Hot rupee hurts Indian outsourcing suppliers

The big companies must work hard to maintain and renew their contracts with western organisations

The recent rise in the rupee against the US dollar is expected to continue for some time to come, barring any political crisis or natural disaster, according to the Indian press.

NASSCOM, the public body that represents outsourcing organisations based in India, forecast that the Indian technology sector would rise by 27 per cent in the financial year 2006-2007, but in fact it rose 30 per cent, to $US40 billion. For the 2007-2008 financial year NASSCOM has forecast a rise of between 24 per cent and 27 per cent, equivalent to a staggering $US50 billion of revenue.

According to research undertaken earlier this year by CLSA, it was identified that the IT industry in India employs some 1.6 million people directly, with a further six million in related industries. The industry itself contributes some 5.2 per cent to India's gross domestic product (GDP), and it is estimated that between 20 per cent and 25 per cent of India's GDP expansion in the next three or four years will come from the IT industry. Approximately 75 per cent of the country's software industry is exports, and it is this huge figure that will be impacted the most by the rise of the rupee against the dollar.

This will bring into stark relief the reasons that many organisations use third-party providers for IT and business process outsourcing (BPO) services based in India. Cost should never be the only reason for outsourcing any services, but it is, of course, a major contributor to any decision to send business overseas, and a rise in prices of this nature may make some companies question the financial advantages. However, the vast majority of outsourcing contracts between western countries and India are in US dollars or UK pounds, therefore it will be the India-based providers that will suffer the immediate effects of this situation, rather than the customer organisations. This is understandably one of the reasons that has made India a popular outsourcing destination in the past -- the ability to protect against the rising cost of the rupee.

It will be a challenge for the likes of Wipro, Tata Consultancy Services, HCL, et al to minimise the impact of the rising rupee and maintain and renew their outsourcing contracts with western organisations.

However, even if prices should rise marginally when these contracts are up for renewal, it should be remembered that the quality of the talent available in India remains extremely high and the infrastructure improves on an almost daily basis. For many, these and other factors will continue to make India an attractive place to do business.

Len Rust is publisher of The Rust Report.

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