India must oppose surging protectionism

It should aggressively voice its concern about increasing restrictions on the movement of professionals at both bilateral and multilateral forums

India’s second largest information technology company Infosys Ltd has announced that it will hire 10,000 Americans over the next two years. This comes after the US administration’s criticism that Indian technology companies are taking jobs away from Americans. Last month, US President Donald Trump signed an executive order to review the H-1B visa programme. Indian IT companies earn the bulk of their revenue from the US market and are big beneficiaries of the work visa programme. Legislation has also been introduced in the US House of Representatives, aiming to double the minimum salary of H-1B visa holders to $130,000 per annum. According to analyst estimates, this could affect the operating margins of Indian technology companies by up to 300 basis points. One basis point is one-hundredth of a percentage point.

The H-1B work-visa programme has been a fiercely debated issue in the US. Critics argue that the programme has been used by Indian outsourcing companies to bring in cheap labour, which hurts American workers both in terms of employment and income. Supporters, on the other hand, are of the view that the programme attracts required skills and helps US firms remain competitive. For instance, The Economist reported in December that in the US, “vacancies in computing and information technology could easily top a million by 2020”. The bigger question that US policymakers should address is this: will increasing the cost of hiring foreign workers and raising wages make American firms more competitive?

The overhaul of the visa programme is part of a wider protectionist agenda of the Trump administration, which has withdrawn from the Trans-Pacific Partnership and intends to renegotiate existing trade deals.

However, the US is not the only country which is taking protectionist measures. Australia and New Zealand have also made movement of professionals difficult, and the UK has tightened visa norms. The chief economist of the International Monetary Fund, Maurice Obstfeld, has fittingly described the evolving situation in his foreword to the latest “World Economic Outlook”: “Mainly in advanced economies, several factors—lower growth since the 2010-11 recovery from the global financial crisis, even slower growth of median incomes, and structural labour market disruptions—have generated political support for zero-sum policy approaches that could undermine international trading relationships, along with multilateral cooperation more generally.”

India will have to tread carefully, given this situation. Union commerce minister Nirmala Sitharaman recently hinted at counter moves against US companies operating in India. Indian policymakers should avoid taking such measures for multiple reasons. First, Indian IT services companies have themselves to blame in part at least for not realizing in time that the labour-cost arbitrage model has limitations. Second, the US is not the only country which is making movement of professionals difficult.

Third, India needs foreign direct investment (FDI) to fund its growth. The Narendra Modi government has done well to liberalize FDI rules in various sectors, which has resulted in a significant surge in foreign investments. Any retaliatory action against companies from the US—or any other country, for that matter—will affect the confidence of international investors and will bode ill for the economy in the medium-to-long run. FDI not only creates jobs but also has a spillover impact in terms of knowledge transfer, which helps increase productivity in general. A 2015 working paper, Impact Of American Investment In India, published by the Indian Council for Research on International Economic Relations had highlighted how investment from US companies has benefited India in various sectors. India has gained significantly after opening up its economy in 1991 and there is no reason why it should not take the process forward.

Thus, rather than replying in kind, India should aggressively voice its concern against increasing restrictions on the movement of professionals at both bilateral and multilateral forums. Global leaders did well to avoid protectionist policies in the aftermath of the 2008 financial crisis. India should play an active role in reviving a similar global consensus through multilateral forums as rising protectionism will have implications for global trade and growth.

At a broader level, even as some of the advanced economies are facing difficulties and are growing at a slower pace, the basics of economics have not changed. This is the reason why the work of early writers in modern economics remains relevant even today. In his classic work, An Inquiry Into The Nature And Causes Of Wealth Of Nations, the father of modern economics, Adam Smith, noted: “…nations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.”

Wise words given the current situation—and as worth heeding now as they were when he wrote them.

How can India deal with rising protectionism?