Buy American, Hire American - New Visa Rules and Impact on IT Industry

Things used to look a lot different for the H-1B visa program before Trump took office.

Let’s travel back in time to 2016, when Trump began his US presidential election campaigning under the ‘America First’ theme. In his inaugural address, he said:

“From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first.”

Since he has been in office, every decision taken by the Trump administration, is justified to be in the best interests of American workers & American families. Whether it’s on trade, immigration or foreign affairs, the ban on visitors from certain Muslim-majority countries, or the periodical rhetoric on building a wall to prevent undocumented workers from destroying the American economy.

On June 22, in pursual of his ‘Buy American, Hire American’ philosophy, President Trump signed an Executive Order halting the processing and issuance of several non-immigrant work visas, specifically the H-1B, L, H-2B & J temporary visas, till the end of the year. Stepping back a few months, in April of this year, the White House announced a 60-day curb on the issuance of green cards. The objective was once again similar, however, the gaping hole in the policy was the fact that the jobs supposedly saved from immigrants were relatively small when compared to the jobs going to foreigners entering the U.S. through non-immigrant work visas.

As if to correct the fallacy in its earlier declared immigrant policy, the latest proclamation brought the left-out pieces under the purview of the ban. The idea is simple, to keep American citizens employed, as the country tries to fight its battle through the pandemic induced economic recession. Delving into specific scenarios, the move was largely seen to force compliance from tech companies to find locals and maintain older engineers instead of importing younger, low cost workers.

This has been received as a major blow to the Indian nationals, who have been one of the most prominent beneficiaries of the visa program. Many popular work visas, like the H-1B for skilled workers, mostly dominated by the Indian IT sector, and the L-1 program, which is particularly used by Tata Consultancy Services to move staff from India to the U.S. are on the list of those banned. The order will impact both the big Indian IT firms like Infosys, TCS, Cognizant, as well as tech companies like Google, Facebook & Apple, who use the visa program to fulfil their staffing needs. Each year, the United States issues around 85,000 H-1B, 65,000 of which go to private sector applicants, and Indian would garner a whooping 70% of these.

Let’s look at the basics. The tech-boom coupled with the onset of Information Age meant that low cost IT services were in demand. In order to fill the vacuum of low-paid, high-skilled employees in this domain, the United States administration provided for a certain number of work visas which allowed companies from outside the U.S. to work on client sites. The USD 155 billion Indian IT services industry has often faced flak for exploiting the H-1B visa regime to keep costs low. Companies like Infosys, Wipro, TCS traditionally followed an offsite to onsite employee ratio of 80:20. The Trump administration has alleged that these companies have been sending workers to America at low costs which is hurting the country’s own skilled employee-base.

This inability to take advantage of labor arbitrage could result in a significant impact on the worker wages and profit margins of the Indian IT companies. Employee expenses account for nearly 60% of the operating costs of Tier 1 players like TCS, Infosys, Wipro & HCL Technologies. The higher number of onsite local hire will result in higher costs per employee, which can further put pressure on the declining revenues in the current fiscal. The move already had an adverse impact on the stock prices of the Indian It firms, though it is not clear if the plunge was entirely caused by it. However, in the interim, any prospects of Indian IT majors building up their order books will be severely undermined as they stagger through an economic recovery. Equally likely is a spill-over effect to other sectors as the move comes at such a fragile time when the Indian economy is gradually starting to open up trade of people and services in an effort to revive from the pandemic.

Another important perspective to keep in mind is that the U.S. import of services from India stood at $29.6 Billion in 2018, up by 4.9% from the previous year, and 134% since 2008. Majority of these are in computer and information services, telecommunications, and research & development sector, which depend significantly on H-1B visas.

However, the impact on the sector will largely be limited due to the reducing dependencies on visas in the last few years by hiring people locally. Increasing denial rates from 6% to 40% in the last 4 years had led to the IT firms having lower reliance on the entry system through work visas.

Additionally, the COVID-19 pandemic ensured that the companies had contingent plans at disposal to move more work offshore in order to cope up with the travel ban. With a higher share of employees working remotely, onshore requirements for IT firms are likely to be lower. Rating agency ‘Crisil’ also said that it does not expect any material impact on the credit quality of most IT firms too.

Despite the stated reasoning for the Executive Order, the economic data & rationale rarely provide any tangible output of the policy. Though the overall unemployment rate has spiked sharply (to 13.3%) as cited in the proclamation, the ban is much more likely to have an impact on ‘computer occupations’, the unemployment rate in which has rather fallen and led to the creation of some 950,000 jobs. There is no doubt as to the fact that the move comes in light of the upcoming presidential elections, and Mr. Trump has been selling his ‘America First’ mantra in order to appeal to the domestic constituency. Critics also say that the White House is taking advantage of the pandemic to rigidify the immigration laws.

Whatsoever might be the inducement, there is no doubt to the fact that American companies rely on talent and skillsets from foreign nations, especially India. Politicians on both sides of the aisle as well as the Silicon Valley has condemned the move. What’s to look out for is till how long the stringency in visa restrictions continue.