Will Obama's moves hit Indian IT sector? Phaneesh Murthy answers

Phaneesh Murthy, CEO, iGATE, is one of few businessmen who openly said Obama's re-election is not the best news for IT outsourcing industry.

In this exclusive interview to rediff.com, he speaks about what would happen to the Indian IT industry now that Obama has been re-elected.

As the CEO of a big software company, what was your state of mind when the US presidential elections were going on?

It is no secret that I believe that the best way for the US economy to recover is by continuing spending and reducing deficit rather than increase taxes to reduce the deficit. That way, my views are more Republican.

As the CEO of a company that has significant operations in India, I have always been a little nervous about the amount of noise that President Obama has made on the aspect of outsourcing.

In this globalised world, for somebody to talk about jobs going overseas reveals a lack of understanding of the global picture because most of these companies that we work for are global in nature and have significant operations. Many of their growth markets are actually in India, China and Asia.

Consequently, these kind of comments send very negative signals and potentially cause a couple of companies who are benefactors of the US government like banks who have taken Troubled Asset Relief Program (TARP) money to rethink what they should be doing.

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Since most of these companies have global presence, will politics play a part in how corporate sector should operate?

Generally speaking, I would say no. But there are a lot of regulatory changes that are happening.

For example, regulations in Financial Services companies regarding security and confidentiality and privacy of data will prevent certain type of work to be done from outside the US. That's the way it will come about.

Politics does play a role in highly regulated industries. It may not come directly as 'No more offshoring' because business has to do what it has to do. There are other regulations which are in play which will probably change the percentage of work and the kind of work that can be done from India.

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You clearly showed your displeasure immediately after the election results by saying that this is not good news for India... while most from the Indian IT Industry including Nasscom said the result will not have any impact on outsourcing.

It is not as if the last 2 or 3 years have been great for the Indian IT industry. They have been under President Obama's watch so to speak.

The fundamental principle is that until you get growth back in the US economy, the Indian IT industry will not register big growth. The question is how do you get growth back? Are you going to tax your way to spend more to get your growth back, or reduce government and let private sector to do what it can do to get growth back.

One of them still worked for the last two years and hence my contention is that the other one would have been better for the overall US economy and therefore for the Indian IT industry.

In general, the Republicans tend to be a little more pro India, at least marginally.

I must confess that I worked very hard all my life to become a CEO. Now unfortunately, in the President's scheme of things, all CEOs are dirty, money sucking greedy people who add no value to society except that they can pay lots of taxes.

This vilification of CEOs that has happened over the last three years is very negative news to me as the CEO. That will probably continue now.

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What would be iGATE's business strategy in the coming years under the Obama rule from an outsourcing point of view?

I don't think there will be regulatory framework which will change here. This is a globalised, interconnected world.

Remember all of the manufacturing is outsourced from China and Mexico. They will be hit first.  

Secondly, all of India has to turn around and say is that you are hurting outsourcing of jobs. Then may be, we don't want to necessarily open our markets as much as we have for the multinational companies.

Hence, I don't believe that in a globalised interconnected world like we are living in today there can be any regulatory framework that can come in the way. It will be all whispers and informal pressure. But at the end of the day, companies will have to do what they have to do.

A couple of days ago, a report came out that the BPO Industry in Philippines seem to be undaunted by Obama's anti-outsourcing threat. They still seem to be very buoyant about the outsourcing prospects as according to them, when the direct operating cost per full-time employee (FTE) is $70,000-80,000 in the US, it is only $15,000-16,000. So, they expect outsourcing to continue. Do you feel that way?

I actually have a slightly different view on this. There may be a country view, an industry view and a company view.

Jobs in India especially for operations (BPO) work will continue to grow. But because of regulatory pressures, a good chunk of that work could end up in own captive arms of global companies with their own employees as opposed to being outsourced to third party vendors.

As a result, there will not be too much impact on jobs coming to India. But you will find a change in the mix between work going to captive units and third party vendors. We will have to wait and watch to see what happens.

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Just before the US Presidential elections, it was reported that the unemployment rate came down a bit. Will it affect the decision making in the US administration and in the industry like yours?

Unemployment rate will fluctuate in the US in the next two years without a clear sense that anything is dramatically changing. I don't know if there is a steady reduction in unemployment in the US. Also, in the new globalised inter-connected world I don't think unemployment can be brought down to 4% levels.

As a result of Obama Health Care, costs will indeed be higher. These numbers fluctuate a little and I don't believe that they matter materially to us right now because we have been operating in this environment now for the last two years with relatively high unemployment rate.

In the last year or so, most of the deals are not coming based on customer giving up the work (previously done internally) to somebody else but they are coming at the cost of one service provider or the other.

What is the ideal situation for the US?

High growth of US economy of 3.5 to 4% would be just perfect for everybody. If the US economy is growing nicely at 4%, then unemployment will come down, consumer spending and sentiments will be higher which means they will be buying more goods and services from all over the world.

A strong growth in the US economy will actually be good for the whole world.

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China is also worried about the kind of growth rate that they have....

Yes, it was felt that China and India have strong enough domestic market that they would not be impacted by the slowdown in the US economy. But it has shown that strong enough domestic market is not enough to sustain the growth rate that we were originally looking for with strong external economy.

With unemployment rate coming down in the US, do you see a fast recovery of the US economy?

It will take at least one year for anything to start changing and even for the needle to start moving because I do not see any dramatic shift in policies which is going to make the economy start growing. If you have a continuity and stability in leadership, it is unlikely you will see a dramatic change in policies and dramatic transformations. And hence it will be a slower recovery.

Where do you see the first signs of recovery coming from?

We would like to see a strong recovery in the housing sector.

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The manufacturing sector has shown signs of recovery there. Are you happy about it?

Yes, manufacturing is currently doing well and that is helping the US economy sustain rather than slipping into like a European recession. I hope this will continue.

Interesting thing is, the consumer sentiment is relatively optimist, so they are spending. Even if I have Rs 100 in my pocket, and I don't feel good, I won't spend it but if I feel good, I will spend it. As consumers are spending, manufacturing sector is moving along.

Any money that you save is not earning you anything because the deposit rates are very low in the US at 0.4%. Hence people are spending instead of saving. I see this trend continuing for another year because I don't see interest rates changing very dramatically.

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In 2008, you said, it was all gloom in Silicon Valley. What is the mood there now?

Silicon Valley is actually very strong right now. There is lot of investment especially in tech companies particularly companies around mobile, cloud computing, analytics, Web 2.0 and Web 3.0 technologies.

The Valley thrives on technology and as long as technologies are doing well, Valley will do well. Definitely there is no gloom in the valley now.

You go to a fanciest restaurant and you don't get a seat - and that to me is always an indicator. That is how it is in the Silicon Valley now.

What is your state of mind as a CEO now as compared to two weeks back just before the election results?

My state of mind is that we just have to continue to work harder to win business. We will continue to invest in IP (Intellectual Property). I don't think there will be a dramatic shift in our strategy in any way. I was hoping for something different. It did not happen. But hope is not a strategy.