I.T.

outsourcing in India and its impact on the

Indian market

Date: 10/16/2009
Bhavin Gandhi
Morrison University
 I.T. outsourcing in India and its impact on the Indian marketPage 2

Abstract

The last decade has witnessed the emergence of India as the center for “business process

outsourcing” in the global market. According to the Nasscom-McKinsey 2002 report,

Information Technology Services (ITS) has become the fastest growing industry in India, at an

expansion rate of 65% a year. This paper focuses on the emergence of India as a vital hub for

“business process outsourcing” in the global market and its impact on the Indian market.

Bhavin Gandhi | © Morrison University, Reno, NV

 I.T. outsourcing in India and its impact on the Indian marketPage 3

1. Emergence of ITS in India

In recent years, however, new communications technology and overinvestment in

telecommunications infrastructure has made the long-distance transfer of information realizable

and extremely cheap. Most of the developed countries started off-shoring their service

operations. These services include call centers, software development, financial services, stock

market research, and medical transcriptions. Until the 1990s India was a relatively closed global

market economy, although it was and continues to be the largest democracy in world. The

government owned most major industries in India and the economy was developing at

remarkably slow rate of 3.5%(). The currency crisis of 1991 forced the Indian government to use

most of the nation’s gold reserves as collateral for an IMF loan and led to economic deregulation

and the reduction of import tariffs(). These changes attracted investment by multinational

companies such as Unilever and Citicorp, which realized the value of that segment of the Indian

population that was educated, English-speaking, and technologically skilled. These corporations

often recruited workers straight from college and then trained them to perform required tasks.

Among these workers, software developers played a crucial role in the expansion of foreign

investment in India’s service sector. By the mid-1990s the trend escalated with many other

multinationals seeking Indian workers, both by importing Indian workers to the West and by

relocating or outsourcing operations overseas. This period also saw the establishment of the

Bhavin Gandhi | © Morrison University, Reno, NV

 I.T. outsourcing in India and its impact on the Indian marketPage 4

Indian IT services industry, currently led by Infosys, Tata Consultancy Services (TCS) and

Wipro().

2. Driving factors for outsourcing

In recent years, increased global competition and shifts in the U.S. economy led

companies to cut costs and increase efficiency by focusing on their “core competencies” and

outsourcing back office functions and labor-intensive services to lower-cost locations. Also,

immigrants in the U.S. and U.K. created transnational entrepreneurial networks during that time,

which created and expanded business ties between developing and core countries. Not only the

liberalization of emerging market economies in countries such as India in the 1990s made them

attractive locations for investment but also the development of new information and

communications technology made possible and profitable the outsourcing of jobs that do not

require face-to-face customer service and that allow for telecommuting by telephone and/or the

internet(). The internet and telecommunications system became increasingly effective as an

input and delivery tool, allowing easy and immediate access to information and providing

constant connectivity and enhanced control of operations. Motivating factors similar to those

driving manufacturing globalization led corporations to capitalize on “people-cost arbitrage”

through the search for workers perceived as more pliant, skilled, competent, and hard-working,

who work at cheaper rates than workers in the West.

Bhavin Gandhi | © Morrison University, Reno, NV

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3. Factors that made India an outsourcing hub for ITS

In recent years, India’s reputation as cost-efficient base was major draw for many

multinational companies. The large wage differential between India and U.S. labor for the same

job makes India extremely attractive to multinationals seeking to decrease costs and increase

revenues. The costs of business operations were estimated at more than a third lower than

China’s and approximately one fifth lower than Malaysia’s. India became a big draw for

multinational companies given that the IT service is a labor-intensive industry and India

provides a large reservoir of workers at much cheaper wages than their Western counterparts().

For example: In early 2000s, a telephone operator cost $12.57/hr in USA while they cost under

$1/hr in India. Also, payroll clerk’s cost $15.17/hr in USA that cost only $1.5/hr in India().

Apart from lower operations cost, the large English-speaking, well-educated and technically

trained population provided a desirable work force that multinational and domestic companies

can tap. India annually outputs approximately 3.2 million English-speaking college graduates,

which gave India a competitive edge as compared to Philippines and Russia().

India’s time zone position in relation to U.S. and Europe gave it an additional advantage.

Time difference between India, U.S. and European countries (9.5 to 13.5 hours ahead of the U.S.

and 4 to 6 hours ahead of most European Countries) allowed companies to work round-the-clock

shifts so that data can move back and forth during off-hours and constant connectivity and

access to clients can be maintained(). Since 2001, there was tremendous amount of improvement

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in quality and price of international communication in India. The cost of one-minute telephone

call has dropped by more than 80% since January 2001. This allowed India to attract most of the

call center jobs from all around the world. India also had the history of successful outsourcing,

joint ventures with Indian firms, venture backing, and the establishment of subsidiaries by large

U.S. corporations over the past decade. These include GE, Citigroup, Amex, British Airways,

Wipro, Spectromind, Infosys, Convergys, and others. Also, social networks linking Indian

expatriate executives, managers and entrepreneurs in the U.S. and Europe to Indian firms gave it

an additional boost.

India also had an independent, well-established judicial system with a track record of

upholding intellectual property rights as compared to other nations. Not only that but recent

efforts by the Indian government to improve infrastructure, deregulate foreign investment and

provide incentives to foreign investors made it the most lucrative outsourcing market in the

world. Russia, a recent competitor, is still viewed as less desirable a location due to the current

political and market instability(). In addition, India’s growth potential for the IT service sector

was huge, as its past market share in the global market was only 1.7%.

Clearly, India is a most attractive destination for BPO for American and European

companies. Its large English-speaking and qualified workforce, labor cost differential,

geographic location, time-zone attractiveness, and growth potential, as well as the hospitable

environment for foreign investors provided by the Indian government, will in all probability

allow India to remain a preferred off-shoring destination for some time. So what are of the

effects of this outsourcing on India?

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4. Effects of outsourcing on the Indian market

In India, the effects of BPO have generally been viewed favorably by the corporate

sector, the government, segments of the public, and to some degree by those currently employed

in the IT/ITES sector and in related growth industries. The positive effects of BPO include:

➢ BPO (Business Process outsourcing) created rapid creation of new jobs. India’s rate of

GDP growth had increased almost 7%, making it the second fastest growing economy in

the world().

➢ India currently holds forth largest reserves in the world.

➢ The Indian government now sees itself as a strong economic and political player on the

global stage.

➢ India temporarily became a land of opportunities and outsourced jobs are being created

in every major city.

➢ Due to these opportunities, smaller cities like Hydrabad, Pune, Kolkotta, Ahemdabad

become really big.

➢ Workers are well paid in software industries according to Indian standards. For example:

workers with two years of experience are paid about $1200/month as compared to

national average income of $600/year().

Bhavin Gandhi | © Morrison University, Reno, NV

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The rapid growth of outsourcing places India in a position of great dependence on global

markets, leaving its economy vulnerable to sudden fluctuations and reversals. The paradox is

that India has attracted outsourced jobs largely on the basis of its low-wage skilled labor pool.

As demand goes up, wages will follow, and India’s comparative advantage will diminish. So,

now we will examine few negative impacts on the Indian market due to outsourcing.

➢ Too much dependency of Indian economy on ITS.

➢ Growth of outsourcing will slow as corporations move to cheaper sites outside India,

thereby leading to major unemployment.

➢ When cost advantage is gone with increasing wages in India, BPOs (such as call centers)

wouldn’t have that much growth.

➢ New jobs available tend to be geared towards already privileged workers with high

education and English fluency. This phenomenon is increasing gap between poor and

rich.

➢ People are migrating from rural areas to major cities and hence they are negatively

affecting operational cost saving for companies in non-metro locations. This can

ultimately lead to decreased profitability of ITS in long run.

Bhavin Gandhi | © Morrison University, Reno, NV

 I.T. outsourcing in India and its impact on the Indian marketPage 9

1. Conclusion

India’s emergence as a globally competitive supplier of software and services has

attracted worldwide attention. It is shown that the software and service sector not only

contributes significantly to GDP but also emerges as a major source of employment generation

in the country. It is also argued that Indian I.T. sector's success owes largely to the foreign

investment. But as soon as India’s comparative cost advantage will diminish, the question then is

whether the outsourcing boom is followed by a bust? Will relocation of jobs to even lower-wage

countries decrease this growth? While there are no simple answers, it would appear that in the

next few years we will have to see whether this trend in Indian I.T. sector will continue or not.

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Bhavin Gandhi | © Morrison University, Reno, NV