Outsourcing to India

Is the world's most populous democracy a potential economic powerhouse?

In recent years, business and government leaders have studied the growth of India and China and wondered if there will be anything left for the other world economies to manufacture or service. What follows is one point of view concerning the slumbering giant, India. Consider three things: the long and established history of migration of work or outsourcing; India’s less-than-giant status at present; and the country’s potential to become a friendly economic power that embraces democracy, entrepreneurship, free enterprise and freedom of the press.

When economic downturns are accompanied by substantial job loss – especially jobs that migrate rather than terminate – it rightly causes some alarm. A robust and resilient U.S. economy has had its share of economic downturns, leading to the migration of jobs and even entire industries in several manufacturing sectors.

So, why has the most recent economic downturn and job migration in the information technology sector caused such waves? A short answer could be that many individuals whose jobs are being outsourced are being asked to train the new recruits overseas – literally giving their jobs away.

In 2003, Intel CEO Andy Grove remarked that the United States had to take steps to maintain a competitive edge. To do this, he said, U.S. industry must double software productivity through more research and development and investment in science education just to compete with the more than 260,000 engineers graduating annually from Indian institutions.

What Grove did not say is that in 2003 the Bureau of Labor Statistics was reporting that IT hiring had already picked up with the creation of 152,000 jobs in computer and mathematical occupations.

The reality is a little more complicated than the short answers above. To better understand the complexities of the situation, it may be helpful to start by providing a historical perspective of this issue by examining the economic evolution of a simple hamlet as it becomes a bustling city.

The hamlet comprised the entire economic world, satisfying practically all the wants and needs of the habitants. The butcher, the baker, the candlestick maker and other trades met the needs of the inhabitants through a division of labor and specialization of tasks. Specialization did lead to deployment of work, but this happened within the hamlet. It was an idyllic situation in the then-known world.

The agricultural and industrial revolutions introduced superior technologies of production. New areas of the world and new resources were discovered, providing a wider array of goods and services. The hamlet, with its microcosm of economic division of labor, gave way to larger  communities.

A new stage of economic development emerged, with increased division of labor and more sophisticated deployment of economic activities within and between the larger communities contained within the nation. Great thinkers of this period, such as Ricardo, advocated for such comparative advantage – the ability to concentrate on doing what the nation does best and leaving toother nations what they do best – and exchanging with each other the fruits of specialization forthe general benefit of all.

As long as the migration of industries stays within the nation it is not altogether bad. But when the migration crosses national frontiers it causes deep damage to the idyllic nature of the community, of the nation. For instance, as long as the horse and buggy is replaced by the car – both manufactured in the same community by a redeployment of production from the buggy maker to the auto worker – the situation is acceptable. Since the agricultural and industrial revolutions there have been several cycles of deployment in the manufacturing sector, sometimes shutting down entire industries.

However, with improvements in telecommunications and the establishment of the Internet age, the deployment of manufacturing was joined by the outsourcing of services. It began in earnest when U.S. businesses needed to fix the Y2K millennium bug, and Indian software engineers were willing to do the humdrum work at a low pay rate. Soon afterwards, the dotcom bust slashed corporate budgets, obliging the U.S. firms to outsource their technology needs to India while sharp drops in telecommunications costs further facilitated the outsourcing of routine tasks even as the core tasks of innovation remained in-house.

Unlike the deployment of manufacturing, outsourcing of services does not necessarily cause entire industries to migrate, although both are based on the principal of comparative advantage. It is the routine, repetitive services accompanying economic processes in a given industry that are outsourced; meanwhile, the core technological and innovative blueprint for future development is retained by the parent company. In fact, IBM and EDS were innovators of outsourcing of services for the $240 billion IT services industry, and they remain industry leaders in terms of revenues generated by outsourcing services. India has captured about 3 percent of this share, employing around 1 percent of the overall Indian workforce.

All of this is small consolation for someone whose service job has been outsourced not just within the nation but across the globe. Indeed it is often remarked that there is something about job migration that never fails to solicit a reaction, good or bad.

Interestingly, all of this outsourcing to India has not resulted in large amounts of job creation outside the Indian IT sector. Nor have there been fundamental changes to the Indian economy or society. Certainly IT is providing the engine for development, just as the automobile industry did for Japan or the manufacturing sector is doing now for China. But the Indian IT engine does not have very many wagons to pull yet. It is a small, slow engine.

The entrepreneurship, leadership and expertise of the indigenous business community are ready to deliver more wagons, but public sector support and spending to make this a reality is lagging. It is lagging because among other things, India is a democracy.

In a democratic framework it is necessary to build consensus. Apparently it is taking India longer than necessary to build this consensus of legislative support for private entrepreneurship. In India, public spending and government support is imperative to improve: transportation infrastructure; labor laws that are serving as obstacles to labor-intensive manufacturing; the education system, so that it may sustain the current level of technical expertise and strengthen the democratic framework; and productivity in the agricultural and manufacturing sectors.

Most importantly, government input is essential to undertake financial sector reforms; strengthen the banking sector and mobilize the savings of households, which constitutes 30 percent of disposable income along with approximately $200 billion (U.S.) tied up in gold consumption; and support further development of a strong financial domestic market for efficient capital allocation across all economic sectors and away from state-owned enterprises.

This current state of the Indian economy does in no way constitute serious competition or a threat.

India’s present strength lies in the businesses that do not require the concrete infrastructure of transportion, financial markets and energy. The strength is found in IT, biotechnology, analysis of data/design and provision of information. There are entire sectors that have yet to awaken.

The United States, European Union and other countries can play a crucial role in the awakening of India as an economic partner by collaborating for the long run. Partnership and collaboration are possible because of shared values. Values such as entrepreneurship, the advocacy for family-owned businesses and minimum government intervention in capital markets and industries that provide brain power. And all this is available within a democratic framework.

Goldman Sachs predicts that India will be the third largest economy in 2040. China and the United States will continue to lead, but India will far surpass current powers such as Japan and Germany. McKinsey’s Global Institute speaks of a similar sort of advancement being achieved by as early as 2030.

While both 2030 and 2040 are some distance away, such predictions nevertheless cause apprehension to some in the global business community. Several things could happen in the next two decades to upset this apple cart, so the future remains uncertain.

In the meantime, Indian IT companies such as Tata Consulting, Wipro and Infosys have achieved a level of maturity that has allowed them to globalize their workforce by starting to hire talent from around the world. This talent will be deployed close to home. And business graduates now being recruited from universities in the United States and the United Kingdom are training and working for Infosys on its campuses in Bangalore and Mysore, with plans for career advancements closer to home, or “near sourcing.”

Non-IT companies are following this near-sourcing lead, and unlike the Chinese government, the Indian government is empowering its independent businesses to follow the path they judge to be appropriate. This trend to employ foreign nationals is not so different from that followed by the Japanese and German auto industries in the 1980s and 1990s when they implanted their factories in the United States and in Latin America.

What could be different this time is a deliberate policy to partner and profit from the increasing maturity of the Indian companies to create win-win situations for all instead of being mired in adversarial situations.

Mature economies like the United States and the European Union rely on brain-power activities for sustaining or increasing economic growth and productivity. India has a lot to offer in this area, along with the political, economic and business culture infrastructure necessary to exploit this situation. India has a lot to learn regarding public-private partnership and governance issues among others, but it can result in a long and productive partnership rather than a threat.

Is it possible that this valuable partnership has already begun? And were the visits of Presidents Clinton (2000) and Bush (2006) an affirmation of this partnership?

Ameeta Jaiswal-Dale is an associate professor of finance at the Opus College of Business and a visiting professor at the University of Caen and EDHEC, France. Her areas of teaching, research and consulting are international finance, risk management and corporate governance.

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