India's IT thrust in the past decade was in large measure based on the export of lower-end software and IT-enabled services, which was made possible by the availability of cheap labour. The challenge now is to sustain it.
THE second week of June witnessed one more occasion to celebrate India's success in the export of Information Technology-enabled services (ITeS): the National Association of Software and Service Companies' (Nasscom) ITeS-BPO Strategy Summit 2003, held in Mumbai. Media reports suggest that confidence and jubilation ruled the day at the summit. Nothing captured the mood more than Nasscom president Kiran Karnik's statement: "When I see the rear view mirror, I see no one. We are so far ahead that we have practically no competition at all."
As international firms decide to outsource or locate offshore their back-office operations, India has found for itself a new opportunity. Prior to the digital revolution's transformation of service activity, the provision of most services required the presence of a service provider at the point of delivery of the service. As a result, services export took the form of migration of personnel to the location where the service was provided, as epitomised by the migration of skilled technicians, doctors and nurses to the United States and of semi-skilled and unskilled workers, including carpenters, masons, chauffeurs and housemaids to the Gulf countries from India. Benefits to the home country came in the form of remittances of hard currency earnings by these migrants to their families, which augmented the scarce pool of foreign exchange available to these countries. But the magnitude of such income was limited by the restrictions on the movement of skilled and semi-skilled and unskilled personnel set by the immigration laws and practices of countries where the relevant service demand originated.
The digital revolution, it is argued, has changed all that. Now there is a range of services being provided by workers located in a country different from the one in which the service is actually delivered. These services are delivered via telecommunication or data networks, and are either outsourced or organised by agents in the country of origin of the service to whom the provision of these services are contracted out or outlocated by subsidiaries of corporations from the country of delivery of certain services.
When categorised by origin and focus, it is possible to identify four types of ITeS: in-house or captive centres; units that were originally spin-offs; business process outsourcing (BPO) units and broad-based service providers, who offer consulting or IT services in addition to BPO. Examples of services outsourced or out-located include customer interaction services; the processing of credit card accounts, insurance claims and business payrolls; the creation and maintenance of information bases in the form of networked data centres and their use in the provision of information services such as help desks; and the generation of digitised records as in the case of medical transcription. Other examples of outlocation include investment in design subsidiaries and back-office facilities. A McKinsey-Nasscom report lists 10 processes as attractive opportunities - telesales/telemarketing, Web sales and marketing, database marketing/customer analysis, benefits administration, payroll services, engineering and design, inbound call centres, claims processing, billing services, and credit/debit card services.
The possible range of ITeS in an environment where the service sector's role is growing worldwide is immense. The reasons why such relocation occurs are obvious. It substantially reduces the cost at which such services are obtained or provided, and so long as an appropriate location in terms of the availability of manpower with the requisite skills (say, basic computer literacy) and the necessary characteristics (for instance, knowledge of English) is chosen the quality and efficiency of the service are also ensured. At present India is the favoured location on these grounds.
NASSCOM estimates that revenues from ITeS increased from $565 million in 1999-2000 to $930 million in 2000-01, $1,475 million in 2001-02 and a projected $2,400 million in 2002-03, increasing the share of ITeS in the total revenues from IT services and the whole IT sector respectively from 10.2 and 6.8 per cent in 1998-99, to 11.3 and 7.5 per cent in 2000-01, 16.2 and 11.4 per cent in 2001-02 and 19.3 and 14.6 per cent in 2002-03. With worldwide spending on ITeS and BPO estimated at $712 billion in 2001, and with evidence that outsourcing of such services is on the rise, there is reason to believe that this growth can be sustained. As a share of exports, Nasscom estimates suggest that the contribution of ITeS rose from 14 per cent in 1999-2000 to 14.5 per cent in 2000-01, 19 per cent in 2001-02 and 24 per cent in 2002-03.
If current rates of growth continue into the future, then even the employment implications of ITeS growth appear remarkable. According to Nasscom's annual industry survey, the IT software and services industry is projected to employ 650,000 IT professionals by March 2003. This reflects a growth of 24.4 per cent from an employment level of 522,250 a year earlier. Of the total, while 205,000 are still accounted for by the IT software exports industry, 160,000 are employed in IteS. Besides this, there are 25,000 in the domestic software market and over 260,000 in user organisations. Arun Kumar of Nasscom is optimistic. "In the ITES sector, we saw almost 200 personnel being hired every working day of the year. The interesting trend here was that there was a shift away from hiring freshers to professionals with more domain-specific skill sets and business analysts with programming skills, which reflects that Indian companies are tapping high value service lines," he reportedly said.
However, according to industry journal Dataquest, the ITeS market in India, at present, is substantially restricted to call centres. Even if some activity has taken place in other areas such as medical transcription, engineering and design or other Web services, this is seen as being too little to make a significant impact on the overall market or growth. Yet, worldwide, the ITeS sector is highly diversified, holding out the promise of diversification into higher value areas. Such diversification has other implications. Primarily, the size of each operator needs to be extremely large to accommodate the large business demand of each client. This is already triggering a merger and acquisitions wave in the industry, spearheaded by the creation of Wipro-Spectramind last year, which, not surprisingly, has emerged the leader in Nasscom's ranking of top 15 players in terms of revenues. One report quotes industry experts as predicting that the number of firms in the business would come down from 320 to around 12. Thus, though technologically a dinosaur relative to software generation, the BPO sector is turning out to be a field for really big players who could focus their energies elsewhere.
While BPO has come as a blessing to a country, which till recently was seeing a virtual stagnation in employment generation in the organised sector and was faced with balance of payments difficulties, the dynamics of the ITeS sector is disconcerting. This is an area where inability to sustain operations based on lower wages can alter the scenario quite quickly. Given the wage level, higher revenues per worker should be the name of the game. In practice, however, the business works the other way: given revenues per worker, which decline with competition, keeping wages low is crucial for profits. The evidence shows that except for medical transcription, which records abysmally low revenues per worker, there is not too much difference in the revenue per worker across areas, which averages Rs. 6 lakhs (or around $12,500) a year. This low figure, which can only get lower, points to the fact that even now low wages relative to the developed countries do drive the industry.
Not surprisingly the charge of unfair competition is repeatedly surfacing in India's principal markets abroad. The bill passed by the New Jersey Senate to prevent holders of government contracts from outsourcing their business abroad, which other States in the U.S. are also threatening to adopt, may not have made a dent as yet, but is indicative of the dangers of relying on this area. There are indications that pressures are building in other markets such as the U.K. and Germany to protect local jobs against outsourcing to low-wage locations, particularly India.
Besides, notwithstanding Karnik's perception that India is way ahead of the competition, the recognition of the prospects in this area would encourage other countries with a pool of educated unemployed to bridge the language-skills barrier to enter the industry. This could trigger a race to the bottom, of the kind that is a familiar story in the export of primary products from developing countries.
Moreover, India's ITeS success is clearly shifting attention away from the more technology-intensive software area. At present the game in the ITeS business is easy to play and export revenues from this activity are eligible for the no-tax benefit provided originally to software exporters. This is resulting in a rush into the industry, that is, in practice tending to overstate India's IT success. Not surprisingly, there is reason to believe that, overall, India's "software" thrust of the last decade is not as spectacular as it appears. It is, substantially, export of lower-end software and IT-enabled services facilitated by the availability of cheap skilled labour. And it is in large part a technology-aided extension of the earlier waves of migration by service providers of different descriptions: doctors, nurses, and blue-collar workers of various kinds. An expansion of that kind cannot be self-sustaining.
Even in quantitative terms the latter development is not as spectacular. The `net foreign exchange revenue' to the country from migration of the old kind, captured by the volume of remittances into India, is in the range of $10-12 billion annually. The `gross' foreign exchange revenue from software services and ITeS exports is, even after the boom, placed at $10 billion. Unless software services and ITeS exports can avoid the tendency for inflows to taper off because of exogenous forces like protection and third-country competition or because of internal competition, as happened with remittances, this may be one more overstated opportunity, even if extremely useful in the current circumstances. Complacence and unwarranted hype leading to the neglect of other avenues of growth must therefore be avoided. Nasscom's celebration of the ITeS boom suggests that this is a real danger.