India's IT-ITES/BPO exports, as everyone "knows" is booming.
According to the statistics cited at the India Brand Equity Foundation (which quotes data from Reserve Bank of India (RBI), India's central bank, and IDC):
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This is one industry that has been adding to India's exports by leaps-and-bounds - depending on the source, the figures range between 25%-to-50%/annum!!!
Which is an eminently (feel-)good news... till one does a reality check :-((
According to NASSCOM (National Association of Software and Service Companies), a significant %age of these exports are to USA - accounting for almost 2/3rd of the export revenues.
So do US statistics reflect this surge of Indian IT-ITES exports?
... Which is when one hits another reality!!!
According to a report by US Govt Accountabiity Office, entitled "US and India Data on Offshoring show Significant Differences" in BPT (Business, Professional and Technical" trade services, which - to the best of my knowledge - is the US term for the Indian IT-ITES exports):
"...data show that for 2003, the United States reported $420 million in unaffiliated imports of BPT services from India, while India reported approximately $8.7 billion in exports of affiliated and unaffiliated BPT services to the United States."
Obviously, $420mn-US imports is too a huge difference from $8.7bn-Indian exports to be a typographical error.
So what accounts for this this discrepancy?
Apparently, Indian way of counting the chicken is pretty different than their counterparts in US, e.g.,:
Just in case, one wonders why RBI does not put its foot down on this spurious "number game", here is an explanation - RBI's data is actually the NASSCOM data:
"RBI, which is India’s central bank, is responsible for reporting official Indian data on trade in services. However, RBI data on trade in services incorporate the data collected by India’s primary information technology association — the National Association of Software and Service Companies (NASSCOM)... Thus, the data cited above for India come from NASSCOM."
To find similar examples of the Number Game, please see:
17 comments:
I seem to be missing th point. What is "spurious" about all of this? India uses a broad definition, and USA a narrow one. This is completely logical. When you see those reports in India, they are trying to give you the big picture - how everything related to IT is changing. But the US is concerned with more technical issues. I don't see why any of this is a problem...
phucker:
you are right. there is nothing 'spurious' about the two figures!
there are, howeve, two issues:
one, the definition of "exports" that is used by the industry in India. to use affiliated trade (which is essentially, intra-company trade) as one's earning is almost like adding my tenent's income in calculating my household income ;0)... if any and everything is included in as earnings, then the very defintion of exports becomes redundant.... even though, by quoting those figures, one is trying to influence policy making
or to put it differently, one can always calculate these figures are %age of the GDP - but do they actually, and really, add to the GDP??
secondly - and that was the point of this posting - these details are never highlighted in any of the MSM or industry forums. so either, one is ignorant about these, or is hiding these.
Professor Shukla,
Thanks for the post; I was one of the people wondering about these figures to see whether
". by quoting those figures, one is trying to influence policy making".
When I first read the excerpt in desipundit, I got a feeling that we are exaggerating the services trade. But it just looks like one of those infinite problems with definition. Services in India is defined differently than in US. As simple as that. I don't think this is any issue. AND, the Indian definition seems to be more appealing.
If at all there is a culprit, it has to be US coz they are trying to understate the value of services provided by India. I happen to be in the same industyr and $450 million whereabouts look PALTRY!!!
Prof,
the influence on policy making is quite apparent if one looks at the examples of subsidies, waivers, tax-breaks etc, that the sector is able to manage.
Here are a couple of news items, that highlight this influence:
http://sify.com/finance/fullstory.php?id=14349761
http://www.tn.gov.in/misc/TN-ITES-2005.htm
Gover:
As I responded to phucker, a definition, in order to be valid, needs to have a grounding with the reality. Indian definition of 'exports' may be more 'appealing', but I am not sure if it truly reflects the reality
So, the USA is very bad in everything, except for the way it accounts for IT imports from India?
: )
The main reason for the difference is, as you pointed out, that "onsite work" is not counted as imports by USA while we do count it as exports. From a national perspective, I think this is great, because the US underplays how much work is going to the Indian cos, which keeps a lid on anti-offshoring rhetoric! So, let the US account for it the way it wants to.
I am familiar with how NASSCOM counts for exports, and there is no double counting, as you imply with your intra-company trade comment. Basically, if IBM or ACN sets up shop up here, NASSCOM asks them to report their billing to the parent. It then counts this number as export out of India, which it is, since it is ACN India billing ACN USA. Infosys US revenues are only counted once as are India revenues.
So, no reds under this bed!!!
Cheers
Not really, Supratim!... if I have been citical about US, it is about its foreign/military policy (which also often masquarades in the garb of its economic policy)...
but anyways, that is not the issue here.
I have responded to the point made by you in an earlier response to Phucker's comment. Like NASSCOM, I can ask my tenant about his income and add it to my household income - but essentially it does nothing to my real income, does it?
I am confused about the tenant analogy and am not sure how it applies here. Let me explain what NASSCOM does for foreign firms, and then you can tell me why that is inappropriate.
A foreign company, say Microsoft or Texas Instruments or IBM, comes to India and sets up a development office here. They hire 1,000 people, who write software that gets shipped back to the parent, for inclusion in their products or services. The work done by the Indians is INCREMENTAL or REPLACEMENT - none of this is duplicated by the parent. Usual billing is cost-plus (so, I could make a case that the invoicing is lower than if it were done at third-party rates). This billing is captured by NASSCOM as exports out of India. I don't see what the problem is?
After all, cars made by Maruti (majority owned by Suzuki) at Gurgaon and exported under the Suzuki label, to their network are counted as exports, right?
This is the same, except that it is a part of the whole, and it is billed by hours.
There is no double counting, unless your point is that we should not count foreign companies' centres' work in India as exports? Heck, that would knock China's trade surplus numbers completely off the block!
Oh, another thing, the RBI is nobody's fool - IMO, they are the best regulator of India. The strength of our banking sector vis-a-vis most other emerging markets is testimony to the big stick that they carry.
The fact that RBI accepts NASSCOM data is because the data is largely cross-verified by the flow of "invisibles". Our current favourable balance of payments situation owes something to the IT industry, and the RBI knows that. And,in hard cash terms!
Supratim:
I have given the links to the sources in my post. Please do go though them, since they will clarify you query, eg.
- When the salary of people/engineers giving 'onsite delivery' is calculated as "exports" (think of Maruti's export revenues if the salariesof workers are added as "offsite delivery":)
- re "RBI is nobody's fool" - yes, agree with you on that. Thankfully, unlike Federal Reserve or European Central Bank, it is not a private body, and is accountable to people. However, about the "cross-verification", this comment is from RBI's own report that you will find on its site:
"At present, NASSCOM is the main source of data on ‘Software exports’ which is used as the controlling total for compilation of software exports for BoP. Further, software exports disseminated by the NASSCOM, which form the basis for BoP compilation, include ITES/BPO services also."
and yes, if one really looks "China's trade surplusses" from a definition of "exports" as something that actually adds to GDP in hard-cash terms, it will get knocked off the block;)...
...(but dont worry, that will not happen - we have the media, the industry forums, the analysts, the desperately-need-to-"feel-good"-educated middle-class, etc.. who will keep the illusion alive;0)
Dear Prof,
I think we are talking at cross purposes and I think you are applying different yardsticks for mfg and service companies (not an uncommon failing, though ; ) )
Maruti (majority owned by Suzuki) makes cars here in India, sells to Suzuki at cost-plus, which then sells to the final customer. The cost of its workers are included in the total cost of the car.
Microsoft India (wholly owned by Microsoft) writes code here in India, sells to Microsoft at cost-plus, which then sells to the final customer. The cost of its workers are included in the total cost of the code.
What is the difference between the two examples? Only that in the first case, salaries will be c. 15% of the total cost, while in the second case, it will be c. 60% of the total cost. So, according to you, why is one acceptable as exports, and the other not?
RE: RBI - I agree they depend on NASSCOM for the data, but they have the hard cash flow to verify it. Do you think that they would accept NASSCOM data if there are big discrepancy in what they get and what NASSCOM reports?
I think your commentary and others such as it, represent a backlash against the adulation that the Indian IT services industry gets. Which is good, because it keeps the industry honest and people like me, who track the industry, on our toes!
: )
Madhukar,
First of all, you claim that 2/3 of our software exports are to the US, and then you try to prove that they are not....
Whether to US or to anywhere or in whatever form, they are exports.
BTW, 40% for temporary Indian workers in the US !! Too farfetched. Dont you think the numbers you present are also not that accurate, like you claim for NASSCOM data. Lets say 1 lac H1 visa workers from India in the US, and another lac L1 (maybe L1 has been discontinued). Each of them earn say $50,000 per annum. So that comes to 5000000000. Five billion.
And you say -
"The Indian IT-ITeS industry has recorded revenues of US$ 23.6 billion in FY 2005-06, as compared with export revenues of US$ 17.7 billion in FY 2004-05, a remarkable 33 per cent growth in exports."
5/23 * 100 = 22% approx. And I have inflated the figures.
Please try to understand the IT industry. When Indian IT workers go to the client site, its not always to work for them there and Indian companies are the agents (thats called bodyshopping, if you dont know, and that, as such, has reduced a lot). They go there to resolve issues, fix bugs, discuss the requirements, etc. Much like if you import F-16s or Boeings - you will have their engineers coming over here to set up facilities, oversee the transfer and fix problems.
I estimated the number as 1 lac, since L1 numbers have reduced a lot, after misuse by some software companies. In fact, it turned out to be good. More work is offshored here instead of "bodyshopping".
By the way, lets "assume" that what you say is "totally" true.
But then, how is the growth occurring ? Can it be done without the money? There is growth, and hence companies are investing in man and material. Why would they otherwise do that? Ultimately, it is growth, and its good for the country, whether IT industry posts 25% annual growth, or 5%.
You would not want more people being added to the poor and unemployed, would you?
@Supratim
sorry, once again for the delay... was travelling.... nopes! this is not a "backlash against the IT industry" just a bit of de-hyping ;0)
You have a point in your obsevation about "Maruti (majority owned by Suzuki) makes cars here in India, sells to Suzuki at cost-plus, which then sells to the final customer. The cost of its workers are included in the total cost of the car" is similar to the calculations done software industry.
The difference, however, lies in your next line: "Microsoft India (wholly owned by Microsoft) writes code here in India, sells to Microsoft at cost-plus, which then sells to the final customer. The cost of its workers are included in the total cost of the code."
One, the "cost-plus" remains with Microsoft - it is an intra-company trade... Yes, you can also call it "exports" if you want. The difference is that the company to whom we are supposed to be exporting does not recognise it as a corresponding "import"...
Two, the manufacturing companies do not hype up their figuers to get tax-holidays and such other subsidies (oops! "incentives", I think, is the term which is used)... Take away the 35% corporate tax benefits, various other state subsidies that IT companies get, etc., and one will find a different picture
@In the shadows
Thanks for the visit and your comments
Though I do understand your cognitive dissonance that these numbers create, I fail to see the point you are trying to make.
I am only pointing to the discrepancies between what we/Nasscom highlights as "exports" and what US sees as its software "imports" from India. I have given links to all the sources.... Please do go through them..
Two, the manufacturing companies do not hype up their figuers to get tax-holidays and such other subsidies
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Software companies do pay taxes. The corporate tax (I find the name funny - corporate tax) might be waived, but the other taxes still apply. For example, minimum alternative tax.
Also, since the IT companies do not pay much in taxes, they pay the employees higher. The employees still have to pay the taxes. Some one third of his/her income. So when you hear about so-called fat pay packets of IT workers, remember to deduct one third of that. The one-lac investment tax holiday hardly matters when the govt takes away one third of your income, and provides hardly anything in return. Yeah yeah, Germany has higher tax rates, but the government provides "Quality" free education and healthcare for all citizens....
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