Curb could hamper India’s growth
TECH DAMPENER FOR GDP
The link between India's merchandise trade, services export and GDP growth *3-year GDP %growth at constant price; compiled by BS Research Bureau Source: Reserve Bank of India By tightening H1B visa rules, the Trump administration is hitting at the core of India's growth story for there is a one-to-one correlation between growth of software exports and India's economic growth in the last two decades.
An acceleration in India's economic growth in the early 2000s was accompanied by a spurt in services exports, especially information technology. Similarly, a slowdown in gross domestic product (GDP) growth since the 2008 Lehman crisis was preceded by a deceleration in services exports. (See the adjoining chart).
A clampdown on H1B visas will make it tough for Indian IT majors such as Tata Consultancy Services (TCS), Infosys, Wipro and HCL Tech to grow their US business. The US accounts for nearly 60 per cent of all technology exports from India. Indian IT companies will be forced to increase hiring of locals at the expense of Indians raising operating costs and lowering their forex earnings.
“We continuously run a large deficit in merchandise trade. This is largely funded through a surplus in services exports. Any event or measure that hits services exports will have negative implications for the current account deficit and exchange rate besides economic growth,” said Devendra Pant, chief economist, India Ratings.
The net exports of services (export minus imports) jumped five times between 1996-97 and 1999-00. After a brief lull in the early 2000s, exports took off again and began to accelerate rapidly from 2003-04. In absolute terms, annual foreign exchange earnings from services jumped from a modest $3.6 billion in 2002-03 to $54 billion in 2008-09. This set the stage for the growth boom that was ultimately punctured by the global financial crisis in 2008. Higher forex earnings by IT exporters provided Indian companies the means to scale up investments by funding imports of capital goods, energy and other industrial raw materials.
“Faster economic growth and higher import of capital and consumer goods go together. It is tough to imagine an economic boom without the means to finance higher imports,” said G Chokkalingam, founder and CEO, Equinomics Research & Advisory.
The boom in IT exports also provided support to the exchange rate with the rupee remaining stable for a decade between 1997-98 and 2007-08 at around ~40 to a dollar. This translated into lower inflation and a boom in foreign capital inflow. After the Lehman crisis, a slowdown in services exports and weaker rupee have gone hand in hand. In India, IT companies are among the biggest employers, both in terms of headcount and in the amount of wages they put in their employees' pockets every year.