H-1B: A self-defeating misjudgement

• In a bid to arrest COVID-19 induced unemployment in the country, US has decided to temporarily suspend new work visas at least until the end of the year.
• This move affects Indian IT industry in particular as the country accounts for the largest number of H-1B visa applications. .
• However, given the dearth of skilled labour in the US, this move will also be a counterproductive exercise, since it will hinder the recovery of the nation’s industry from the ill-effects of the pandemic.
• While in the short term, the move may not have any major consequences for Indian IT industry, there is a need to reorient strategy to hedge against US protectionism in the long run.

If there is one thing that US President Donald Trump has been a staunch advocate of right from his election campaign, it is the rhetoric surrounding ‘America first’. During his administration, he has been the champion of protectionist policies such as the 2017 executive order – ‘Buy American & Hire American’, pulling out of the Trans-Pacific Partnership Agreement, US-China trade war and restrictions on steel and aluminium imports via a national security case. In the same vein, the Trump administration has made the H-1B visa application harder over time.

COVID-19 has made the clamor around this school of thought grow louder and stronger. The Trump administration has decided to temporarily suspend new work visas at least until the end of the year, thereby barring thousands of foreigners from seeking employment in the US. The curb came into effect from June 24, 2020 in a bid to arrest the growing unemployment in US, one of the worst affected countries – both in terms of the number of COVID-19 casualties and the economic damage caused by the pandemic. The depressed demand for labor was another reason cited by the American administration to justify this unilateral move.

Source: US Labour Bureau; all figures in % * For respondents above 16 years of age

Only Americans, please

As per the latest decree, foreign nationals located outside the US, who were to begin work on an H-1B visa or even L-1 visas (intra company transfer) – but do not as yet hold a valid visa, as well as dependents who were to accompany them (be it spouses or dependent children) will now have to wait longer, till the ban expires.

The order is, however, not a blanket ban on the entry of all foreign nationals in the country. For example, those individuals who already have valid visas – be it the primary visa holder, or dependents such as spouse (on H-4 visa) but currently stuck in India can fly back since the ban does not apply to foreign nationals holding a valid visa, advance parole or other US travel document. It also does not affect those foreign nationals who are already present in the US, including those awaiting a change of status under the H-1 cap. Further, the proclamation provides for discretionary waiver of the ban for foreign nationals whose entry to the US would be in national interest.

The Indian connect

Considering that it accounts for the largest share of H-1B visas, the impact of the ban on the Indian IT industry is currently being debated. The ban will not affect the entry of skilled foreign professionals holding a valid visa, advance parole or other US travel document, even if they are outside the US. Also, in the wake of the pandemic, many IT vendors have transitioned to the work-from-home (WFH) delivery model, fulfilling on-site work demands from remote geographies.

Further, “in the short run”, according to Nasscom Chairman and Infosys COO UB Pravin Rao, “it would have been difficult to send talent anyway, given all the restrictions. Companies have demonstrated resilience and are working successfully. But as the new normal emerges, you want access to talent closer home, you have a need for talent in the office. Tech skills are important in economic recovery.”

Having said that, it needs to be clarified that in the immediate term, the ban will influence a large number of Indian IT professionals and several American and Indian companies who were issued H-1B visas by the US government for the fiscal year 2021 beginning October 1. This is attributed to the fact that they would now have to wait at least till the end of the current year before approaching the US diplomatic missions to get stamping.

In the long run, the move could have direct repercussions for the country since of the total 85,000 new visas issued each year, about two-thirds are bagged by Indians. As per US Citizenship and Immigration Services, while in FY’18, 2,43,994 professionals were granted H1B visas, in FY’19, 278,491 petitions were given the green chit. In percentage terms, this is tantamount to 73.4% & 71% respectively. Further, approximately 66% of H-1B beneficiaries were in computer-related occupations during both these years.

The move will also significantly impact the costs incurred by Indian IT companies based in the US such as TCS, Wipro Ltd, Infosys & Tech Mahindra. These companies widely use H-1B visas to transfer highly skilled workers to the US.

In a bid to avoid the fallout of such suspensions and keep the business up and smoothly running, many Indian multinational companies may have to further increase hiring locally in the US. They have been doing it in the past as well, in due consideration of rising US protectionism For example, around 69.5% of Wipro’s workforce in the US is local, an approach taken up by other Indian companies as well.

However, this will significantly impact the profits as well as cost competitiveness of these firms since employee expenses account for nearly 60-65% of total operating costs. According to a CRISIL 2019 report, employee expenses and cost per employee for Tier 1 players rose faster at ~17% and ~9% on-year in fiscal 2019, respectively, compared with ~6% and ~3% a year before. “Operating margin is forecast to decline 30-80 bps for the sector in fiscal 2020 as local hires increase for onsite job, who cost 25-30% more than their H-1B counter parts,” the agency predicted. At the same time, the remittances sent by Indians settled in US might reduce as they lose their jobs to their American counterparts and return to India. This could also leave a mark on India’s growth and foreign reserves.

Moreover, ICRIER’s Professor Arpita Mukherjee opines:

“The impact on the Indian firms will be more adverse. Given that the visa ban will directly impact ability of foreign firms, especially the Indian IT companies to expand in the US, the US firms may get the projects.”

Further, as local hiring increases, there are chances that these companies may have to downsize/reduce recruitment/employment in India. If this situation materializes, it cvould also raise unemployment in the Indian IT sector, leading to contraction of demand and further economic growth-related challenges.

An eyewash for American voters?

The reason cited by the Trump administration for this policy is the mounting rate of unemployment in US. COVID-19 has taken a heavy toll on the US, taking its unemployment rate to 20% in May 2020, a new post-World War 2 record.

However, a careful analysis of data would reveal that this is an ill-considered strategy. If one looks at unemployment rate across various sectors in the US over the year, it will be apparent that unemployment rate for individuals in computer occupations actually declined from 3% in January 2020 (before the pandemic spread in the US) to 2.8% in April 2020, and fell again to 2.5% in May 2020. This is significantly lower than the 13.5% unemployment rate in May 2020 for all other occupations, as per an analysis by the National Foundation for American Policy (NFAP). Further, contrary to the view that there is a dearth in the demand for labour, the 30-day period ending May 13, 2020 suggests that there were over 6.25 lakh active vacancy postings online for jobs in computer occupations, including those most common to H-1B visa holders.

Secondly, the move does not do anything to create actual employment opportunities for Native Americans nor is there a concrete evidence that reducing immigration lowers the unemployment rate.  In fact, a study by economist Giovanni Peri and others during the last recession and found that denying the entry of H-1B visa holders actually harmed job growth for US-born professionals.

Thirdly, this move will end up hurting a lot of American companies like Google, Microsoft and Indian companies based in US like TCS & Tech Mahindra owing to the serious deficiency of skilled manpower in the country. Programmes like H1-B and L-1 enable US businesses to bridge the STEM skills scarcity in the country and offer access to skilled tech workforce not available locally, thereby ensuring that they can deliver on projects that keep them on the leading-edge of global competitiveness. Shutting off H-1Bs would impact a lot of services like financial, travel, etc.

IIFT’s Professor Pralok Gupta explains the implications of the ban in the context of post-COVID reconstruction of US economy:

“By putting visa curbs on the movement of skilled workers, local hiring can increase in some sectors, subject to the availability of local talent. But for the remaining services where there is a dearth of American talent, visa curbs will not significantly affect the hiring position.”

Lastly, in the face of this aggressive exclusion, alternative destinations like some European nations and Canada will lure Indian STEM students. For example, Canada has got pathways like the Express Entry program, and the Global Talent Stream, which will help to bring entrepreneurs, engineers, and innovators. Already, agencies like MobSquad are reporting an increase in enquiries for Canada.

Immigration has built the foundations on which Silicon Valley has blossomed into a global technology leader. A significant number of CEOs of leading American tech companies were not born in the US. India, for instance, contributed significantly to carving the roadmap for America’s success by bridging the STEM skills deficit of the latter.

However, the only silver lining here is that the Trump administration has temporarily suspended new work visas. Industry watchers are hoping that this is a tactful political gimmick ahead of the November 3 presidential election. They believe that once a political victory is scored & President Trump is reinstated to power, this move might be rolled back, and better sense will prevail.