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BPO and the Indian economy

By C. Rammanohar Reddy

All the euphoria that very easily becomes hype cannot change one thing. IT services cannot do for India what manufacturing did for China.

THERE IS a buzz in the air about the Indian economy. The Finance Minister tells the international media that India is on the verge of explosive growth. One of the leading business magazines in the world, BusinessWeek, speaks in the same breath of India rising and the U.S. possibly declining. . It even seems as if India is beginning to displace China as the "most favoured economy" of the global business community.

Some of this new excitement about the Indian economy is linked to the strong recovery in the current fiscal. To that extent the euphoria is not justified since this is a recovery fuelled by a reasonably good monsoon. The buzz is about more than how the economy is doing in 2003-04. The magic set of initials is BPO, or business process outsourcing. Software that is the flavour of the times. The excitement instead is about the motley set of activities from low-end customer support services to research and development in computer chips that are now increasingly based in India. Where the buzz earlier was about China becoming the manufacturing base of the global firms, it is now about India becoming the "service capital of the world". Indeed, Nandan Nilenkani, the Infosys chief, is reported in BusinessWeek as speculating that just as China cut costs for global manufacturing, India will make similar savings for global services.

How big is this BPO affair really? Can the re-location of numerous BPO services to India really do what a relocation of low-end manufacturing has done for China — become a leading source of economic growth and of employment to millions of young people.

Until just a few years ago, the services outsourced to India were mainly back-office functions. U.S.-based companies would get their pay-roll activities and airlines would have their ticketing documentation carried out in India. Outsourcing from these non-core activities has moved on to the core areas as well. We now have, though still on a very small scale, GE getting some of its research and development on aircraft engines and Intel some of its chip design research done in India. What has made all this possible is the development of high-speed and large-capacity communication networks.

Common to all these activities is the critical role of information technology (IT), which is why IT-enabled services (ITES) covers a larger area and is a better description than BPO of the new era of outsourcing. The key driver is the search for cost savings. The educated young Indian can deliver low-end services like basic customer support and increasingly carry out high-end research work at a fraction of the cost in the West — with little or no compromise in quality. "There is just no place left to squeeze," is the cruel observation of a BPO specialist quoted in the BusinessWeek article on India. The squeeze is on high-tech workers in the U.S. and the beneficiaries are the educated Indians working in Gurgaon, Bangalore, Hyderabad and Chennai. NASSCOM estimates that companies in the West can save up to 60 per cent in the costs of the services they outsource to India.

How far will out-sourcing go and what impact will it have on India's economy? There are three sets of questions to be answered in this connection. The answers require hard facts but the only source of information in India is NASSCOM and, outside India, the many private research/consultancy agencies. All have a case to make out in favour of ITES/BPO and that makes an informed assessment difficult.

The first question is about the size of the ITES/BPO business in the years ahead. There is such a wide range of estimates put out by consultancies and private research agencies that credibility is at a premium. An estimate prepared by IDC that NASSCOM cites sees global ITES business rising from $570 billion in 2002 to $1,200 billion in 2006. The recent E-Commerce and Development Report 2003 cites a Goldman Sachs figure of $570 billion in 2005 for global BPO contracts and a Gartner estimate of $300 billion of ITES revenue in 2004. Another research agency, Forester, says that because of unreliability of suppliers, the global BPO business will rise to only $145 billion by 2008. These are global estimates of contracts that are outsourced both at home and across borders. What matters for India is how much of this business will be on offer in the global market. Gartner Asia has suggested that global BPO business that would be available for offshore contracts by 2005 would be only $28 billion.

This is a new and evolving business so a certain amount of "guesstimation" is to be expected, but the huge variation in numbers says that it may be too early to come to any definite conclusions. And while the papers are filled with news of jobs lost in the West and employment gained in India, the numbers that have been quoted are (as yet) small. NASSCOM estimates (again) are of 160,000 people working in all ITES sectors. In the U.S. and the U.K. there is as yet no discernible increase in unemployment among ITES and high-tech workers that can be attributed directly to outsourcing to India and other developing countries. Jobs are being lost, but the numbers (as yet) are small. A recent report in the Financial Times notes that of the 80,000 call centre jobs in Scotland, only 8,000 are for now slated for closure. There are projections, of course, of huge job losses. The most extreme is the one made by Forrester, which claimed that the U.S. would lose 3.3 million jobs in IT by 2015 of which 2.3 million would go to India.

The second question is whether India will remain the preferred source of offshore contracts in ITES/BPO. There is again no hard data about where India stands today. The most recent Gartner estimate is of India obtaining a 49 per cent share of offshore business in 2005. But the two main issues of concern to Indian outsourcing business are the ability to maintain quality and the resistance among IT workers in the U.S. and the U.K. to outsourcing, especially to India. The growing backlash against BPO mirrors the public protests against the loss of jobs in manufacturing in the 1970s and 1980s — with one difference. Workers in IT and high-tech are numerically fewer but they are more powerful and have a greater visibility than the organised labour of the 1980s. Whatever the management consultants may say about the larger benefits of outsourcing to the U.S. and the U.K. economies, rising unemployment among IT workers will lead to political and social lobbying that will compel corporates to go slow on outsourcing. The sword of globalisation will be fought bitterly by the IT community in the U.S. Irrespective of the logic of globalisation, India cannot hope to benefit freely from the drive to relocate services.

The third question is about the impact ITES/BPO can have on India — even if it were to enjoy unfettered growth. First software, then ITES. There is no question that India has made a mark in these particular areas of IT. They have opened up opportunities that did not exist even a decade ago for the urban educated. They have facilitated the emergence of a new class of entrepreneurs who have put the "old economy" industrialists in the shade. And they have contributed considerably to India's export growth. Some of the work may be high technology only in name (for example, medical transcription) and some of it may be fairly demeaning (for example, the acquisition of new persona as demanded by some call centre operations). Yet, the boom that has lasted a decade and promises to continue has changed the face of urban India — pockets of urban India to be more precise. However, all the euphoria that very easily becomes hype cannot change one thing. IT services cannot do for India what manufacturing (and before that agriculture) did for China. Today, there are 500 million Indians in the work force while NASSCOM estimates are of 160,000 men and women in the ITES sector. Even if ITES business grows four-fold over the next couple of years — as suggested by the recent Gartner estimate — and there is a corresponding growth in ITES workers that still means only 0.1 per cent of the work force will be in the boom business. Of course, a vibrant outsourcing business will also have spin-offs in manufacturing and services, which will have a manifold impact on output and employment. But the scale of India's challenges require most of all a transformation in agriculture and industry. The tragedy will be if India's policymakers fall victim to the hype.

All visitors to China come away impressed with the frenzy of activity that seems to characterise the cities and towns, especially on the east coast. It is difficult for a visitor to India to say the same thing. If he or she were to visit only the IT parks and the campuses of the leading IT companies, the impression would be of "India shining". But outside the enclaves the story is different. If we embrace the illusion of turning India into the service capital of the world, then we will be left with just that — enclaves of vibrant activity and prosperity amidst a mass of people still struggling with their daily life.

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