It has been reported that protectionism is growing exponentially since the last couple of years, and it is drastically affecting the growth of the Indian technology sectors. For instance, the reduced corporate tax rate by BEAT has impacted the R&D centres of the tech giants in India. As a result, IT industries are facing a rising wave of protectionist tendencies in key markets globally.
The Previous Wave
In 2017, India was hit hard by the protectionist measures according to the Global Trade Alerts (GTA) database. The effect of Base-Erosion and Anti-Abuse Tax (BEAT) by US government had a negative impact on global technology companies. BEAT was active since early 2018 in order to create more jobs in the US and stopping the job-seekers to move to offshores.
In an interview, Fatema Hunaid, Partner, Grant Thornton India LLP said, “Basis analysis of some of the leading IT companies that outsource a large part of their R&D works to India, BEAT could have an effect of wiping out the benefit of headline tax rate reduction”. She also added, “Yet, while the industry is pausing to review, I believe this new tax policy does not take away from the sheen off the inherent advantages of outsourcing to India largely owing to the talent pool and cost arbitrage.”
Due to the large talent pool in India, many MNCs and tech giants like Google, Apple, IBM have been investing heavily in India. There is an exponential growth in the R&D centres since the last couple of years.
According to a report, Finance Minister Arun Jaitley said, “The electronic market in India is one of the largest in the world and is expected to reach $400 billion in 2020”. He also said that the Government recognises the potential of the IT sector and hence electronic systems and IT and BPM (Business Process Management) have been included in the 25 sectors in the ‘Make in India’ programme.
In a piece of recent news, Sangeeta Gupta, senior vice-president, Nasscom observed, “If it is a moderate downturn, given the digital imperative, hopefully, Indian IT can ride it.” She also added, “Digital technology spend is significantly low and I think the headroom for growth is much higher. Banks and financial services companies are already thinking about what can be done to invest in these technologies to deal with such change.”
At the end of 2018, Godman Sachs cut the US economic growth forecast for the first half of 2019 to 2% from 2.4% but added that it was still not worried about a recession. On the contrary to the protectionism, India firms were among the biggest beneficiaries in the last two recessions as US companies transferred the management of working offshore for costs that forced the tech giants like IBM and Capgemini to replicate their model by inclining their workforce significantly in India.
Phil Fersht, CEO, HfS Research said in the same report, “I do see an increase in IT-centric work going to some of the Indian heritage services providers, but not only to save on costs, also to contract for project work in complex areas such as automation, analytics and machine learning as the need for skilled resources becomes increasingly desperate from US and European businesses.”
Manish Tandon, Chief Executive of CSS group also reported that the tech industry might emerge as a strong partner for global organisations to wade through their economic pressures.
Impact On India IT Ecosystem
It is a known fact how Indian IT companies are connected broadly with the US in the technology domain. According to a report, the total number of H-1B visas issued by Indians was 61.8% in the year 2016 where 61.2% of the total initial employment belonged to the IT sectors. The protectionism wave has had a huge impact, both socially as well as economically for Indian IT companies.
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