The Hindu Business Line : The high wage of success

Even as developed country outfits look to India to outsource work, wage inflation is driving Indian companies to look for cheaper skills elsewhere. The trend that is just about to take off will have profound implications for the Indian economy, says ASHOAK UPADHYAY.

At the India Economic Summit last Novermber, Mr Azim Premji of Wipro Technologies pointed to the wage differential between American Information Technology professionals and their Indian counterparts as one of the main advantages in India’s favour. At an average of 14 per cent, the gap seemed not too wide, but the phenomenal flow of outsourced operations in India is the best proof that it was enough for American IT and other multinationals to come to India. The phrase , “I’ve been Banglored!” that became so popular among the not-so-bemused Americans who were laid off and watched their jobs move to the Garden City and elsewhere in India underlined the fluidity of capital seeking low wages with high efficiency anywhere in the world.

That export of capital and jobs fuelled India’s unusual growth story, aided by the telecommunication reforms ushered in by the previous government. The IT boom created a new generation of spenders that in turn inspired a general economic euphoria that has sustained itself at above eight per cent the last four years; it shows little signs of abating despite a price rise barely captured by the average Wholesale Price Index.

When Mr Premji was asked if the wage differential wasn’t narrowing now that Indian professionals were getting higher pay packets than ever before, he replied in the negative. When pressed that the wage differential between Indian professionals and those in countries acquiring outsourcing capabilities, such as the Philippines, Mexico, Algeria were widening in the same way that those between the US and India had earlier, he replied in the affirmative. At the summit and subsequently, it was acknowledged that these countries, not to mention East European nations such as Poland, even Romania, were getting onto the bottom rung of the outsourcing ladder that India may have just vacated by moving up.

That analogy is appropriate up to the point where Indian companies such as Infosys, Wipro and TCS, leading the pack as it were, can play the role that American companies did earlier by searching for cheaper labour alternatives. That is a process begun a few years ago and promises to gather speed in the medium term.

Infosys is ramping up its outsourcing operations in the Philippines; TCS in Mexico. So too is Wipro. A host of factors is determining this expansion based partly on the same logic that American companies used to relocate jobs here. As with all firms responding to the calls of the market, Indian firms are also relocating a part of their work or are expanding offshore because of the time differential and because in the US, Spanish is spoken by nearly 15 per cent of the population. That number will grow as will the need to have Spanish-speaking operators. Indians have a proficiency in English that has been recognised in the Anglo-Saxon world but 15 per cent of Americans do not feel comfortable in it.

Only a hint, so far

To be sure, the Indian IT boom is still robust. The country is still the favoured destination for many MNCs outsourcing not just call-centre operations but higher end jobs such as medical transcription; knowledge processing operations, and design outsourcing are the emerging areas. Frontline Indian companies have an enviable record of prompt delivery, quick on-the-job training and managerial skills that meet global standards.

Not surprisingly, the IT sector beats all others both in domestic and export growth; while merchandise exports grew around 22 per cent last year, IT exports galloped 34.4 per cent; software service exports alone grew by 33 per cent bringing in $31.46 billion; BPO-ITES services earned $8.4 billion in 2006-07 and Nasscom estimates incomes of $11 billion for 2007-08.

These are impressive figures and reflect the quality of firms that have established their footprint across the developed world. Perhaps anticipating competition from other emerging economies at the lower end of the IT services, firms are edging their way up the value chain into consulting, as IBM did years earlier. But the bread and butter of a wide swathe of Indian firms remains their jam too with outsourcing the mainstay of revenues.

That perhaps accounts for the large-scale recruitment by firms such as Infosys and TCS that is reminiscent of war-like mobilisation. Clearly, there is no dearth of assignments flowing their way and the Nasscom projection of next year’s earnings bears testimony to the self-confidence that the sector feels.

Export of capital…

And why not? While preparing for top-end IT services such as consulting gets Indian firms into the competitive big league, they also find it easier to cater to the low-end of business outsourcing by shifting or, as is the case at present, expanding operations in developing countries. Firms such as TCS and Infosys are unique because they occupy that strategic place between the rigorous expectations of the developed markets and the untested advantages of low-cost labour economies emerging into the bright sunshine of the IT world.

To a question about competition from economies eager to put their newfound and cheaper skills to the outsourcing wheel, Mr Premji pointed to the expansion plans of Wipro and other firms into such unlikely regions as North Africa (Morocco and Algeria).

Along with Poland and Romania in East Europe these are nations whose operations will help Indian firms cater to French and German client-markets in Europe besides the US.

After decades, Indian firms have acquired a sensitivity to non-economic factors that figure prominently in investment decisions. A call-centre operator in Poland will be more tuned in to his German client’s verbal idiosyncrasies than an Indian in Mumbai or Bangalore. By setting up shop in such regions, Indian firms compete with local outfits for the cheap labour advantage they enjoy back home. So far acquisitions have been modest in size numbering 13 since 2006. The rumour about Infosys acquiring a stake in Capgemini in Europe remains just that. But Western firms are on an acquiring spree in India. Large firms like IBM are eager to retain profits for themselves from Indian operations and are poaching firms like TCS. Predictably, wage bills have ramped up substantially in fiscal 2007 among most top-end IT firms.

Gaining on the swings

Wage inflation among IT companies is the new spectre haunting Indian companies and is forcing many companies to look for cheaper skills elsewhere. The urge is to go global, and the trend that is just about to take off among IT firms will have profound implications for the Indian economy.

Rising wage costs, a shortage of skilled labour that exacerbates wage bills, will lead to an export of jobs to the cheaper emerging economies; if the wage differential between the developed client-markets and India narrow, as they are closing at a rapid rate, then most clients would look elsewhere for outsourcing or prefer Indian offshore operations relocating critical operations back home.

Trendspotting

The phenomenal success of IT operations will extract its price and Indian companies are already counting on reducing that price by a series of strategies from relocation and expansion of offshore activities to low-cost economies or back to the client economies to acquisitions of developed economy firms. While it is too early to spot a definitive change, such strategies will involve the export of jobs; in the not-too-distant future that outflow will begin to hurt the Indian economy.

Although reminiscent of American style-capitalism where the export of capital also carries away local jobs, the Indian economy has the unique advantage of a strong manufacturing base rooted in the domestic economy whose market potential has yet to be exhausted. That may just offset the flight of outsourced jobs to India’s emerging competitors.

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