US - India Trade Relationship Analysis-3.0

The US is now pressing the hot button- H1B, L1B, and Outsourcing

The U.S. administration is late in using a key geoeconomic tool that India is likely to respond to more quickly: the H-1B visa. Additionally, two more effective tools could be IT outsourcing and L-1B/L-1A visas. There are reasons why India did not respond to tariffs—I have written two articles in the last six months about this:

- [US-India Relationship After April 2](https://mayanomics.substack.com/p/us-india-relationship-after-apr-2)

- [India-US Relationship Analysis](https://mayanomics.substack.com/p/india-us-relationship-analysis-20)

I believe India will come to the negotiation table with increased willingness this time (the commerce minister is already on his way to the U.S.) because India, unlike China, has structured its economy around "human capital services." A significant part of this involves sending people abroad (body shopping) or providing services through outsourcing.

India's growth since the 1990s has been driven primarily by these two catalysts. Major Indian IT companies like Wipro, Infosys, and TCS built their empires on this foundation. Currently, the largest chunk of India's exports comes from what is called IT export, which largely includes sending human resources to the U.S. (primarily) on H-1B and L-1B visas. This system functions more as an economic model than just IT or services.

This system can be viewed as a dollar recycling mechanism. The U.S. has benefited from its partnership with India, among other countries involved in the dollar "fan-out" and "fan-in" process. The dollar originates at the Federal Reserve, moves to U.S. corporations through the banking system, and then these corporations utilize the affordable dollar to purchase services from Indian workers, ultimately building capital in the U.S. When these dollars reach India, the Indian economy treats them as financial capital, driving the growth of Indian corporations that lease human capital to provide services to the U.S. These corporations then reinvest their profits into real assets (such as real estate, various industries, and U.S. bonds). In this process, the value of these Indian giants inflates through stock market derivatives—stocks, bonds, debts, etc. While the Indian financial accounting system does not recognize human capital as an asset, there are indirect practices like Human Resource Accounting Statements that showcase their human capital.

Meanwhile, the U.S. enjoys the most efficient system of dollar recycling with Europe, where a majority of the dollars flow to European companies and families, usually finding their way back to the U.S. This is because many European corporations and wealthy families consider U.S. assets as "risk-free." Historically, most rulers and wealthy individuals prefer to build and protect their assets away from their own regions as a hedge against political instability, power shifts, natural disasters, and general economic instability stemming from the European monetary union. This mechanism of dollars returning to U.S. assets is not mirrored in India and other nations. Currently, about 70% of U.S. dollars remain outside the U.S. The Trump administration has been striving to bring more dollars back into the country to reduce national debt and generate additional financial capital for American companies to foster domestic innovation in manufacturing, supply chain, shipping, AI, infrastructure, and space programs, where the U.S. is significantly lagging behind China.

In this context, one might question why the U.S. should accommodate Indian companies and nationals through H-1B visas and outsourcing. The common perception is that allowing more Indians into the U.S. benefits India and the Indian community without providing value to the average American. Many Americans, including those who identify with the MAGA movement, feel displaced and discriminated against despite having the qualifications and skills for high-tech jobs. Initiatives like diversity, equity, and inclusion (DEI), which were intended to restore balance over the past three decades, have inadvertently created disadvantages for the majority of Americans compared to minority migrants, thanks to widespread abuse and scams.

The damages to the US system and society have already occurred, and there is little chance the country will revert to embracing multiculturalism, Diversity, Equity, and Inclusion (DEI) initiatives. While it is possible to appeal to the President and the Administration on humanitarian grounds, one must question why the US should prioritize concerns for non-citizens. The United States has some obligation to Permanent Residents, but it has no obligation to fulfill towards temporary workers. Guest worker programs, student visas, and other non-immigrant programs are privileges granted based on specific economic conditions; they are not rights. Regardless of how many diplomats travel from India to the US, the administration is unlikely to change its stance on the core issues surrounding these programs. This trend did not begin with the Trump administration; it has been developing for a long time, especially since the burst of the Dot-Com bubble. Significant changes began to take shape after 2008 during the Obama administration. While there may be some adjustments to these initiatives on humanitarian grounds in the future, the overall trajectory will likely lean toward protectionism and prioritizing trade and economic relationships. This approach will help the US maintain its leading position or at least narrow the gap with China. If India can persuade the US toward this direction, there may be some opportunities for cooperation.

Conversely, the U.S. has been looking toward countries like Pakistan as potential partners, partly due to access to critical minerals and oil. The copper resources in Balochistan, along with other minerals, are attracting the interests of both China and the U.S., prompting them to seek relationships and agreements. While India currently dominates as the primary provider of IT backbone support to the U.S., much of this support could be provided by other nations willing to establish advantageous relationships with the U.S. Argentina, for instance, is recovering from an economic downturn and is positioned to offer both dollar recycling support and IT services. Interestingly, to India's disappointment, many Indian IT companies are planning to establish operations in those countries, hiring local workers. In fact, they have done this in the past for a brief period in the early 2000s.

In the realm of outsourcing and consulting, major players like Deloitte and Accenture have a global presence and the capability to expand anywhere in the world. So, where does India really hold an advantage? The truth is, not much. The real need for both the U.S. and India, whether individually or collectively, is to create value for one another through genuine innovation, especially as China continues to skyrocket in growth.

In the long term, the economic corridor between the U.S. and India will depend on how they align their economic cooperation in relation to China. What India and the U.S. need right now is not an economic and trade war with each other. Instead, they should focus on reworking their internal mechanisms for geoeconomic cooperation, modeling their approaches, and striving to accommodate each other through a system built on trust and mutual benefit. This process takes time; the U.S. cannot impose its will on India through bullying, nor can India gain anything by surrendering or appeasing the U.S. Trust cannot easily be integrated into economic models, but the foundation for growth and prosperity lies in cooperation. For cooperation to be effective, trust is essential.

Looking back over the past four decades of U.S.-India relations, cooperation has been limited. This does not mean that a strong relationship cannot be built, but it does suggest that something must change for progress to occur.