In India, How Long Will Services Labor Cost Arbitrage Last?

My colleague Brian Sommer has been busy in the blogosphere of late, penning a number of columns which might in fact be of even more interest to procurement than his regular audience -- IT or business executives buying consulting services. One of his more recent posts examined the conflicting economics we're seeing in the market from Indian outsourcing.

According to Brian, "I've seen a number of Indian outsourcers report that rising wages, high attrition and a stronger Indian Rupee are not hurting sales or crimping profit margins. The Wall Street analyst reports I get seem to support this view. However, Nasscom is arguing the opposite saying that the Indian government needs to restore export incentives and/or other tax benefits to offset profit shortfalls caused by a rising currency." For those interested in comparative country economics, what’s most interesting here is that "India and China have two very different monetary policies. China is clearly following the export economy model Japan used so effectively during the 1960s and 1970s while India is allowing its currency to float".

Brian then goes on to cite how Tata is building a 5,000 person global delivery center in Mexico which might be a signal that "the days of segregating outsourcers and integrators into Indian and non-Indian firms may be coming to an end. Instead, we should refer to firms as national firms (for those whose workers are predominately based within one nation), multi-national (for those firms with a material percentage of workers based in several nations) and global (for those firms with 50% of their workforce based in over two-dozen countries)."

Without question, the days of low-cost highly skilled Indian labor are behind us. While India's physical infrastructure may still looked like more like bombed out Beirut in certain areas than that of a fast growing economic superpower, there's no question that India's human capital infrastructure has arrived on the world stage -- both at home and beyond. And regardless of which classification that Brian suggests that individual Indian firms end of falling into, one thing is for sure. And that's each Indian firm will have to fend for itself in the open market without the same central -- and some might argue artificial -- monetary support that the centrally planned Chinese economy provides to the industries it wants to support.

Jason Busch

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