Higher Product Costs Would Plague the US if Outsourcing to India is stopped

Can the US Afford to Halt Job Shipping to India

Imagine the scenario that outsourcing to India stops for a month. Consider that outsourcing to India, largely in the form of Business Process Outsourcing and Knowledge Process Outsourcing comes to a standstill.

The purpose of understanding such a situation is important as most of us take outsourcing to India or any other country for granted. To know the fallouts in case outsourcing to India stops is also important as India still commands 40 per cent share of the world outsourcing spend. In this context, outsourcing to India is not just the driver of global outsourcing; outsourcing to India also drives economic growth by absorbing millions of business processes, which would otherwise be untenable - cost-wise and strategically.

To clearly comprehend the consequences that would result if outsourcing to India is halted for a month, it is important to be aware of the present-day form and structure of outsourcing and therefore outsourcing to India.

21st century outsourcing in the second decade is like “cloud computing” or a Banyan tree. Both have deep roots and far-reaching tentacles. Outsourcing to India is also like engine oil—invisible in day-to-day business dealings but critical nonetheless.

These different natures of outsourcing will have a bearing if outsourcing to India is stopped. For instance, the global outsourcing industry is worth more than $380 billion, and with India having 40 per cent share, about $150 billion will be sucked out of the global economy if outsourcing to India is reversed.

Tightening the screws on outsourcing to India will have a reverse cascading effect. Input costs would rise for companies engaged in activities such as software development, law, transcription, web design, accounting, engineering, and entertainment, etc.

Once these input costs rise, as such deliverables are inputs for many companies not directly engaged in these activities, the products and services made by them will become costlier. Costlier services and products will directly and immediately lead to fall in demand and cause economic growth to decline. Decreased economic activity will result in a decrease in international trade.

This, itself will lead to less and less companies outsourcing to India or other countries. Thus, for all proponents of stopping outsourcing to India, both in the U.S. and Europe, it is important to remember that outsourcing is not a linear phenomenon. Outsourcing is a business reality that is organic in nature.

What this aspect of outsourcing does is that it makes outsourcing to move in step with all other aspects of business activity and not in a parallel manner—in answer to those against outsourcing to India.

In other words, if raw materials and other expenditure form input costs—outsourcing is the discount that makes services and products commercially attractive and even viable. This is specially the case with services and products originating from the U.S. and Europe.