Indian IT faces $100,000 H-1B shock, but innovation may be the answer

Visa fee hike poses a major challenge for the industry, but it is also an opportunity for cash-rich firms to rethink their model

The Trump administration has massively hiked the one-time H-1B visa fee to $100,000 for new applicants, which previously ranged from $2,000 to $5,000, depending on the size of the company applying for the visa. It will significantly impact Indian information technology (IT) companies, which rely heavily on these visas for on-site professionals to execute projects.  H-1B visa was introduced to fill skill gaps in the United States workforce.

 

Impact on the Indian economy

 

Indian IT and IT-enabled services (ITes) have boomed, growing at a compound annual growth rate of 12.1 per cent over the last 30 years, with the US being a dominant destination, accounting for 54–55 per cent of India’s software services exports in recent years. India exported services worth over $100 billion to the US in 2022–23. The IT sector has played a major role in transforming India’s economy. The Indian IT sector contributes 7.4 per cent of gross domestic product (GDP), and it is projected to rise to 10 per cent by 2026. The IT sector provides about 5.5 million jobs directly. IT services exports were at $194 billion in 2022-23, making India’s current account resilient. With over 50 per cent of IT services exports at a risk of getting adversely impacted, there will be implications for India’s GDP and employment.

 

Impact on the US economy

 

Indian IT services have also contributed significantly to the US economy. According to a study by Nasscom in 2022, Indian IT firms and their clients generated $396 billion in US sales (output), supported 1.6 million jobs in the US, and contributed over $198 billion to the US economy in 2021. Thus, India’s IT and IT-enabled services exports to the US are a win-win situation for both countries.

 

Possible responses

 

Since it may not be easy for US companies to substitute Indian IT firms, alternative ways may be found to circumvent or manage such a sharp hike in visa fees. First, Indian IT companies may serve their US clients from India, as has been the trend after Covid, reducing their on-site presence. According to US Citizenship and Immigration Services data, top IT companies such as TCS and Infosys reduced their H-1B filings by an average of 46 per cent over the last five years. This trend may gain momentum going forward.

 

Second, major IT companies may increase local hirings in the US to lessen their reliance on H-1B visa. In fact, it has been reported that 80 per cent of US workforce in HCL Tech, one of the major Indian IT companies, comprises local hires. Third, IT companies could consider staffing options in countries close to the US, such as Canada. Fourth, it is likely to give a big boost to global capability centres (GCCs) in India. From India’s standpoint, though wages in GCCs may not be as attractive as those for on-site professionals employed by Indian IT companies in the US, GCCs may emerge as the second-best option for IT and IT-enabled services. Small IT companies, in particular, are likely to benefit more from such  a trend.

 

A wakeup call for Indian IT

 

Indian IT companies have thrived on US demand, but recent developments are a wakeup call, highlighting their vulnerability. All along, Indian IT companies have focused on providing basic IT services. After over 30 years of operations, it is time for them to build a more resilient business model to move up the value chain and create innovative products with global demand, alongside providing basic IT services. Major Indian IT companies should aspire to become global players such as Google, Microsoft, Nvidia, and Open AI.

 

For introducing innovative products with global demand, Indian IT companies would need to boost spending on research and development (R&D). Indian IT companies spend about 1 per cent of their revenue on R&D, a trend that has not changed since 2021. This is because they have prioritised short-term benefits to their shareholders over creating long-term innovative products. Being cash-rich, they have opted to buy back shares and pay substantial dividends rather than reinvesting profits in R&D.

 

For instance, the top five Indian IT companies have bought back shares worth over ₹1.10 trillion since 2017. Similarly, the top three IT companies have paid out more than ₹41,000 crore in dividends since 2020-21. IT companies in the US spend much more, many in the range of 13 to 15 per cent of their revenues, on R&D. Indian IT companies need to leverage their strengths (strong cash flows and relatively low wages) to invest in R&D to develop innovative products, including artificial intelligence (AI) models. There are reasons to believe that with strategic investment in R&D, they can produce innovative products  such as AI  at a much lower cost than those by their counterparts in the US and even China.

 

In sum, an increase in H-1B visa fee has posed a major challenge for Indian IT companies. To sustain their growth in a highly uncertain global economic environment, they need to modify their business models to focus on innovation alongside traditional IT services. 

The author is senior fellow, Centre for Social and Economic Progress, New Delhi. The views are personal