India's Rapid Ascent to High-Cost Country Status

Despite the cheap availability of experienced hired "personal" services labor in India -- what I wouldn't kill for a skilled driver, chef, or babysitter that cost me less than $2,000 each per year -- India's professional classes are beginning to price themselves out of the market on a global low-cost basis. In a recent Financial Times article, the authors remark that "India's information technology outsourcing sector is heading for crunch time next year, as a rising currency and increasing wage and real estate costs force the industry to rethink how it does business. One observer quoted in the piece notes that the impact of a 12 percent appreciation of the rupee against the dollar this year is "horrible" when it comes to maintaining IT margins. As a result -- at least in part -- "India's IT outsourcing companies have been among the worst performing on the stock market this year."

How are Indian services firms staying alive and profitable in this environment? Smart Spend Management, that's how. The best of the best are maintaining margins through "moving more work onshore and hiring cheaper graduates from disciplines other than engineering. They have also employed hedging." In an environment where salary costs are rising at nearly 15% per year -- nearly 100% higher than China and the Philippines, The FT notes -- this relentless focus on the bottom line is critical. But perhaps most of all, the combination of wage inflation and a strong currency will cause Indian outsourcers to ultimately get into higher margin software development and solution delivery as their core business. After all, even with a high cost structure, investing in innovation almost always pays off in the end. And with what is certainly the best higher education system in Asia -- at least for the privileged top performers -- India has the best shot of all at developing an economy that looks more like Silicon Valley than its regional rivals.

- Jason Busch

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