Research Shows Rising Rupee May Hurt Indian Outsourcers
October 19, 2007
Nobody ever said globalization was easy.
In an ironic twist, the rising value of the Indian rupee against the U.S. dollar and the UK pound may end up hurting the large Indian IT and BPO providers.
According to Alan Rodger, research analyst with IT research and advisory organization Butler Group, the rupee has risen around 12 percent against the U.S. dollar in the last 12 months. The expectation is that the outsourcing providers based in India, which service organizations in the West, will be worst affected. Rodger acknowledges the Rupees’ going from strength to strength will present a challenge to India-based outsourcing providers when it comes to the renewal of contracts with western companies. However, Rodger points to the high quality of service and talented workforce available in India. That together with the continued improvements to the infrastructure will, in his view, continue to stand India in good stead.
This rise in the rupee against the U.S. 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 organizations based in India, forecast that the Indian technology sector would rise by 27 percent in the financial year 2006–2007, but in fact it rose 30 percent, to US$40 billion. During the financial year 2007–2008, NASSCOM has forecasted a rise of between 24 and 27 percent, equivalent to a staggering US$50 billion of revenue.
According to research 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 percent to India’s Gross Domestic Product (GDP), and it is estimated that between 20 and 25 percent of India’s GDP expansion in the next three to four years will come from the IT industry in India. Approximately 75 percent 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 organizations 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 deliver from overseas, and a rise in prices of this nature may make some businesses question the financial advantages. However, the vast majority of outsourcing contracts between western countries and India are in, for example, U.S. 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 organizations. 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.