India’s New Prime Minister Inspires Hope for Outsourcers Looking for Rejuvenation

What makes the industry place so much faith in Modi is his record as the chief minister of Gujarat state. Once an industrial backwater, Gujarat today accounts for 16% of the country’s industrial output and 22% of its exports.

"Much of our money is spent building infrastructure," says MP Kumar of Global Edge

About ten years ago, Bangalore-based IT outsourcing firm Global Edge Inc launched an office in the San Francisco Bay Area, hoping to strengthen its bond with U.S. customers by staying closer to them. The strategy proved successful for Global edge, but it uncovered a shocking truth: India is more expensive than America.

“As the days went by, we realized that running a business in Bangalore, India’s outsourcing capital, is costlier than California,” said MP Kumar, Founder and Chairman of Global Edge.

The experience of Global Edge is not an isolated case but the tip of the iceberg. India’s infrastructure has been buckling under the weight of sudden growth in the last few years, with inflation eating away at all the profits of businesses.

“Much of our money is spent building infrastructure,” Kumar said. “Rampant power cuts, high inflation, unskilled labor, pot-holed roads…. we have a lot of problems at hand.”

Last year alone, the country’s central bank raised interest rates more than eleven times in a desperate attempt to push down inflation. Nevertheless, inflation is still hovering over 8.5% and analysts say it will rise further if the coming Monsoon season fails to bring in sufficient rain.

Despite slowing economic growth, India’s stock market is rising like never before, because investors believe that the newly-elected prime minister Narendra Modi will turn the economy around. Sixty-three-year-old Modi, who was the chief minister of India’s Western state of Gujarat, has a strong record of building infrastructure and stoking growth. Under his rule, Gujarat became the country’s economic powerhouse, leading the Economist magazine to compare it to China’s fast growing Guangdong.

According to Kumar, India’s formal labor industry, known locally as “India Inc” is hoping that Modi will build infrastructure and negotiate with the Obama administration to ease its immigration laws. Hours after Modi took his oath of office, NASSCOM, India’s outsourcing lobby group, put out a statement saying that it was anticipating “support and encouragement” from the new prime minister.

Over the past years, India’s outsourcing industry has been talking of expanding to smaller cities, a strategy that helps it cut costs and become more competitive. But lack of infrastructure in the countryside has confined businesses to large cities like Bangalore and Hyderabad.

Modi and Indian Inc

Modi has already hinted that he wants outsourcing firms to generate jobs in smaller towns, particularly in underdeveloped Northeastern states. NASSCOM is asking for incentives in return for generating jobs there.

Addressing NASSCOM members in February this year, Modi promised to do everything he could to prop up the IT industry, saying that he believes that India’s future depends on the success of it’s technology sector.

What makes the industry place so much faith in Modi is his record as the chief minister of Gujarat state. Once an industrial backwater, Gujarat today accounts for 16% of the country’s industrial output and 22% of its exports.

Soon after taking office last week, the Modi administration announced plans to develop 100 smart cities across the country. “Smart cities will ease the pressure on big cities like Bangalore and Hyderabad, pushing BPO firms to smaller cities, where operating cost is significantly low,” says MP Kumar, who is believed to have a close rapport with several top politicians in the ruling party.

Aside from infrastructure, the BPO industry also wants Modi to rewrite laws governing exporting services. Cumbersome and confusing laws, Kumar says, have pitted several information technology firms –– including Infosys and IBM –– against the Tax Department.

IT firms operating in technology parks are exempted from tax on their software export. But the tax authority is also taxing software developed in India Inc’s overseas units.

Unskilled Labor

The biggest challenge facing the industry today is lack of skilled labor. India’s colleges produce millions of graduates each year, but IT companies cannot hire them without first providing training for them.

This  has forced many top IT companies to spend millions dollars on training programs. Some firms have hired academies to train their employees, while a few have built their own training schools. Infosys, for example, has a    state-of-the-art training school in Mysore, a small city barely 100 miles Southwest of Bangalore. Also, TCS has recently broken ground to build a bigger training facility in the Southern state of Kerala.

But the smaller firms, the ones run by the likes of MP Kumar, are struggling to deal with the skill gap. Together, Infosys TCS can train about 70,000 graduates annually, but this is just a small fraction of the numbers the country needs.

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Kumar says India needs to have dozens of training facilities teaching emerging technologies such as analytics, cloud computing and mobility. Moreover, he says, Modi should set up an expert committee to draw up and update college syllabuses, which he considers outdated and irrelevant.

During his campaign trail, Modi said that the country should focus on grooming an industry that develops “high-end software” rather than feel content with labor-intensive BPO and call center services. It remains to be seen if and how Modi will realize his plans.

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