American president Barack Obama wants to end tax breaks that he thinks lead US companies to shift jobs to developing countries like India. Indian analysts fear this will hit foreign investment and jobs in India. These fears are overblown. Indeed, the tax changes may unwittingly facilitate the takeover of US firms by Indian ones, showing once again that protectionism ultimately hits the protectionist.

The US imposes corporate tax on the global income of its companies, not just their US earnings. US companies have long protested that this made them uncompetitive in low-tax countries. To reduce this disadvantage, the US made profits earned abroad tax-free, until repatriated to the US. This tax break helped US companies establish large operations (and shift jobs) abroad. Obviously, the tax break was not the only consideration, but made outsourcing more attractive.

They came initially for cheap labour. But soon they found that India had a greater comparative advantage in skilled than unskilled labour. Indian companies like Infosys, TCS and Wipro proved they were world class in computer software and business process outsourcing (BPO). Other companies showed that highly skilled services could be outsourced to India too – credit ratings, radiological reports, and legal services. And India’s scientific skills encouraged many multinationals to outsource R&D too. Others came to access India’s own market for goods.

Source: Times of India

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