Decoding Obamanomics
Dec4,2008
Barack Obama’s tryst with destiny has captured the imagination of the global community. The 47-year-old legal eagle has made history by becoming the first African American to be elected President of the United States. As Obama prepares to shift to the White House in January, the attention is now gradually shifting to his worldview and how it impacts countries across the world. India, too, would be impacted by President Obama’s policies. There is already some consternation in the Indian IT industry at Obama’s apparent keenness to curb outsourcing. We decided to sift through his key economic proposals and the likely impact on India. Here’s a reality check.
Pump priming the economy
The immediate challenge for Obama is to prevent the US economy from slipping into a deep and long recession. Already, the economy has shed over 1.2 million jobs this year. Worse, it has been jolted by a severe financial crisis and consumer expectations for the future are at their lowest levels. Obama is calling for a second round of $50 billion in stimulus to jump-start the economy that he hopes would prevent 1 million Americans from losing their jobs. Half of this money would go to states to limit their programme cuts and offset tax and fee increases. The other half would pay for infrastructure improvements.
Implications for India
Increased federal government spending will have a positive fallout for India. The US is India’s largest trading partner accounting for almost 20 per cent of the latter’s exports. Greater spending on infrastructure, for instance, could translate into opportunities for construction and metal companies more so, since US companies have virtually exited low-tech manufacturing. Says a leading economist: “There is likely to be a significant import content to the planned expenditure. Government procurement in the US is a tender-driven process based on cost considerations, which could work in favour of the Indian companies.”
Taxation policy
The President-elect proposes to cut taxes for working class families and low-income homes earning less than $75,000 a year, and raise taxes on homes with an average annual income of more than $250 000. He also plans to exempt seniors with incomes of less than $50,000 a year from paying income tax. Obama says as a result of these measures 95 per cent of Americans would see their taxes lowered or unchanged. He also proposes a windfall tax on excessive oil company profits to give American families an immediate $1,000 emergency energy rebate to help them tide over high energy bills.
Implications for India
Tax cuts for the middle class could give a fillip to consumer spending in the US. This could boost Indian exports that have been hit by the slowdown in the US economy. Merchandise exports such as textiles, leather and handicrafts could stand to gain. Economists point out that tax benefits at lower levels of income have generally yielded a significant bump up in consumer spending. Says Surjeet Bhalla, Chairman of Oxus Investments: “There might be an inclination to save after the financial crisis, but it should lead to greater consumer spending as well.”
Labour and environment
Obama has stressed that the economy, energy and climate change are inter-related problems. He wants all trade agreements, including the WTO, to include binding obligations that protect the right to collective bargaining as well as other core labor standards recognised by the International Labor Organisation. Obama wants to link environmental standards to trade agreements so that companies from any particular country cannot gain an economic advantage by damaging the environment.
Implications for India
Obama’s articulated policy on labour standards would concern the Indian establishment. India sees attempts to link labour standards with trade as a protectionist stance. However, experts feel that there is no cause for alarm yet. They point out that the new US administration would be loath to initiate policy measures that could affect the cost and availability of essential goods and services. Says D.K. Joshi, Principal Economist, Crisil: “These are liberal statements that are difficult to implement as policy.” Even on environmental issues, Obama may find it difficult to walk the talk. In fact, its own track record leaves a lot to be desired. The US releases more greenhouse gases than any other nation accounting for more than 25 per cent of those generated by humans worldwide. As a result, it has not so far ratified the Kyoto protocol.
International trade
Obama asserted during the campaign that he would fight for a trade policy that opens up foreign markets to US companies, which would then support American jobs. He plans to use the WTO platform to fight for his vision of fair trade policies. He wants to complete a Doha agreement that would increase US exports and support good jobs in America. He also believes that the United States needs to be more aggressive in filing cases in the World Trade Organization against countries that violate global trade rules to keep out US goods.
Implications for India
Obama’s assertion that he will aggressively pursue US interests through WTO (even file cases against countries like China) will not go down well with the developing countries and might make it difficult to revive the stalled Doha round. However, economists believe that much of what Obama says might be just posturing, and he may just end up adopting a reasonable position on most outstanding issues. Says Joshi, “The Doha round is not going to be dependent on what Obama proposes. The perception of unequal benefits, particularly in agriculture, among developing countries is strong.”
Outsourcing
Obama believes that companies should not get tax benefits for moving their operations overseas. Obama has underscored that public contracts should be awarded to companies that are committed to American workers. That could spell trouble for India’s outsourcers particularly the IT industry, which gets most of its revenue from the US. The other concern area for the IT firms is the cap on H1B visa. Obama did not highlight the issue much during his campaign. The US government has capped the visa at 65,000 after increasing it to 1,95,000 during the peak of the tech boom.
Implications for India
India’s outsourcing industry has been somewhat jittery after Obama’s victory. But industry circles are also hoping that economic pragmatism will prevail in the end, since it is recognised in the US that there are many categories of professional skills, particularly in IT, which are not available there. Says Bhalla, “Restricting outsourcing as protectionism in not possible.” The IT industry is also taking comfort from Obama’s statement that he is in favour of a “temporary increase” in the H1B Visa programme as a stop-gap until the government reforms the immigration systems comprehensively.
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