Dead wrong – atleast this particular statement of Mr. Obama didn’t mean it.

Let me explain.

Among the major companies which have shipped jobs to foreign countries such as India include General Electric, Microsoft, Hewlett-Packard, Motorola, Pepsico, Honeywell and IBM.  Back in 2004, the Bush administration passed an Act called the American Job Creation Act (AJCA) under which there was a specific provision called ‘Invest in USA’. US companies could exploit this provision and repatriate profits back to the US from their offshore operations. Not BPO, KPO or any other outsourcing operations – these are ‘business operations’. What it basically meant was that, if Motorola set up a phone manufacturing facility in Taiwan, and if they made profits out of this particular plant, they could repatriate profits back to the US by paying a lower tax rate. There would be a tax break on 80% of the repatriated earnings and the rest 20% of repatriated earning would be taxed at 35% making the effective corporate tax rate on companies repatriating approximately 5.25%.

This lower tax rate encouraged various companies to utilize this provision, bring back earnings and invest in the US, thereby creating more jobs. This provision though, was meant to be a one-year tax holiday only. Republicans did try their best to extend this tax holiday and re-introduce it along with the stimulus bill, but was shot down by the Obama/Democratic administration. Obama was referring to this provision of tax breaks (the provision having already expired, Obama was just making a political point!) rather than any IT or Business Process outsourcing that our media and political establishment has raised a frenzy on.

Allen Sinai makes a compelling case in the WSJ that on average, of the repatriated funds that came back to the US, 25% of those funds for U.S. capital investment, 23% for hiring and training of U.S. employees, 14% for U.S.-based R&D, and 13% for U.S. debt reduction. Per recent studies, if this provision is introduced now, this could help bring in USD 545 billion, which we all agree would be a pretty sum to battle the crisis.

So much for the media frenzy, so much for wild discussions on different discussion boards on protectionism. Ben Bernanke, the Fed’s chairman is an authority on the Great Depression, and he more than anyone else would know that banning outsourcing is the same as erecting trade barriers, which are universally acknowledged as having worsened and prolonged the Great Depression – he would never allow that to happen in this market.

Let’s not get caught up in the frenzy in these depressing times – let’s look at facts, arguments and then come to a conclusion. The incentive to the media is to grab more eye-balls (and hence declare through a catchy line, ‘Obama is against Outsourcing’) than present rational arguments. Let’s not add fuel to the wrong fire.

Now that we are done with the excitement and enthusiasm of ushering in the New Year and all that, let’s look at what 2009 has in store for us.

With the hypothesis of ‘data doesn’t lie’, let’s look at some of the news across the world and India before meshing in our conclusions depending on the data  -

a) RBI has cut key lending and borrowing rates, esoterically called repo and reverse repo rates (Simply put, these are rates banks pay to borrow from the RBI and get from the RBI for keeping cash there). Repo stands at 5.5% and Reverse repo stands at 4%. RBI cut interest rates for the fourth time since October and has unveiled thousands of crores of stimulus package. If this doesn’t amount to ‘measured panic’, I don’t know what is.

b) In September-October 2008 timeframe, inflation was 12%. It is around 6.6% now. (Inflation, as a simple concept, is rise in prices). Since inflation has reduced from 12% to 6.6%, it is a good thing, no? Actually and worrisomely not. In usual circumstances, reduction in inflation is good for the economy. However, we now have a serious risk of deflation where it might touch 0% or go negative. Economics 101 will tell you that reducing inflation is a slightly easier job than pulling out an economy out of deflation, or even worse stagflation (Lots of jargon like inflation, deflation and stagflation used. Our dear friend Wiki has loads of explanation on them).

c) If Indian economy was on the rise over the past 4-8 years, Real Estate in India was on cocaine. Simple example. In 2003, a 2 BHK (bedroom-hall-kitchen) in one of the very good localities in Hyderabad cost Rs. 17 lakh. In 2007, the same flat costs Rs. 50 lakh. That’s close to a 200% increase. I am not sure any of our salaries rose by 200% in the same period, barring a lucky few. If income doesn’t keep up with investment avenues (or is it the other way round), sooner or later, that particular investment avenue has to be disbanded. Now that we hear that prices are coming down (drastically in some places), speculators will go out of business which will lead to a further spiral. My call is that real estate should correct itself by atleast 20% if not more by end of 2009.

d) Other general news in India includes

- Investments being drastically cut down by manufacturing and service companies.

- Risk of layoffs (massive in some places) to calibrate supply and demand (the offshoot of this being that people would be fraught to take home loans where EMI is more than 1/3^rd their net income and hence further reduction in real estate demand)

- Good startups would find it difficult to find funding, and hence many a innovative idea would die a death for now.

- With banks not reducing interest rates in line with RBI reduction (although they had no problems increasing it immediately when RBI was increasing the rates), discretionary spending will drastically reduce. Small businesses will have difficulty getting working capital (Wiki again!) to sustain their business in this difficult economic scenario.

e) Globally, US has cut interest rates close to zero percent, while Japan magnanimously has reduced interest rates from 0.3% to 0.1% to stimulate the economy. US, UK and Japan are already in a recession, while I believe Asia will be truly hit by a recession in 2009. Asia’s biggest revenue generator is exports. With worldwide spending clampdown, exports have already taken a hit and are expected to take a bigger hit in 2009. US’s economic stimulus package – $850 billion, China’s stimulus package – $585 billion. Aren’t those numbers just plain awesome. I think they are avoiding mentioning a ‘trillion’ since it sounds a big number. In fact, I forget the number of zeroes in a billion or trillion now. South east asia’s manufacturing and shipments are down dramatically and expected to continue over the next half year. I wonder what’s up with Antarctica?!

By now, you would have arrived at a conclusion that I am extrapolating at a doomsday scenario. Not really. The end of 2009 will see some light, although recession is going to continue well into 2010.  IT service providers especially will benefit due to the strong dollar-rupee equation along with increased outsourcing from US and UK companies. The health sector is not cyclical and will not be affected by the recession. There are some stocks which you can really buy cheap (although, for the risk of repetition, the word ‘value’ is being bitch-slapped around in media for any and every stock). As Buffett says, ‘I don’t know what will happen 1 year down the line or 5 years down the line. The only thing I know is if I invest in good businesses, they will give me a decent return over the long run’. The advice is valid both for stockmarkets as well as life.

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