Individual business policies adopted by the governments can impact the way businesses are done. In the previous post, there was a mention about how government can have a control over the outsourcing policies, so that jobs are not outsourced indiscriminately.

Well that is true, a recent bill proposed by President Obama does deal with the outsourcing issue.

The proposed policy suggests increasing the tax on the benefits gained from outsourcing the jobs from U.S. Basically, the policy will succeed in achieving its target if there are fewer incentives for the U.S companies to outsource their operations. Although the policy aims at a beginning to create and conserve more jobs in U.S, it’s worth to look at the implications of the policies, especially, to see how that affects Indian outsourcing market.

The policy will definitely affect the foreign companies that are operating in U.S. The policy will mean that the foreign companies will have to pay lot of tax on the labor imported by them. WSJ and LA estimate a tax rate of 55% on foreign companies. That will be a setback for countries like India, which is the biggest player in outsourcing industry. A present slump in number of H1B visas taken up is anything but a reflection of the same.

Foreign companies might savor the advantage due to lack of competitiveness from U.S companies (owing to a high cost). But, in the long term, it will hurt all the economies, since U.S investment is a big factor and reduced investment from U.S means reduced money in all the markets, especially India.

But the policy will not lead to automatically stop the U.S companies from outsourcing work from home to India. Chances are that comparative cost advantages that countries like India might still provide, would outweigh the loss incurred by the tax loss companies will face in the US.

A rise in domestic BPO sector is an indicator of that. It is possible that some third party companies will be affected because of regulations on the US counterparts, but that is yet to be seen.

The world market is highly competitive and one has to compete in a free market, “closing doors” and “protectionism” is not a solution. The policy makers will have to realize that and instead concentrate on stronger ways of tackling the situation, for e.g. by investing in education, science and technology, renewable energy sources, etc.

Ensuring a stable economic environment is prerogative of every government. But the world economy cannot be put on balance to attain such a balance. Outsourcing has been number one player in world economy globalization, economic growth, and generating employment. So one would need to think about policies that are mutually exclusive of the benefits they provide by retaining jobs in home country as well as overall growth.