Impact of weak US Dollar, oil price and World Trade Organization agreement on outsourcing
Sunil Jetley, Special Correspondent
December 26, 2004

As US dollar comes down crashing on euro and yen, Indian Rupees move little compared to US Dollar and keeps falling compared to UH pound and Euro. The way India’s central bank has handled the currency volatility is interesting.

The main source of outsourcing contracts is America. European and Japanese companies literally survives by selling to America. Seventy percent of outsourcing contract originate from US demands.

Consequently as US Dollar declines compared to Indian Rupees, India will lose the edge of lower cost compared to US Labor force. But that is not happening. Like China, India has pegged its currency to US Dollar. As a result, Indian currency floats on the basis of US Dollar values and hence there is no question of reduction in the number of outsourcing contracts.

Three factors may however, change that scenario in 2005. 

First is that the US Administration will require India and China to revaluate their currency and allow free floating instead of pegging to US Dollar. 

Second, the higher oil price will provide an added incentive for India and China to revaluate their currency. Higher value of Rupees compared to Dollar or Euro effectively lowers the domestic Petroleum prices since 70% of the same is imported.

Third, the World Trade Organization requirements of Process Patent Law implementation will also provide and added incentive for India to revaluate the currency.

Outsourcing IT, Telecom and other services to India was supposed to be a temporary transition process. As the Western economies automate through use of Robotics and automated code generation techniques, the recitative tasks that are outsourced from India will reduce in volume over time.

However, with Indian Rupees revalued to even a marginal extent may kill outsourcing even within a few years.