12 Jun 2017
Topics IndiaU.S.

The Trump administration’s decision to review and revamp the H-1B visas, aiming at protecting information technology (IT) jobs in the United States, could prove counter-effective in the long run.

When U.S. President Donald Trump signed an executive order to revamp the H-1B visa guest worker programme on 18 April 2017, he did so with the aim of protecting U.S. jobs, especially in the IT sector.

Based on historical trends, the information and communication technology sector has a strong impact on the economic growth of a country, according to Professor Vu Minh Khuong at the Lee Kuan Yew School of Public Policy (LKYSPP), who referenced this impact in his paper ICT as a Source of Economic Growth in the Information Age: Empirical Evidence from the 1996-2005 Period.

Indian IT companies sharing the spoils

Indian IT professionals account for 70 per cent of all H-1B holders. This is mostly due to Indian IT companies such as Tata Consultancy Services (TCS), Infosys and Wipro sending a large number of IT engineers to service clients in the U.S. their largest overseas market. These companies reportedly obtained around 86,000 H-1B visas from 2005 to 2014, which is approximately the same as the total number of H-1B visas the U.S. issues each year.

Reports claim that Infosys alone filed 6500 H-1B applications in 2016 and some 9000 in 2015. But Trump's decision to review the visa allowance already appears to be having an impact Infosys is reportedly applying for under 1000 H-1B visas this year.

Questionable move for the U.S. economy

The move, however, may be misguided in terms of creating long-term IT jobs in the U.S.

James Crabtree, Visiting Senior Research Fellow at the LKYSPP, explained that while the move was an attempt to prevent shipping IT work offshore to India which can be done in the U.S., it may not benefit the U.S. economy.

For one, it could lead to U.S. companies paying more for IT consultants, since they now have limited access to cheaper Indian IT staff. Compared to their U.S. counterparts, who earn an average of US$150,000 per year, Indian staff are reportedly paid US$60,000 to US$65,000.

Furthermore, it may not be as simple as replacing Indian IT consultants with U.S. ones.

The bigger problem is that there are not as many idle U.S. IT workers, Crabtree said. It is different from trade, where many low-skilled factory jobs are lost to those in India. There are not as many idle IT workers in California to pick up the slack close to zero.

He added that well-paid U.S. IT consultants will see their wages rise should the hiring of Indian IT consultants see a sharp decline in the U.S.

Trump's decision will no doubt benefit U.S. IT professionals and further the administration's protectionist agenda but in the long term it could have other macroeconomic implications.

A greater proportion of workers in U.S. IT companies will be Americans, but the overall size of the workforce for the industry will decline, meaning less work being done, Crabtree said.

This decline in output could hurt an already mature U.S. economy that has not seen significant growth recently. The U.S. economy expanded only 0.7 per cent during the first quarter of 2017.

A double-edged sword for India's IT sector

In the meantime, the move is expected to hurt the US$150 billion Indian IT sector, of which the U.S. accounts for 60 per cent.

The short-term impact is that Indian IT companies will have to hire more workers in the U.S. instead of using workers from India, Crabtree said, which means those companies will be less profitable due to the higher salaries of U.S. workers.

However, Vineet Nayyar, the vice chairman of major Indian outsourcing firm Tech Mahindra, has downplayed the impact of the move, classifying it as a minor setback in an industry of four million people. Some even heralded it as beneficial. As Crabtree noted, the move is likely to shift more IT consulting work to India.

At the moment, they [Indian IT companies] have a choice to do a task in India or the U.S. Since U.S. workers are more expensive than visa sponsorship for Indians, there is an incentive to do more [work] in India.

According to Crabtree, one upside is that Indian IT companies will have to reassess how they do business.

Forcing them to innovate could make them more efficient in the long run, albeit taking a hit in the short run.

There is also the possibility of U.S. IT companies moving some of their operations to India in order to continue accessing cheaper labour. Due to India's strength in IT services, Crabtree said that U.S. and European companies will continue to build up operations in India.

[This is] not just in basic IT outsourcing, but also in research and development and design, he said. India is an attractive place especially cities like Bangalore and Hyderabad to develop such centres. Increasingly, global companies will look to them for expertise on technology services. I don't see any reversal of that trend.

Impact on bilateral economic relations

Despite this, the impact of tightening the H-1B visa could have implications for bilateral relations.

U.S. foreign direct investment in India stood at US$28.33 billion in 2015, while 100 Indian companies made US$15 billion worth of tangible investments across 35 U.S. states, creating more than 91,000 jobs. Indian IT companies alone have reportedly invested almost US$2 billion in the U.S.

In the light of the above, it may not be a wise economic move to force out these Indian IT companies. Moreover, should U.S. firms also shift their operations to India as a result of this policy, the U.S. could see a loss of its IT jobs in the long term rather than new ones being created.

Indian Prime Minister Narendra Modi has been lobbied strongly both by industry leaders back home and Indian IT professionals working in the U.S. to take the H-1B visa matter up with President Trump when they meet in the U.S. this June.

According to Crabtree, Trump's move could provide Modi with a powerful bargaining chip in other bilateral negotiations. IndiaU.S. trade ties have expanded by more than 10 times in the last three decades. The bilateral trade in goods surged from US$5.6 billion in 1990 to US$66.2 billion in 2015.

India's rivalry effect on U.S. exports is particularly low, meaning India poses less competitive threats on the export performance of the U.S., as Vu indicated in his paper Effects of China and India on Manufactured Exports of the G7 Economies. This is a point that Modi would do well to highlight during his meeting with Trump.

The U.S.'s relationship with India is also strategically important. According to Crabtree, both countries share a common threat in China's rise. He added that this has in turn helped change traditionally prickly bilateral relations into friendlier ones in recent years.

A no-win situation

President Trump has a lot at stake in approaching the H-1B visa review. Instead of creating new American jobs, it will likely lead to wage increases due to the substitution of cheaper Indian IT labour with more expensive U.S. employees, thus increasing costs for the U.S. IT sector.

The move may also force some U.S. IT companies to relocate operations to India and chase away growing Indian IT investments in the U.S., both of which could result in job losses. The Trump administration should also be mindful about antagonising a growing trading partner and strategic ally, especially since India is expected to be the world's fifth fastest-growing economies. The policy has wider repercussions than perhaps the Trump administration predicted.

Topics IndiaU.S.