It has been a turbulent week for India’s world-beating software services industry. The optimism that followed US President Donald J Trump’s statement in his speech to Congress last week that the doors would still be open for skilled immigrants gave way to uneasiness two days later when the US Citizenship and Immigration Service tweaked the rules for fast-tracking H-1B visas, which are the industry’s mainstay. The US government agency announced that from April 3 it will suspend premium processing of H-1B applications, which allows fast-tracking and costs around $1,100 extra.
Infotech industry lawyers say they do not use premium processing service often these days but are worriedly watching for other changes that may be on the way from the US Citizenship and Immigration Service. “We were using the fast-track service in earlier years but try to avoid it now,” said one lawyer. “The visa is already very expensive.”
Can India’s giant software services industry survive the twin challenges of US protectionism and rapidly evolving technological changes? Some insist it can handily evolve and scale new heights, but others see dark days ahead as the industry struggles to retain its dominance of the global software development market.
What is at stake for the software services industry and India cannot be overstated. Over the last 25 years software services have grown from a cottage industry into a behemoth that employs 1.1 million highly skilled people. It has a chain three times as long of suppliers and ancillary industries fuelling its constant growth. During the past quarter-century, India’s infotech industry’s revenues have soared to almost $150 billion of which the largest chunk comes from software services. India controls an impressive 56% of the global outsourcing industry.
There are already about 350,000 Indian software engineers and workers in the United States. For them, the United States is the Promised Land – the land of the green card and very often from where there is no return. “The philosophy with many engineering graduates is that they want to be in the US,” said a senior consultant who handles immigration for several top companies. “The aspiration is to be there. Very few come back.”
US protectionism
For this army of software developers, the immediate threat comes from Trump and the tide of protectionism enveloping the US. “Trump is pandering to the racists and xenophobes who helped him get elected and he will surely place limits on H-1B visas,” says tech guru Vivek Wadhwa, a Distinguished Fellow at Carnegie Mellon University’s College of Engineering in Silicon Valley.
The cuts could come from one of Trump’s headline-making executive orders such as the contentious travel ban announced in January, which a federal court later put on hold, or from one of several bills in the US Congress aimed at what is described as the “abuse of the H-1B and L-1 visas”.
The High Skilled Integrity and Fairness Act, introduced by California Congressman Zoe Lofgren, has attracted widespread attention. It aims to nobble companies employing non-Americans by more than doubling the annual minimum salary for H-1B visa holders from $60,000 to a hefty $130,000.
Senior infotech executives point out that higher salaries push up costs and could create problems for existing staff who may already be H-1B visa-holders. “Even if it [the base salary] goes just to $100,000 it will affect large numbers and there will be a cascading effect,” said Ganesh Natarajan, chairman, 5F World and the Nasscom Foundation.
An industry consultant predicted: “They will try to increase salary levels so it gets tougher to send people. They will want more compliance so we will have to maintain more records. And there could be more audits.”
The worry about stricter immigration controls also comes at a time when the Indian software services industry is already feeling the pinch of tighter budgets and a global slowdown in spending on software mega-projects. Nasscom, which represents the infotech industry, initially even held back on its predictions for the 2018 financial year, citing the mix of political uncertainty and the spending slowdown. It pegged growth for the current year at around 8.6% which was lower than expected.
“At uncertain times like these, many companies are unwilling to offer clear guidances,” said Nasscom spokesman Shivendra Singh. “There have been many factors including Brexit and Trump.”
Business is also being squeezed in the UK.
“British banks have put spending on hold because they don’t know what a post-Brexit world will look like,” said a senior industry insider. “And Trump has put doubts in the minds of US companies about whether they should work with foreign companies.”
Of course, even before Trump took office, Indian software companies had sensed a new wind of US protectionism and were looking at strategies to cope.
These companies point out that the headline figure that 65% to 70% of H-1B visas issued annually go to Indian nationals conceals key facts. Most crucially, only slightly over 20% of these visas are issued to Indian companies like Infosys, Tata Consultancy Services and Wipro. A large chunk of the remaining quota is utilised by US companies like IBM and international players like Accenture.
Another option Indian companies use to get hi-tech workers into the US is the L-1 visa, which allows intra-company transfers. But companies only use this if absolutely necessary because of high rejection rates. “There is a problem with the L-1 visa,” said Nasscom’s Singh. “Indian companies face a 40% rejection rate compared to small numbers for the rest of the world.”
Indian companies have also been looking for ways to reduce their dependence on the US market. But they have not had a great deal of success. About 62% of the industry’s revenues come from the US and another 17% to 18% from the UK. “The US was an early adopter of working with Indian companies,” said Singh. “And in the UK, cultural ties played a part.”
Technological change
Another shadow over the career prospects of Indian software engineers is that the numbers being hired even in India is likely to be much lower in the future. “What took 40 employees to do will now be done by four,” said a senior executive. “We will definitely not be as big.”
So, what is the way forward?
All companies are looking at reducing their reliance on Indian workers, and also at tackling projects on a 90-10 basis with only a few workers on shore. Cash-rich Indian companies are also studying the possibility of buying US companies and thus, increasing the number of locals on their rolls. This would counter the provision in the H-1B and L-1 Visa Reform Act introduced by Senator Dick Durbin (Democrat) and Senator Chuck Grassley (Republican) that aims, amongst other things, to prohibit companies with more than 50% of their staff on H-1B visas from bringing more immigrants into the US via the same route. In addition, some major Indian companies are looking at using their offices in Ireland and Mexico so they can be close to their clients in the US.
There is also the possibility that the US could come to the realisation that restricting the number of H1-B visas would harm its interests as it does not have adequate replacements of the same calibre. Some see a changing tone in Trump’s proposed embrace of merit-based immigration that he enunciated in his speech to Congress.
A JP Morgan report on the Indian information technology services industry pointed out that the US might lose out by tightening visa rules. It said:
“By making the provision and cost of H-1B visas prohibitive, it can potentially (and perversely) drive US organisations to outsource more than they might have otherwise done. Attempts to prevent ‘outsourcing’ will likely shift more work out of the US.”
‘No doomsday’
Can Indian software services companies muscle their way into offering high-priced products and consultancy services? That is the end game that every company aspires to. But initially at least, the cost of making the transition will be high. And, the fact is that they are still making money and getting growth in their existing spaces.
“There is still scope to do the job they are already doing,” said Sarabjit Kour Nangra, vice-president of IT research at Angel Broking. “They are not in a hurry to invest in a space that is not as lucrative for them.”
In the longer term, the software service industry will have to step up its game and adopt the latest technological changes that will see automation taking over many jobs that would have required large manpower in earlier years. “Technology is bringing in a lot of disruptions,” said Singh. “We need to evolve.”
The software development game is changing beyond recognition at ultra-fast speed. In the first decade of this century, Indian companies were called in mostly to manage payroll and other back office functions. Today, technology has moved from the back office to the customer interface.
“Technology is now being used to deliver a superior experience to customers,” said a senior executive. “Everything is through apps or automated call centres.”
California-based Wadhwa asserted that Indian companies are not ready for the big changes that are looming in the not too distant future. “I have long warned Indian IT leaders that they’re shuffling the deckchairs on the Titanic,” said Wadhwa. “They refused to listen and adapt to the new realities of technology.”
But others dismiss such grim predictions.
“The talk of doomsday is frankly ridiculous,” said an executive at one of India’s big software companies. “We’re not seeing it anywhere.”
Nasscom’s Singh insisted that after some “relatively short-term” pain, “we will see growth pick up”.
Another senior executive at one of the Indian software giants said: “In 1999-2000 after Y2K people predicted that this would be the death of India’s infotech. But we reinvented ourselves. Now the Internet era has given way to digital and we are very confident we will take ever more market share from Western companies.”