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Talent crunch could put brakes on BPO success story - Times of India
December 28, 2006
The BPO (business process outsourcing) industry is now one of the most
powerful growth engines bringing prosperity to places like Hyderabad,
Pune and Bangalore.
Mushrooming offshoring companies are quickly absorbing the once
unemployed army of educated young people, driving up salary levels and
demand for space.
Peripheral vision
The industry has also spawned supporting ecologies of malls, retailing
business, services and entertainment in places like Gurgaon and
Hyderabad.
Now, the runaway growth is threatening to become the biggest risk to the
industry as companies, pressured by spiralling costs in these regions,
begin to explore alternative low-cost destinations.
For example, a large Delhi-based offshore services firm that employs a
staff of more than 4,000 is evaluating whether it would be
cost-effective to move some of its operations to China.
A spokesperson for the company vehemently denied that it was considering
moving jobs but a source said it was putting together a China strategy
that could involve moving work away from India.
Already software companies like TCS and Satyam have made a start by
setting up shop in China.
"The offshoring industry may see a bottleneck as early as 2007 as
companies are rethinking their location strategies because of increasing
property and labour costs," says Vikash Jain, engagement director of
Dallas-based Everest Group, which advises companies on their offshoring
strategy.
Latest government data showed that consumer prices in BPO hubs like
Hyderabad and Pune were rising faster than even big cities such as
Mumbai and Delhi.
In emerging centres like Bhopal and Jaipur, consumer price inflation was
even more. Jain says many foreign firms that had planned to set up BPOs
in India have now put the plans on hold.
"They are now waiting and watching," he says.
Proper schooling
Kiran Karnik, who heads industry association Nasscom, recently said that
in the next five years India may lose potential offshoring work worth an
estimated $5 billion due to talent shortage.
Nasscom is in talks with the government to set up special education
zones to expand to ease the talent bottleneck.
An eye on speed limits
A sudden slowdown in the industry is unlikely but even a gradual slump
over the next couple of years would break the momentum of the economy as
consumers in BPO hubs would begin to cut back on spending.
A stagnating BPO sector would increase the emerging risks to the economy
that is now believed to be overheated.
The Economist said last week that India's recent acceleration largely
reflected a cyclical boom and it could be vulnerable to a hard landing.
RBI has tried to fight inflationary risks by pushing up interest rates
but money supply fuelled by foreign inflows and credit growth continues
unabated.
Share prices are near all-time highs and some analysts believe that the
property market is now showing characteristics of a bubble.
Adding to domestic inflationary concerns is the fear of a slowing US
economy dragging down global growth which would hit Indian exporters and
manufacturers, most of whom are operating at near full capacity.
Industrial production slowed to 6.2% in November compared to over 11% in
September. It was over 10% in November 2005. Analysts are already
noticing several soft spots.
"While our base case is for a soft landing, we believe that, in the
event of sharp risk aversion in the global financial markets and/or a
global hard landing, India's growth cycle is far more vulnerable than
China's," Morgan Stanley said in a December 22 report.
The country's public finances are not really in the pink of health. The
combined fiscal deficit of Centre and states in 2006 is estimated to be
7.5% — the reason why India continues to be rated below investment grade
by international rating agencies.
The trade deficit, which is the amount of imports over exports, is
widening too. The shortfall for April-November 2006 was over $36 billion
compared to $27.6 billion for the same period last year.
"India's balance of payments position remains vulnerable to any rise in
oil prices and potential decline in overseas funds flow. In this
scenario, we believe the current account deficit can be met only by
drawing down on forex reserves, which in turn could put downward
pressure on the rupee. This could slow economic growth," ABN Amro, which
is bullish on the Indian banking sector, said in a December 7 research
report.
In the balance
In this scenario, the India story appears to be delicately poised.
"Though India's growth story appears more defensive on the surface, we
believe it is also exposed to the global cycle through its linkages to
financial markets to fund its credit-driven domestic demand," says
Morgan Stanley.
As more uncertainties build up, India needs to move really fast to cool
the property market and replenish its bank of skilled workers.
If other countries like China manage to quickly expand their talent
pools for the offshoring industry to tap, it may take away a large
number of jobs from here.
Poor English-speaking skill remains China's biggest handicap, but it is
said to be mass-training students in the language. Then, the BPO segment
could be the unexpected twist in the India story.
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