Date:27/02/2006 URL: http://www.thehindubusinessline.com/2006/02/27/stories/2006022702620100.htm

Back `India will enjoy low-cost IT labour edge for 20 years'

Moumita Bakshi Chatterjee

Advantage India
India's cost advantage to continue for 18-20 years.
Even in the worst-case scenario, the cost advantage could be sustained for about 10 years.

New Delhi , Feb. 26

The low-cost labour advantage enjoyed by Indian IT services over sourcing nations is here to stay for at least two decades despite the perceived sharp rise in wages.

According to Everest Research Institute, India's cost advantage over most sourcing nations, including the US, UK, France, and Japan, is likely to continue for at least 18-20 years.

"It is true that the wages in developing nations in IT services and BPO are experiencing double-digit growth at select skill levels.

"However, the effects of this on labour arbitrage are overstated," according to the `Sustainability of labour arbitrage' report by Everest Research Institute, which offers research services.

"Across levels, the overall wage inflation is substantially lower. Further, exchange rates should continue to move in the favour of the offshore industry (developed nations' currencies strengthening against developing nation's currencies), helping sustain and even increase labour arbitrage."

Downplaying the perceived effects of the salary hike, it said that the wage increases in India differed by process and levels, with overall increase being much lower than commonly reported figures.

For instance, in the Indian IT services ambit in 2005, the wage increase ranged from as low as six per cent in case of project managers to 15 per cent for team leaders.

The weighted average wage increase was 10.5-11.5 per cent.

In case of work offshored from US to India, the labour arbitrage can sustain for 18-20 years.

For offshoring between Japan and India, the arbitrage can sustain for 26-28 years, for IT services.

For work offshored by France and UK to India, the labour edge can remain for over 30 years, the Everest report said.

"The three most important elements that current reports misinterpret are - the growth in individual salaries versus the more appropriate growth in role levels; reports also pick up the highest cost increases rather than taking into account the overall effect (bulk of costs are at entry level which only grew at six per cent); and third, they usually just cover wage increases at the offshore destinations versus the composite picture, which includes wage increases in source country, and other cost changes," said Mr Joe Fernandes, Managing Principal, Everest Group India.

The Everest report also said that even in the worst-case scenario, the cost advantage could be sustained for about 10 years.

"However, such pessimistic scenarios have a low possibility of realisation and in reality, labour arbitrage will be sustained for much longer periods of time," said Mr Sheetal Behl, market research analyst with Everest Research Institute.