How long can price advantage drive India's outsourcing boom

How long can price advantage drive India's outsourcing boom? Jyotsna Sikdar Feb. 28, 2005

There is little doubt in any ones mind that the currency differential i.e. 1 US Dollar equals 44 Indian Rupees is the main driving force behind outsourcing boom in India. But the international think tanks have started asking questions as to how long can these currency differentials drive the outsourcing boom in India?

As China adjusts its currency to a more flexible instrument floating in the open market, India will have to follow suit. India with more than $130 Billion in Forrex reserve just cannot tell the world that India is poor and needs to keep the currency at $1 = INR 44 for ever.

So if finally the Indian Rupees starts gaining ground against the US Dollar, what will be the net impact on the outsourcing contracts?

According to some international software contract management and appraisal firms, the immediate impact will be little in IT sector and quite major in call center operations. The nature of IT business requires stability in development and maintenance environments. With increasing value in Indian Rupees, higher inflation and wages in India, Western companies will still continue to pour in money to get services outsourced. This will continue for a few years. However, in the long run, the outsourcing will not be a lucrative alternative for American or European companies.

For call centers though the impact will be much severe. The higher wages in US Dollar terms and negative effects of Indian accents will drive call center business away from India at a much faster rate as Rupee gains ground.

Experts disagree on how quickly Indian Rupee will revaluate. Government of India will try to obstruct such moves but it is believed that as China opens up, India will be expected to move in tandem.

India's main problem is the perception in international market. India has to transform from low cost provider to a strategic quality service provider. The image has to change fast especially in IT sector. A failure in that regard can be catastrophic.

How long can price advantage drive India's outsourcing boom? Jyotsna Sikdar Feb. 28, 2005

There is little doubt in any ones mind that the currency differential i.e. 1 US Dollar equals 44 Indian Rupees is the main driving force behind outsourcing boom in India. But the international think tanks have started asking questions as to how long can these currency differentials drive the outsourcing boom in India?

As China adjusts its currency to a more flexible instrument floating in the open market, India will have to follow suit. India with more than $130 Billion in Forrex reserve just cannot tell the world that India is poor and needs to keep the currency at $1 = INR 44 for ever.

So if finally the Indian Rupees starts gaining ground against the US Dollar, what will be the net impact on the outsourcing contracts?

According to some international software contract management and appraisal firms, the immediate impact will be little in IT sector and quite major in call center operations. The nature of IT business requires stability in development and maintenance environments. With increasing value in Indian Rupees, higher inflation and wages in India, Western companies will still continue to pour in money to get services outsourced. This will continue for a few years. However, in the long run, the outsourcing will not be a lucrative alternative for American or European companies.

For call centers though the impact will be much severe. The higher wages in US Dollar terms and negative effects of Indian accents will drive call center business away from India at a much faster rate as Rupee gains ground.

Experts disagree on how quickly Indian Rupee will revaluate. Government of India will try to obstruct such moves but it is believed that as China opens up, India will be expected to move in tandem.

India's main problem is the perception in international market. India has to transform from low cost provider to a strategic quality service provider. The image has to change fast especially in IT sector. A failure in that regard can be catastrophic.