The US has adopted tough measures to regulate the H-1B visa policy. The move by the US government is pressurizing the margins of Indian IT companies. Due to new norms, the H-1B visa rejections have surged. This has led to Indian IT companies to recruit staff onsite which has decreased their margins on account of higher onsite salaries.
What is the H-1B visa?
Changes in the H-1B Visa norms:
|Year||Revenue (In $ billions)||Margins|
Future Outlook of Indian IT sector:
The revenues are expected to rise further in future at 6-8% in dollar terms for the IT sector in FY20. The revenue growth will mainly be on account of the increasing pace of growth in digital services. The operating profits of the companies are further subject to a decline of 30-80 bps for FY20. The expected decline will be a result of increased employee costs.
The IT sector has heavily relied on labour arbitrage for sustaining in the industry and improving its profitability. In 2017, Indian-origin employees made up 63% of the total consumers of H-1B visas. Later, a sudden change was implemented in the policy that created problems for the IT companies as they had to fill in the gap by hiring onsite staff.
IT companies’ workforce consisted of the offsite-onsite ratio of 80:20. The H-1B visas have been a backbone of the IT firms’ strategy. This is mainly because they reduce employee cost by around 20% YoY.
The Indian IT firms including TCS, Infosys, Wipro, Hexaware, HCL Technologies & US arm of Tech Mahindra witnessed a sharp decline in visa rejection. The visa approval dropped to 8,468 in FY17 from 14,792 in FY15
In 2018, Indian IT firms received only 16% i.e. 2145 of H-1B visa permits from 63% in 2017. The visa approval for Indian IT firms was less than work permits allowed to Amazon alone which stand at 2,399 visa approvals in FY18.
Indian IT firm’s strategy
As the margins of Indian IT firms are severely being affected by the H-1B visa norms. They are resorting towards new solutions.
Going forward, recruiting of onsite staff may seem like a solution but this leads to a decline in the profitability margins of the companies. This has adversely affected the performance of the companies. Furthermore, this has also resulted in the Indian IT firm resorting towards a more permanent solution.
Moreover, IT companies have started to recruit employees from neighbouring countries to the US. The companies are increasingly hiring staff from Mexico & Canada through Trade Nafta (TN) visas.
Trade Nafta (TN) Visa:
The TN visa does not consist of an application timeline, unlike H-1B visas. TN visas are not subject to annual quotas and can be renewed indefinitely. These visas are also inexpensive and swifter to process. Recruitments from Mexico & Canada have soared since the constraints emerged in H-1B visa policy. This move is mainly to make up for the loss of employees from the H-1B visa.