Policy Brief February 2010

Productivity of India’s Offshore Outsourcing Sector: Business-based Evidence

Suman Modwel 1 Tawfik Jelassi

Abstract: Following on an earlier paper discussing the sustainability of India's comparative advantage in IT offshore outsourcing, the authors pursue their enquiry whether rising labour costs are being compensated by rising productivity. A sample of six firms including the big three in Bangalore was selected for a field survey, and the total factor productivity (TFP) approach used to look at trends of output, capital employed and wage costs per unit labour, enriched by insightful discussions on site. While the trend towards decreasing age profile of the work force has succeeded in maintaining mean salary per capita constant, productivity performance in TFP terms is not so uniformly brilliant across the sample. Caveats and cautionary notes on using TFP as a reliable tool to gauge efficiency of labour especially in times of sharp changes in capital and labour resources and other exogenous factors including exchange rate movements have been expressed. Keywords: Offshoring, outsourcing, total factor productivity, output, capital employed, wage costs, age profile, attrition rates, Bangalore, tier 2 cities.

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Suman Modwel and Tawfik Jelassi are respectively Professor and Director of Research, Chargé Mission Inde, and Professor and Dean of the School of International Management, Ecole Nationale des Ponts et Chaussées (ENPC) Paris, France. The authors would like to thank Groupe d’Economie Mondiale at Sciences Po (GEM) for its support.

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Introduction The rise of India as the leading destination for IT offshore outsourcing has made it a rich field for discussion. Of late, there has been some speculation about the sustainability of India’s competitive advantage because of rising costs of skilled labour and emergence of several other low cost competitors, with China the closest behind it. The authors too joined this