Some more offshoring to India? Bring it on!

A couple of hours after I finished writing the post below, another perspective came to my mind which made a lot of sense and was in a way a little contrast to what I had written in that post! But then again, I believe, some perspective is better than none!

In the post below, I mentioned that the growing IT/ITES/BPO/KPO market in India is mainly thanks to the growing developed nations like US and developed part of EU and that now that when the developed nations are showing slowing growth or stagnation, this will directly impact the growth of the IT/ITES industry in India.

However, when I thought about developed nations stagnating or growing slowly. I instantly thought the margin pressures that these developed nations will immediately face due to the recession. These margin pressures will in-turn enforce cost-cutting and efficiency improvements in the companies, for which I believe they will again turn to comparative-low cost and knowledge-based economies like India.

This will lead to more offshoring of activities with focus to improve efficiencies. Again, the amount of this offshoring will be not a very impactful size as the unemployed in those developed nations will also be utilized at a low-cost to generate the same efficiencies.

I have been meaning to write this post as soon as I wrote the earlier post of "At the mercy of developed nations", however my laziness took over me. I saw an interview with Stephen Roach, Chief Economist, Morgan Stanley on TV yesterday where he mentioned a similar perspective, which reminded me to put down my thoughts here.

More offshoring - Bring it on! Right guys? We can take on some more of US depending on India to save some of their losses :)

But considering the entire corpus/size of offshoring is likely or logically should go down if US hits recession, I would still think that the net effect would be a slight reduction in offshoring.

At the mercy of developed nations?

So, which services industry is driving most of India's growth? Its easy to guess - the IT/ITES industry which comprises IT and ITES Services, the BPO (call centers and transaction processing offshoring), KPO (High value research & analytical services) and LPO (Legal Processes Outsourcing). And who does the Indian IT/ITES industry provide its services (or rather who gives us the business) ??? - Again, the answer is simple - the developed nations viz., USA and the developed European countries.

This industry started on its growth trajectory around late 1990s and early 2000 when the developed nations were in a high growth phase with technology changing lives of almost eveyrone in the world. I am not sure if I would be wrong if I think that it was thanks to this that India is now in a developing stage and is expected to be a superpower by 2020 (thanks to the Goldman Sachs research).

The Industry is now about USD 38 billion and is expected to reach USD 80 billion by 2010 growing at over 25% per annum. It employs over 400,000 or 4 mn people, and is also expected to grow at around 27% per annum.

Having said the above, I sometimes think to myself, if India is at the mercy of developed nations? I do not want to seem as looking at the glass as half-empty and not half-full, but, what if, just what if the boom had to bust? or even slow down?

Why, you ask? Why should one even think that? One should be proud of one's country and its acheivements! Well, I certainly am, and also very very bullish on India and its competencies. Nevertheless, its a scary thought when a country's growth is to a very large extent driven by a few developed nations. It is a fact that India's various other important sectors have grown thanks to the IT/ITES Industry.

Growing real estate sector which comprises growing residential sector, office sector, retail malls, movie-halls, serviced apartment is also driven mainly by the IT/ITES sector. The FMCG and the consumer durable sector too take a piece of the cake thanks to this growing market. Business Travel including foreign travel (for both indians and foreigners visiting India) and domestic travel has increased, in-turn driving hotels, entertainment and has also driven the Indian tourism industry. In short, the growth in the IT/ITES sector, which is only thanks to the developed nations of US and Europe, is driving not only its own growth but growth in every other sector in India (multiplying effect) and therefore growing India's overall growth at a much higher rate.

Yes, everything written above is great, you may think! But sometimes I can't help but think that it is the US and the Europe alone which might be driving India's growth today. And that is a scary thought. If this is true, then am I right in thinking that we are the mercy of the developed nations?

The growth in the developed nations has started to slow down and most hedge funds & top mnc funds have started changing their strategy and focus away from these economies. These nations are either in their maturity or late maturity stage where their growth rates have slowed down considerably or have started to stagnate. This only adds to my worry by strenghtening my point in a way.

So, what happens when the so-called developed and matured economies to whose mercy India is growing, starts showing signs of stagnation and decline???

My guess (and my logic supports the thought) is that the only way India's IT/ITES Industry will be able to sustain its growth for a long time, is by driving strategic change and finding innovative ways and solutions to still operate in a profitable manner in a scenario where earlier it sustained only by capitalizing on the growing economies.

The Indian KPO Industry

Like it? Hate it? Cant do without it? Thats where the money is?

Whats your take on it?

Let's discuss!