic development objectives, slows our recovery and deprives Ohioans and other Americans of employment opportunities," he added.

TCS, India's largest IT firm, runs a project in Ohio. It employs 300 people and receives $19 million in tax credit for creating local jobs. "All staff there are involved in private projects," an analyst quoted a company official as saying.

Nasscom is leading a delegation to the US later this month and will be taking this up with relevant officials in the US. "We are taking up the issue with the US officials concerned later this month. We will also seek the support of the Union minister for industry and commerce Anand Sharma, who will be in the US at the same time," Mittal said. He added, "It is imperative that the focus on free trade remains strong, but instances like Republican Senator (Charles) Schumer's Border Security Bill and the Ohio state ban on outsourcing only reinforce our stand on discrimination."

Expressing its concern over the ban, the Federation of Indian Chambers of Commerce and Industry (Ficci) said that at a time when the global economy is just getting out of a financial crisis and when countries need to work collectively, protectionist measures of any kind could further deteriorate the situation.

"At a time when companies from across the globe, including those from the US, are participating in government projects in India, Ohio state's ban on offshoring by government departments would discriminate against Indian companies," Amit Mitra, secretarygeneral, Ficci, said.

According to another industry body Assocham, the ban is against the spirit of " free world trade" and " amounts to creating trade barriers" which will go against the US. Infosys chief executive officer ( CEO) and managing director ( MD) Kris Gopalakrishnan said, " We are concerned with the recent news from the US about banning offshore outsourcing by Ohio state government departments." Infosys is India's second largest IT firm and a big part of its $ 4.59- billion revenue in 2009- 10 was generated from the US market.

Harit Shah, an IT analyst at Karvy Stock Broking said the government's " mindset of protectionism" in the US may lead to some more drastic measures.

The uncertainty about " what more is likely to come" is bothering the industry.

Even if the ban, which Nasscom is examining the possibility of challenging legally, spreads to other states, it may not immediately impact India's IT exports, since government, particularly state governments in US, are not a major vertical for Indian IT companies. The biggest revenue earners for Indian IT outsourcers are the banking, financial services and insurance ( BFSI), manufacturing, telecom and retail sectors.

Besides, players said that Indian IT companies are increasing the representation of local citizens in their global delivery centres in the US and Europe, in line with local sentiments. Though such a move will affect their margins to an extent, IT companies could easily afford that kind of negatives, analysts said.

Shah added that the ban is considered to be a non- tariff trade barrier by the World Trade Organisation ( WTO) and it would be very difficult for the US to defend Ohio government's move it in the world forum.

Srishti Anand, IT analyst at Angel Broking, said the likes of TCS and Infosys could employ locals and continue with their outsourcing operations. " The only concern is the possible imposition of tax on outsourcing, which could affect these companies' margins," he said.

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