In a move that could upset the Indian outsourcing industry’s robust growth so far, China has announced operating tax exemption for its outsourcing businesses till 2013. The exemption, which will benefit Chinese companies in 21 cities, is in line with China’s aggressive campaign to emerge as the top outsourcing destination in Asia. India’s IT related outsourcing services — a sunshine industry — can no longer take comfort in the logic of economic competitiveness. Apart from a rising China, the sector is also looking at rising protectionism in its primary client destination, the US.
Ever since the Obama administration came to power there has been a concerted push to disincentivise outsourcing. American companies, some of whom heavily outsource to India, have been in the firing line. In a bid that is supposed to keep jobs in America, the US government has been threatening to revoke their tax benefits. The recent move to substantially hike the H-1B work visa fee in order to fund border protection measures with Mexico, is congruent with this line of thinking. Although it would help if the US government abandons this protectionist mindset, the Indian IT sector must recognise the changed global reality: it faces a highly competitive future.
Given that Chinese pockets are deeper than ours, it’s not a good idea to compete in terms of providing tax benefits to outsourcing businesses. The Software Technology Parks of India tax benefits are being discontinued from next year, and these should be allowed to lapse. Instead, IT service providers need to look for new markets and develop new products, while the government must help the IT industry address the skills crunch which is emerging as an obstacle to its expansion. The government needs to speed up educational reforms and adopt a more liberal attitude to the entry of private and foreign players in education, while ramping up the quality of education in government-run schools and colleges. Better quality education would not only resolve the skills crunch but also help IT firms move up the value chain, so that customers would be compelled to choose Indian IT products and services because of quality rather than cost considerations alone.
Simultaneously, the industry needs to diversify its clientele and aggressively explore destinations outside the US and the Anglophone world. ContinentalEurope is a big market, the Middle East and South East Asia also have great potential. The IT sector must be able to compete globally on its own merits, and the government must do its bit to facilitate this.
Source:http://timesofindia.indiatimes.com/home/opinion/edit-page/Chinas-IT-Challenge/articleshow/6301403.cms
