India’s Getting Too Expensive
The high cost of doing business in India is pushing some smaller technology companies to relocate elsewhere in Asia. Soaring wages and rentals there are having a significant impact on mid-sized companies, many of which blossomed for several years amid a vast pool of well-educated workers and comparatively lower operating costs.
The $52 billion software industry — arguably India’s best known overseas — is now confronted with multiple challenges.
The economic slowdown in the U.S., the single largest market for outsourced orders, has cast a shadow over near-term business prospects.
It’s being exacerbated by local issues such as an appreciating currency, rising fixed and operating costs, a growing shortage of skilled manpower and the prospect of a sharp tax increase. Under so-called sections 10A and 10B of Indian tax laws, software companies are currently granted a tax holiday on income generated out of units at designated software-technology parks — a concession that brings down the effective tax rates to 12% to 15%, compared with the peak effective corporate tax of 33%. That benefit is due to expire in March of next year.
Larger firms will be able to expand in special economic zones spread over 30 acres or more and take advantage of similar tax holidays at those facilities. But small- and mid-sized companies, who don’t have a need for and can’t afford such large facilities, will feel the pinch immediately because of the “uneven playing field.”
On the jobs market, the supply of Indian software professionals is also growing tighter because of the rapid expansion. In the financial year ended March 2005, Indian software and business-process outsourcing companies employed fewer than 1.05 million people directly. At the end of March 2008, the number likely grew to 2 million.
With millions of graduates being churned out every year, “the size of the talent pool isn’t the issue. Our issue is that the employability of that group of people coming out of those colleges.”
Wages, meanwhile, have been shooting up at the rate of about 15% a year in tandem with the demand for experienced software developers. A study of 30 emerging countries conducted by Gartner last year, which showed India was the “most lucrative destination as far as outsourcing was concerned” on a scale of ten parameters, including labor pool, English-speaking skills, cost structure, infrastructure and government policies. However, if wages continue to rise at a rate of 15% and the rupee-dollar exchange appreciates by 5% a year for a few more years, it’ll dent India’s competitive advantage
