India: rethinking if outsourcing is really the future

Written by Subhash Agrawal | Updated: Mar 12 2005, 05:30am hrs
Outsourcing of services has become a huge business, over a trillion US dollars in 2004. What started two decades ago, rather modestly, is now a global behemoth, facilitated by fast communication technology that can bypass national borders or physical bottlenecks. The loss of so many jobs, or even its threat, has led to an emotional backlash in developed countries. But an overwhelming body of evidence points to the fact that outsourcing is likely to produce more jobs for advanced countries in the medium term. There is a very well-researched essay by Daniel W Drezner in a recent issue of Foreign Affairs, titled The Outsourcing Bogeyman, and to paraphrase him, the sky is clearly not falling, and protectionism will do far more harm than good.

The fact that outsourcing is inevitable is great news for India, which is now such an established brand that, as someone said recently at a conference, no local firm needs to have a Why India slide in their PowerPoint presentation any longer. Growth in Indias outsourcing sector will likely top 40% this year, taking the combined IT and IT-enabled industry to touch $22 billion in revenues. Business is booming, the threat of backlash has receded after US elections, and Indian firms are celebrating. But has the country really chanced upon its Shangri-La, and should we all be jumping with joy The remarkable good fortune for Indias largest outsourcing companies is juxtaposed against a mix of factors that should dampen any excessive hyperbole.

First, most of the work currently outsourced to India is low-end and of much lesser strategic value than we imagine. An economic reversal in western economies could potentially turn off the tap rather suddenly. While some Indian firms are undoubtedly trying to move up the value chain, there is, by and large, too much complacency and not enough aspiration for acquiring higher-end skills that are far more sustainable.

Second, the larger significance to the national economy is limited. The whole IT and outsourcing industry constitutes less than 1% of Indias GDP and employs approximately just over a million people. Which is a miniscule portion of the educated workforce, leave alone the total employable population of 400 million. Projecting into the future, even the most optimistic estimates predict an increase of no more than 2 million to the outsourcing workforce by 2015, by which time Indias overall labour force will become 450 million. The daily overdose of cheerleading and attention over outsourcing is begging for an injection of balanced reality.

Last, and this is perhaps the worst, there is a glaring paradox revolving around the two faces of Indias IT infrastructure. Even as Indian firms parade overseas as the information and business process answer to the world, there is a remarkable absence of information, automation, or even sensible business processes in the daily lives of most Indians. In fact, the country lacks even the most basic form of computerisation, especially in government, public hospitals, universities, or other large institutes. Or in land records, where things are so bad that large tracts do not have clear ownership papers, one reason why so much of litigation in India is property related. In fact, the impact of IT in the rest of the country is so abysmally low that India ranks almost at the very bottom of 55 countries rated every year in International Data Corporations annual Information Society Index. Even Saudi Arabia, Egypt, Romania and Costa Rica consistently score higher.

Consider two recent examples. In a major litigation in India, one with implications for the larger oil and gas sector, it was reported that crucial court documents went missing. In any other country, they would have been digitally scanned, stored and authenticated. And a few years ago, foreign investors who were present did not know whether to laugh or cry, when the country's disinvestment minister sheepishly disclosed at an international conference that the property title to the governments largest public sector hotel was not traceable!

And so, while outsourcing undoubtedly helps earn valuable foreign exchange and brand recognition for the country, and perhaps even some externalities in terms of better educational facilities, it is still largely an urban, middle-class phenomenon. It pales into insignificance in the larger context. Which is one of a country that is still largely agrarian, overwhelmingly poor and urgently in need of water, power, roads, education and healthcare.

All in all, India is clearly much better off with its successful outsourcing industry than without it. But this alone cannot be the main pivot of the countrys future economic planning. Indian outsourcing firms will continue to make handsome profits for some years. But the country would be reckless to rest its laurels on producing an army of telephone operators or medical transcribers for the world. Outsourcing should be viewed as a bonus, with the main focus of Indias economic reforms firmly centred on creating manufacturing jobs, revitalising agriculture and raising social indices in the countryside.

The writer is editor , India Focus