Could Rising Wages Diminish India's Outsourcing Edge?
Siliconeer, News Report, Siddharth Srivastava, Posted: Jan 21, 2005
India has shown the highest average salary increase in the Asia-Pacific region during 2004, beating China, Korea and Japan, according to a survey by global human resources firm Hewitt Associates. Analysts are worried, however, that such high increases in wage costs may result in the exit of business that is sought in this country for the very same reason — low overheads. What is particularly worrying is that the highest rise in wages has occurred in the Information Technology sector where India bids to be the number one player in the world due to a combined advantage of low cost and high quality manpower at its disposal. Combined with the news that the rupee has appreciated in the face of a depreciating dollar, IT firms that rely heavily on export revenue fear a resource crunch.
According to the report, India showed the highest average salary increase in Asia followed by China, Philippines and Korea. While India reported an 11.6 percent overall pay hike, in China salaries grew by 6.4-8.4 percent, 7.4-7.7 percent in Philippines and 6.4-6.8 percent in Korea for the year 2004, the survey said. The hike during Phase I of the survey in India was marginally higher than 11.45 percent in 2003, Hewitt’s Asia Pacific Business head for talent and organisation, Nishchae Suri said, adding that Phase II for the Indian market would be completed by February 2005.
Employers in the region reported a more positive outlook in terms of salary increases in 2004 largely due to a region-wide economic upswing, Hewitt said, adding the trend was expected to continue next year as well with very few companies reporting the need for pay freezes in 2005. “The economic upswing is clearly reflected in the overall increases experienced by countries in Asia. Considering the global attention drawn by India, Philippines and China, it is not surprising to see the highest salary increases in these countries,” Mick Bennet, Hewitt’s managing director for Asia-Pacific, said.
What is worrying analysts in India is that the IT industry in India witnessed the highest average salary increase at 14.5 percent though as many as 89 percent of participating companies linked salary hike to performance ratings. The rising wages coupled with an appreciating rupee in the face of high U.S. fiscal deficit and the no-tax promise by President George Bush to plug it, will end up eroding the basic comparative advantage that India enjoys vis-à-vis other low cost centers of the world such a Vietnam, China and the Philippines, which are beginning to focus on the software sector. In an interview, Vivek Paul, vice-chairman and president at Wipro’s global IT arm, has warned of an end to the low-wage culture that has been at the heart of India’s software boom.
Indian software engineers typically earn one eighth of the salaries of their counterparts in the U.S. and Europe, with average monthly salaries of engineers here being $ 700 compared to over $5,000 in the U.S. Paul also said that the rupee was, in “purely economic” terms, 20-30 percent undervalued on international currency markets. The rupee has risen only 1 percent against the U.S. dollar over the last six months, during which the greenback has plunged against major currencies such as the Euro. Paul warned that India’s cost advantage would “fritter away as salary costs go up and, as the rupee continues to appreciate.”
The fear is that an appreciating rupee in consonance with rising salaries could result in the considerably lessening the purchasing power difference between the rupee and the dollar. Though the exchange rate between the dollar and rupee stands at over Rs 45 to a dollar, $1 is considered to be equivalent to Rs. 9 in terms of its purchasing parity. That is, a similar bundle of goods and services can be purchased for $1 in U.S. and Rs 9 in India. This is the equation that is also generally worked out by software companies when they pay equivalent salaries to engineers who seek work in India back from the U.S.
The concerned software company books profits as the exchange rate between the dollar and rupee are much higher than the difference warranted by cost of living. With appreciation of the rupee, however, the exchange rate advantage is narrowed while rising salaries negates the purchasing power parity, which makes it a lose-lose situation for Indian exporters.
India’s software exports have surged by 30 percent this year. Revenue from India’s IT exports was $12.5 billion in the year 2003-4 (March ended), which in turn has resulted in a 10-15 percent annual rise in wages in India’s software and back-office services industry.
According to research firm Gartner Group, the global IT services market is worth $580 billion, of which only $19 billion is outsourced, but India has 80 percent of this offshore market. The figure for outsourced IT services is expected to grow at a very rapid pace.
However, industry observers also say that there may be no immediate threat as Indian firms have incorporated elaborate plans to circumvent the rising wages. Most Indian IT firms that operate in the global scale have begun implementing backward linkages to cheaper locations to deliver on business generated from Europe and USA. IT giants such as Wipro, Infosys; Satyam and TCS have set up operations in China, given the lower wage cost of software engineers due to excess supply of trained manpower. Indeed, Indian firms facing competition will have to take the cue from the Indian model of low cost, friendly exchange rates, to further their business interests.
The going is definitely not going to be easy. The Hewitt survey has also warned against the high attrition rate in Asia. The highest turnover was reported in India, where the average rate was 15.4 percent, in a reflection of the rampant job hopping that happens in the Indian corporate world, especially the IT sector. Other markets with high attrition rates include Australia with 15.1percent, China 12.6 percent and Hong Kong 12.1 percent, the survey said. The respondents also projected greater salary increases for 2005, it said, adding there was a stark reduction in the number of companies projecting pay freezes next year. None of the companies in India, China, Australia, Malaysia and Singapore anticipated a pay freeze, it said. Over 1,000 companies from IT, banks, chemicals, construction and engineering sectors in Australia, China, Korea, India, Japan, Malaysia, Hong Kong, Singapore, Philippines, Singapore, Taiwan and Thailand took part in the survey.
Siddharth Srivastava is the India correspondent for Siliconeer. He is based in New Delhi.
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