The Future of Offshore Outsourcing: The Case of India

AMBAMy blog has been silent for a while, as I got ready to speak in Bangalore, India, where my friends at AMBA put on a great conference on offshore outsourcing of capital markets jobs. One of the introductory talks fell to me, focusing on the long-term future trends in this industry:

“What will drive us to move jobs to India? What will hinder us? “

“More importantly, what are the social, political, economic, and fiscal consequences of doing so? (both in the country commissioning the work, and in the country performing the work)?”

“Will it kill jobs domestically?”

In a time when for most audience members, who were capital markets hot-shots, their social license to operate is already under threat, these are serious questions.

Let it be said only that the widespread fear that outsourcing destroys jobs domestically in the commissioning countries is not at all supported by the data (mostly from the OECD STAN database). The services sector has both higher growth and higher outsourcing growth than the manufacturing, and — looking deeper — even within services, the sectors which experience the highest degree of offshore job outsourcing are generally also the sectors which experience high growth (and job growth) domestically in the commissioning country! So generally we only outsource where domestic growth would otherwise be constrained by domestic, qualified labor supply. Enough said to justify the social license to outsource offshore. For more, read the slide-pack.

Since you can just find the full presentation here, I will not spend much time on my talk and the domestic politics of offshoring, and focus on what else I have learned in Bangalore.

So here is what I have learned from other speakers at the conference:

(1) India, like the rest of the world, is urbanizing rapidly, and economic growth is concentrated in the cities:

60% of India’s population growth will originate from regions, but those will deliver only 10% of the country’s GDP growth.

Urbanization and the growth of the urban middle class are rampant. And it’s not only driven by jobs, it’s driven by the hope of jobs too. In the wisdom of Calvin & Hobbes: “If the secret to success is being at the right place at the right time, and you don’t know what the right time is, the right strategy must be get to the right place and just hang out there”. That, more than actual growth, is also driving urbanization.

(2) The globalized part of India is growing like there is no tomorrow:

I have been to Bangalore four times in seven years, and it’s felt like visiting four different cities, such is the rate of upward social mobility in the most globalized of India’s cities.

In those seven years, Bangalore’s office space has grown six-fold. More people in Bangalore now work in a class-A office space than in the whole of Singapore.

Seven years ago you would neither see a woman in jeans, nor one driving a vehicle. Most were walking, and those who were passengers on bikes sat sideways, preferably with a child (or often two) sandwiched between the driver and the woman (in a perhaps indeliberate demonstration that it was the husband who is driving them around, and not someone else). Now you see women in jeans driving their own scooter or car. It may not sound much to the non-Indian readers, and perhaps the Indian ones haven’t noticed the changes they live through every day, but these are big changes.

(3) In weird ways, India politics mirrors the EU (or is it the other way round?):

Snippets we heard:

“India has reached almost the limit of a non-existent government, with the regions having to step in. There is no-one in Delhi who can get things done”, or

“The dream of politicians was always to bring jobs to people, but what has really worked in most other countries is to do it exactly the other way round”.

There are 18 official languages.

Democracy is slow and consensus-driven, on occasion even erratically jumping back and forth several times. All of this sounds very much like the EU!

And something else that mirrors some structural problems of southern Europe in particular: 93% of working Indians are informally employed, in part because labor laws are very inflexible (note that “only” 50% of Indians are self-employed, so of the employed, more than 6 out of 7 are driven into the shadow economy by they legal and administration hurdles and/or over-protective labor-laws).

(4) India is really, really different, and will be more so in the future:

China, after 13 consecutive minimum wage increases, is running out of farm labor, while India, with its enormous informal sector, has 58% of its people working in agriculture (producing 15% of GDP).

The average Indian is 19 years younger than the average Japanese, and 13 years younger than the average American.

India will have the largest English-speaking population in the world by 2025

India really is another continent!

(5) By design or by invisible hand, India is doing exactly what it should:

India is throwing everything at education. Why is this important?

It is a country which gives birth to more than 2 children each second, which has phenomenal data connectivity to the outside world, which has such enormous diversity in language, culture, and religion that fitting in comes more naturally to an Indian man or woman than to anyone else in the world, and in its urban population almost everyone speaks English.

Contrast this with the whole world where — even including the 1.25bn Indians — the number of children being born is already going down! Human capital will be a sparse resource (especially young human capital). All the while, India’s young population is already huge and still growing. Since they can’t export the human capital in proportions that would be significant from a local standpoint, they have to attract jobs from foreign employers, and the way to do so for the individual young Indian is to invest in education in order to increase their personal, global competitiveness.

Both the governments and the private sector are throwing everything into upgrading the enormous supply of human capital. While access to education is still difficult for the average Indian youngster, the growth of education exceeds even the growth of youngsters by a wide margin. India is in the prime-time of harvesting the demographic dividend, which simply means that the working population is large (produced by high birth rates of the past), but has few family obligations: Birth rates have more than halved in 30 years, so today’s young families have many brothers and sisters to share the burden of looking after their elders, while having few children of their own. They have more time and money to spend on their further education than any generation before or after them.

A country in this phase will achieve a high return on investing in its human capital, and — given where the rest of the world’s demographics are headed — the timing for India’s educational dividend is perfect. The private sector has not let this fact gone unnoticed, and companies have massively increased both numbers (IBM, for example, grew from 9,000 employees in India in 2003 to 150,000 today), and the quality of their workers, through advanced training. Many companies now have education campuses that can compete with higher educational institutions globally.

None of this means there are easy ways to benefit from this trend, or that the growing inequality will not require policy responses that slow the current service industry growth figures down at some point soon. The fact remains that the urban middle class in India never had it this good and is growing at a breathtaking rate.

Someone recently said that the government debt crises in the US and Europe (and Japan) make us forget too easily that, on a pan-global basis, we live in an era of unprecedented prosperity growth. On the weight of numbers alone, India would have to mess up incredibly not to be at the epicenter of this trend. And while India may not show signs of having a very effective central government, it certainly doesn’t show signs of messing this one up.

While Southern Europe is producing a “lost generation” of youth-unemployed who, through lack of job experience, and low numbers to start with, will generate low growth for years, maybe decades to come, Indian local governments, and local and international businesses in India, are throwing their weight at first upgrading an abundant supply of human capital, and subsequently importing jobs for them. Watch this space.

4 responses to “The Future of Offshore Outsourcing: The Case of India

  1. A very good summary Karl. We are having work done in India. The quality is as good as what one gets in Europe, Hong Kong or the United States at significantly much lower costs and the people there are willing to work all hours to deliver in time. India has a great potential for collaborations in the high value added services.

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    • The impression I got was that it was less about anything any specific government can do, rather than about the extreme diversity of India which makes anyone in Delhi reliant on much more consensus-driven politics than in other countries. Than can be a good or a bad thing, depending on the context. Compare for example with the Swiss model, which is obviously different but similarly reliant on relatively strong local politics; federal power – inasfar as it exists at all – relies on overpowering consensus of the regions. Similarly, Italy often relies on many parties simultaneously just to form a functioning government coalition. In India, I am told, you have 20 parties right now in the coalition government. The effects can work both ways, but in all three countries they serve to slow things down when it comes to big changes.

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  2. Pingback: Tax Treaty Changes: The Swansong of High-Tax Europe | The Sustainability Report·

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