The flip side of outsourcing to India

The flip side of outsourcing to India

Posted in India | 13-Oct-05 | Author: Rabindra P Kar| Source: Asia Times

In recent years, there has been a vigorous, sometimes acrimonious, debate about whether offshoring (also referred to as "outsourcing") is positive or negative for the United States and the other developed Western economies. Underlying this debate is an unspoken assumption - that offshoring has been very good for the developing countries where the jobs have moved. India is widely regarded as the prime beneficiary of this phenomenon. Consequently, it seems like a rhetorical question to ask whether offshoring is good for India.

If we consider the recent past, since the early 1990s, the general consensus is that offshoring has been a big positive for India. It has been a big factor in changing India's image from a land of poverty and social "backwardness" into a potential economic superpower. It has spawned an information technology industry with exports of more than US$10 billion annually. It has greatly slowed, if not reversed, the "brain-drain" of educated and talented Indians to the West.

Of course, there have been negatives too. The sudden influx of companies and jobs into a few urban areas, notably Bangalore and New Delhi's suburbs, has overwhelmed the existing poor infrastructure, leading to impossibly congested roads as well as water and electricity shortages. The huge inflation in land and housing prices in urban areas has hit the common man hard because the average Indian's income is puny compared to what the nouveau-riche techies earn. On balance though, the offshoring wave has benefited India, both psychologically and economically. At least so far.

Can India ride this wave to economic stardom in the next generation? Long-term, is offshoring good for India?

The central premise of this article is that while offshoring has been good for India in the short-term, the long-term negatives will outweigh the positives. Since that is both a counter-intuitive and controversial assertion, the rest of this article will deal with the pitfalls of offshoring as a driver of India's socio-economic destiny.

Let's start by looking at offshoring's employment potential. Estimates in the US media of the number of jobs currently outsourced to India range between 400,000 and 700,000. The most highly publicized outsourcing estimate, by Forrester Research (2004), predicted that 3.3 million US jobs would be offshored by 2015. Even if (a big if) India got a big majority of them, that amounts to at most 2.5 million jobs. If in the same period the European Union, Japan, Australia and Canada combined outsourced twice as many jobs as the US, that would total 7.5 million jobs in 2015.

Now consider that India's population in 2015 will be nearly 1.2 billion people, which implies an adult workforce of 300 million or more. Thus even the optimistic predictions are that no more than 2.5% of India's workforce will be employed in offshore services. Yet today, both India's central government and many "progressive" state governments are obsessively focused on attracting offshore work - spending precious resources to create technology zones, offering tax incentives and lavishing time and attention on pitches to multinational corporate executives. If India's population were similar to South Korea or Taiwan (in the tens of millions), providing offshore services could have been a big part of its future employment plans. But a nation containing one-sixth of humanity cannot achieve prosperity by taking jobs from other nations with much smaller populations. That is simply not a long-term, sustainable strategy.

A more subtle problem with the offshoring boom, is that it is giving urban Indians unrealistic expectations and distorted goals. The middle-class in India and China now believe that as the jobs move to Asia, they will be able to enjoy the consumption-heavy living standards of middle-class Westerners - two cars, a big, single-family, centrally air-conditioned home; all the electronic gizmos that their hearts desire, and so on. Their dreams of gizmos galore are achievable, since electronic goods keep getting cheaper and more plentiful. But there are some huge obstacles in the way of the other expectations - namely population size, population density, energy constraints and environmental limits.

First consider the effects of widespread automobile ownership. If just one-third of China and India's combined population could afford the US norm of one car per adult, that would be 800 million more cars in these two countries alone. With the world now struggling with oil at more than US$60 per barrel, what would the price of oil be then? If the 200 million cars in the US produce such damaging levels of pollution and global-warming, can our planet withstand a three- or four-fold increase in automobiles?

We have to recognize that living standards are not merely a function of national income levels. They are bound by the limited natural resources available within a nation's borders. India's population density is nine times that of the US. Hence the average Indian can never enjoy the 2,500 square foot single-family home with front and back yards, which is so commonplace in American suburbia. Indians may think that they will be able to buy a bigger home if their income rises. But if the average income in a city or region doubles, the price of good housing often more than doubles.

It isn't just housing that's resource-constrained. Clean water and energy are very finite resources, at least in the foreseeable future. To achieve a living standard comparable to the West, Indians will need access to much more fresh water and electricity per capita. India's water situation is precariously dependent on the monsoon even at the current levels of consumption. As for electricity, India's massive fossil-fuel dependence throws it between the devil (of pollution from coal-fired plants) and the deep blue sea (of high oil prices and coming oil shortages).

The bottom line is that money earned from offshoring cannot significantly raise the living conditions of the average Indian, but it definitely raises expectations. The yawning lifestyle gap between the small, techno-savvy class and the rest, simply creates resentment and frustration, not progress.

Despite its population and limited natural resources, India is not doomed to poverty and shortage. If India's awesome collective brainpower is directed toward developing and utilizing technologies and strategies appropriate to India, it could dramatically raise its own living standards and that of much of the world. The areas of intense focus should be:

(a) Renewable, low-polluting energy sources: India should be investing a lot more in the development and deployment of solar, wind and waste-biomass power. Consider solar power. Being a tropical country it gets much more solar power per square meter per year than Europe or Japan. Moreover, since Indians have not become "used to" central air-conditioning, even current levels of solar-panel efficiency generate enough electricity for the average Indian home. Or consider hybrid (gas-electric) automobile technology. Given its huge oil-import bill, India should be concentrating on research and development (R&D) and manufacturing of hybrids or fuel-cell technology instead of taking pride in the explosion of gas-guzzling foreign car models on Indian roads.

(b) Water purification and conservation technologies: Most Indian rivers have undrinkable water because raw, untreated sewage is dumped into them by towns and villages upstream. Sewage treatment is not a "sexy" technology, but it is far more important to India's well-being than software or automobiles. Most Indians have neither toilets nor showers. But the fortunate few who do are unaware or unconcerned with installing devices such as low-flow shower heads or dual-action flush tanks.

(c) Biotechnology and pharmaceuticals are making great progress in India, but how little of it is oriented toward the diseases that affect the poor majority of Indians. India doesn't need better cholesterol-fighting drugs. It needs vaccines against malaria, cheap medicines against dysentery, cures for intestinal parasites. But most of all India needs cheaper and simpler contraceptives. If India's population growth is not controlled, the current economic boom will make no long-term difference whatsoever.

Unfortunately, India's dynamic private-sector companies are doing very little in the areas mentioned above. Instead, the lure of foreign investment and the great offshore services boom have them focused on products and competencies that serve wealthy, consumerist Western markets. After struggling to gain political independence after 150 years of colonial rule, India is "willingly" surrendering its economic independence to the agendas of Western corporate shareholders.

The final irony of the offshoring saga is that it is pushing Indian industry headlong into, what I call, the great intellectual property (IP) trap. Indians are swallowing self-serving Western "advice" that "strengthening" IP protections will encourage research and innovation. In truth, the Western patent regime is completely dysfunctional. Huge companies such as IBM and Microsoft are granted thousands of patents each year, not because they have made that many big "intellectual strides", but because the US patent office, deluged with applications, grants patents to minor improvements that are both obvious and trivial. Worse, a large number of "IP law firms" have come out of the woodwork, to profit from aggressively (sometimes abusively) enforcing these patents. Instead of encouraging innovation, this IP regime stifles it because individual inventors and small companies cannot afford expensive lawyers to defend themselves against predatory patent litigation.

Since R&D in developing economies such as India, China, Brazil and others, is often five to 20 years behind the "cutting edge", almost anything developed independently in these countries will run afoul of some Western patent. If the developing world honors all the patents filed in Western countries, its precious resources will be sucked dry paying royalties, or it will remain in permanent technological bondage. (Look at it from another angle - how much in royalties did the Western world pay India for inventing the zero?) Indians know in their hearts that IP protection is a game stacked in the developed world's favor. They know that no country becomes a great power while playing by some other great powers' rules.

But the CEOs and chairmen of India's budding companies - the Wipros, the Infosys, the Ranbaxys - are not going to speak up in India's interests because they fear that would be the end of their "partnerships" with Western multinationals. How could Indian Business Process Outsourcing (BPO) firms bid for offshore contracts from GE or Intel, if they don't sign on the dotted line with regard to intellectual property?

And what happens when they win the BPO contracts? Thousands of smart, educated Indians then become the intellectual slaves of a foreign company, for a fraction of the wages they pay their own employees. Every line of software code, every engineering drawing, every new molecule, every revolutionary idea now becomes the property of a Western corporation. Naturally, these advances will be duly patented or copyrighted. The supreme irony will be that future generations of Indians will be forking over royalties to Americans or Europeans for the intellectual output of their own countrymen. And that will be offshoring's enduring "legacy" to India.

Rabindra Kar was born in Bombay (now Mumbai), India, and now lives and works as a computer software developer in Austin, Texas. He has been an activist on work-visa and offshoring issues since the early 1990s. Rabindra holds a bachelors degree in electrical engineering from the Indian Institute of Technology, Bombay; a masters degree in computer engineering from the University of Notre Dame; and an MBA from Portland State University, Oregon, USA.

(Copyright 2005 Rabindra P Kar)

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