What began as a simple "body-shopping" operation, with a small team of Indian engineers contracting out short-term software services to foreign clients, has in three decades mushroomed into a full-fledged industry. But the economic and technological conditions that allowed information technology outsourcing and other services to become India's top export have evolved. They have brought new challenges, threatening the industry's dominance.
India's IT-BPO (business process outsourcing) sector currently employs some two million workers; it earned US$20 billion (S$25 billion) last year. Given the importance of the industry and the fact that nearly 60 per cent of its revenues come from the United States, there is reason for anxiety about developments there. The pending US immigration legislation restricting body shopping and the proposed US Call Centre and Consumer Protection Act of 2013 curbing call centre operations threaten the industry's low-hanging fruit.
But India's IT services face much bigger and longer-term challenges arising from a lack of skill upgrading required to meet the needs of a more integrated world economy relying increasingly on cloud computing.
In the 1980s, pioneers such as Mr Narayana Murthy of Infosys surmounted technological barriers to delivering services by taking programmers to clients' sites abroad. Although technological advancement has since vastly expanded the scope of services like customer care and led to the rise of IT-based business and knowledge processing operations, stationing large number of service providers closer to customers abroad was still both economical and efficient. But not any more.
The economic crisis that shook the developed world and increased the ranks of unemployed proved that model to be politically unsustainable. The US immigration legislation that awaits the approval of Congress is designed to help domestic labour by making it harder and more expensive for outsourcing companies to bring in workers on short-term visas. Meanwhile, the proposed legislation on call centres is designed to encourage US firms to hire locally. A similar attempt last year failed, and it may do so this year again, thanks to the Republican-controlled House. But the days of arbitraging low-wage workers on a phone are essentially over.
Technological advances have made redundant many of the services performed by operators. Falling wages have also reduced the appeal of foreign call centres, which often have problems of language and data security. In the past five years, India has lost 10 per cent of its BPO business (mostly call centres) to countries offering cheaper deals. A business that looked so promising just a decade ago is already looking like a sunset industry.