Australia should be developing Indian industries, not opposing outsourcing

As Australians watch increasing numbers of jobs being outsourced to India, is the world going to see the same nationalistic backlash from Australians that is becoming evident in the US and Britain? In an election year where jobs translate into votes, all the signs suggest so but this short-sighted policy fails to recognise the longer-term impact that such a move will have on global free-trade policy and India's economic development.

To the casual observer it is striking how limited Australian-Indian relations are. The common ties - a British colonial heritage and passion for cricket - have provided little impetus for deeper relations and instead the two countries share few common interests. This is not to say that there is no relationship, just not one that is particularly strong.

In the broader scheme of things, somewhere in between India's Look East policy and Australia's focus on East Asia, there has surprisingly been little crossover in their perspectives. India's concerns, for example, remain coloured by its desire for regional prominence and the resultant need to curtail Chinese expansion, while Australia's reflect its own attempts to exert its regional influence, as well as broader fears regarding immigration, maintaining trade relations and countering terrorism. The September 11 2001 terrorist attacks on the US and the subsequent realignment of global relations could have provided an opportunity for a fresh start in Australian-Indian relations. This would have provided a chance to consign to the past the debacle of India's 1998 nuclear tests, the international reaction to which India sorely misjudged and to which Australia overreacted. This realignment has not occurred, even though the two countries share a common alliance with the West and a common foe in terrorism.

Instead, their oddly Colonial-era trade composition remains - India importing the likes of wool from Australia and exporting gems and textiles - while political ties continue to have a fledgling air about them. In July 2000, John Howard made the first visit in 11 years by an Australian Prime Minister to India. His Indian counterpart, Atal Behari Vajpayee, reciprocated this move the following year, ending a 12-year hiatus in standard political civilities. That said, both sides are keen to stress their burgeoning business links. India's mix of reasonable labour, IT skills and a well-educated, English-speaking workforce attracts Australian companies, just as they do a plethora of other developed nations. For India, the Australian market offers lower relative costs than, say, dealing with markets like the UK, an excellent education system, and exceptional domain knowledge. Many observers have noted that it is these areas - particularly IT and education - that offer the broadest scope for future relations.

India's success with regard to outsourcing, IT and its broader services sector is understandably a source of great domestic pride and the sector's growth has undoubtedly been impressive. India's services sector is now the country's largest in terms of value, contributing around US$231.9bn to GDP. The Asian Development Bank (ADB) estimates that the services sector grew on average by 8 per cent in the second half of the 1990s. During that time, its outsourcing component expanded far more dramatically, with growth of almost 60 per cent in 2001 and 55 per cent in 2002. In value terms, outsourcing remains a relatively small contributor to the sector, generating around US$3.6bn in 2002 but its enviable growth highlights the potential economic rewards.

More impressive has been the impact that the growth of the services sector has had on developing a new, wealthy group in society. The sector has spurred the growth of the Indian middle classes, creating previously unforeseen levels of wealth. Set against this however, service sector workers - particularly those working in call centres - in the likes of Australia, Britain and the US have seen their jobs disappear abroad. It is a galling prospect at any time to be made redundant but to find your job being outsourced prompts understandable nationalistic sentiment.

These workers have reason to be worried. Even in the face of a backlash from the US, which has increasingly manifested itself in legislation, India's outsourcing and IT industry players have defied these hurdles, and the industry has come out leaner and quicker to find new niches. There have been casualties but the renowned Indian entrepreneurial spirit remains as strong as ever and keen eyes have spied new horizons. Indian university graduates may still handle your banking enquiry but the industry is evolving upwards. This is most apparent, for example, in the recent emergence of a new breed of Indian "researcher for hire". Taking advantage of the poor fortunes of Wall Street, India is harvesting its best MBA graduates for plum roles as financial consultants, working for the likes of JP Morgan and Moody's.

As impressive as the situation undoubtedly is, India and the rest of the world need to realise not only that placing restrictions on outsourcing is not a positive option but also that outsourcing has its limitations. Taking the first point, India has been quick to brand US moves as being against the spirit of global trade. There is, however, more to this argument than just political theatre. It is true that US moves to restrict and ban aspects of outsourcing will likely impact adversely on multilateral trade negotiations, ultimately affecting global trade flow and setting a poor precedent. Turning to the second point, the most likely scenario is that outsourcing will become part of a wider range of services that India can offer but its potential and importance must not be overstated.

The outsourcing industry will employ - at most - a couple of million of Indians, which represents a tiny fraction of the workforce in a country of more than one billion people. Already the sizeable growth rates that were witnessed in the industry's infancy are beginning to tail off and, at the same time, domestic discontent is emerging as the IT industry fails to satisfy the aspirations of its well-educated workforce. Indian graduates will not always aspire to work in an industry that employs school-leavers in the West, resulting in a high turnover of staff and a potential slump in productivity. It should also be noted that India's poor infrastructure continues to shackle its potential, while elements of government policy - particularly India's high tariffs on imported goods - still deter international business. Furthermore, the current outsourcing model is ultimately unsustainable; India's own costs will rise, and improving educational opportunities in other developing nations will enable them to challenge India's currently unassailable outsourcing position.

Ultimately, countries like Australia need to help India create indigenous industries rather than attempt to curtail a sector in which India currently enjoys advantages, because of domestic nationalistic sentiment. As the situation stands, a significant degree of the service sector's success has grown on the back of work that other economies have provided. India may have some highly skilled graduates but in general its tertiary education system is appalling. Alongside these vast educational inequalities, the country remains a largely agricultural economy. It will take years of serious reform to significantly diversify the economy and generate enough growth to raise the living standards of much of the population. This approach offers no consolation to the Australian workers and their Western counterparts who are currently losing their jobs. It will however, benefit India's longer-term development and sets a strong global precedent for free trade.