Wage inflation in IT outsourcing industry will make India too costly in two years in spite of rosy picture today
Shanthi Subramanium, Special Correspondent
January 14, 2005

A sustained rise in outsourcing to India has positioned Tata Consultancy Services to become the first Indian software company to exceed $2bn in annual sales. The achievement of TCS is substantial. The revenue prospects are very good.

But problem lies in another area. The wages in the India’s IT industry is rising so fast while deflation in the Western nations like America and Europe is causing clients to cut back on prices so heavily, that outsourcing from India may not be worth it in two years.

Indian outsourcing companies use a single mantra as business model – buy low cost labor in local currency and sell the lemon to Western companies in Euro or Dollar. 

The American and European companies are getting smarter. The Japanese companies dealt with Indian IT outsourcing companies even better. They are pushing price down systematically. Also systems and software automation is requiring less Indian repetitive type work except for inefficient Western corporations which will not survive any way. 

At the same time, cost of living in India is going up very fast. The surging domestic economy is making it difficult to find the young talented educated brain power of India that is willing to work almost for free in international standards. 

An Engineer graduating from an Indian Engineering University has options of working in various industries including option to go abroad. The cost of hiring, medical insurance, cost of commuting, general demand of higher standard of living is making it difficult for Indian outsourcing companies to find the right talent for low price.

Many companies have decided to go to rural country side and find the village youth. Soon they are finding that it is impossible to get work done by those who have difficulty in English fluency and is detached from city environments. 

TCS, Wipro and others have started taking their business into other countries like South America, Ireland, UK, US, Philippines and else where. But there they are facing cultural issues and lower productivity for the price they are willing to pay.

It is obvious that sooner or later trading mentality will  collapse in high tech. But no one knew it will come so fast.