As Indo-US trade talks resume, Indian IT industry should move cautiously

India & the United States of America are trying to normalise the relationship after a bitter spat. With vitriolic comments from the US President Donald Trump's aides and the President himself, Indo-US relationship has gone down in recent months.

The US has slapped a punitive 50 per cent tariff on India for buying Russian oil. Against this backdrop, President Trump's recent comments on social media handles about ongoing trade talks with India is a welcome sign. This has come at a time when many US commentators have started asking for imposing tax on IT outsourcing.

India is one of the biggest beneficiaries of IT services outsourcing globally. The $290 billion strong Indian IT industry revolves around US as a geography as more than one third of its revenue coming from the North American country.

In that sense, the HOPE Act proposed by the US is worrisome. The proposed act says that the US companies will be taxed 25 per cent outsourcing tax if they outsource technology work to third parties.

It is well known that US enterprises are engaged deeply with Indian IT firms in outsourcing technology projects. They not only do service and maintenance work; but also undertake co-innovation for new products and services.

Notably, Indian IT industry has two important pillars. Firstly, the cost advantage that India provides, which is the bullwork of offshoring model for global technology industry. Secondly, India provides technology at scale. If the HOPE Act turns into a norm, then the cost advantage part will go away because at 25 per cent taxation, the complete margin of US firms will vanish.

It means there is not much logic left for US enterprises to outsource technology work to India. Though finding technology talent at scale, which India provides, will be difficult to find in any other geography; but a significant portion of outsourcing work will suffer.

Against this backdrop, the rapprochement between Trump & Modi is an encouraging move. However, it is still early days. Because the US administration is still persuading the European Union to impose 100 per cent tariff on countries like India, China & Brazil for purchasing Russian oil.

This is an irony as EU remains one of the major buyers of Russian oil & gas through reexport route. Therefore, Indian IT industry should make itself resilient to any shocks coming in its way.

To start with, Indian IT firms have to diversify their geographical reach. More revenue from European Union, Japan, Australia, South Korea, South American nations & Africa should be on priority list.

Additionally, Indian IT services firms have to make aggressive moves in building AI-powered products and platforms. In the current AI era, Indian IT services firms have to build capacity at a faster pace to emerge as a winner. For decades now, Indian IT companies have piled on huge amount of cash.

While large buyback and dividend payout have happened, the lack of investment in new capacities is glaring. It is better if large IT firms take remedial measures to address this anomaly.