Growing pains dim India's outsourcing edge

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Bangalore, September 18:: but is able to recruit only about 250, Chief Marketing Officer V. Bharathwaj said.

This is pushing up wages rapidly as financial firms from Citigroup and HSBC to Standard Chartered Bank employ thousands at their back-office hubs in India.

Starting wages at 15,000 rupees ($366) a month are still about one-fifth of what their US counterparts earn, but they are rising 10-15 percent a year.

Cost per employee for a back-office firm in Bangalore is almost similar to Manila, but is 20 percent lower in Guangzhou in China and 35 percent cheaper in Ho Chi Minh in Vietnam, said Avinash Vashistha, chief executive of Tholons.

Analysts say that while Vietnam does not have a vast pool of English-speaking manpower, it is a prime destination for non-voice back-office services such as legal and medical transcription, claims processing, and finance and accounting.

Adding to the squeeze is the rupee, Asia's best performing currency this year, which climbed to a nine-year high of 40.20 against the dollar, up 10 percent since end-2006, while the Philippine peso has gained more than 5 percent.

First Global Securities last month downgraded India's IT services sector to "underperform", citing the rupee and wage inflation. Every 1 percent rise in the rupee impacts the services firms' margins by 30-50 basis points, analysts say.

"Everything is hitting us adversely," said Kiran Karnik, president of the National Association of Software and Service Companies. "Wages are going up, real estate costs are escalating and on top of that you have the dollar exchange rate going bad."

India's back-office services industry, which earned $8.4 billion in exports in the year to March, is also being lured by tax breaks, infrastructure improvements and investment perks offered by China and the Philippines, he said.

The industry is also anxiously watching for any ripple effect from the US subprime mortgage crisis, with some smaller firms feeling the pinch as U.S. companies trim spending on services.