India is the largest democratic country in the world. It is second only to China in terms of population with 1.1 billion citizens. Though it has enormous economic and social problems, it is a major global power.

India’s demographics and history have positioned it well to take advantage of the new global services market. Most of the subcontinent was annexed by the British East India Company in the 18th century. While colonization had many evils, the act combined a number of previously independent nations and created the foundation for a massive national economy. Second, British colonization brought the English language which has become the global language of business and a huge advantage for India.

At the start of the 19th century, India had one of the largest economies in the world, second only to China. However, over the coming years the economy stagnated. In 1947 the subcontinent achieved independence from the British and was partitioned into India and Pakistan. Partition triggered significant turmoil and dislocation which helped drive the Indian economy to a low point in 1952 when it was approximately 7% of the size of the US.

The post independence period has had its economic ups and downs. In the decades immediately after independence the Indian state exerted significant control over the economy. It was not the extreme style of the Soviet economy, but nevertheless constrained growth. By the late 1980s the government started easing restrictions and liberalizing the economy.  Since 1990 the country has seen rapid economic growth typically in the 7-8% range.

Currently, the Indian economy is one of the largest emerging economies in the world. It is commonly grouped with Brazil, Russia and China as part of the BRIC countries that are having an increasingly important impact on the global economy.  The gross domestic product, measured by current exchange rates, hit $1.2 billion in 2008.  However when calculated using purchasing power parity, the economy is estimated to be about $3.4 billion, second of all top outsourcing countries.

Total Population: 1,156.9 million

Source: CIA World Factbook, July 2009

Gross Domestic Product: 1,217.5 billion US dollars
Source: World Bank, 2009

Gross Domestic Product (PPP): 3,388.5 billion international dollars
Source: World Bank, 2009

Gross National Income Per Capita (Atlas Method): 1,070 US dollars
Source: World Bank, 2009

Gross National Income Per Capita (PPP): 2,960 international dollars
Source: World Bank, 2009

Outsouricng to India can provide significant direct cost savings. Wages, the largest component of costs, can be one tenth to one half those in the US.  However, the rapid growth of outsourcing to India has lead to significant wage inflation especially for higher skilled employees. Other locations such as the Philippines, Pakistan, Indonesia and Egypt can have some less expensive resources, but the differences are not always significant.

Employee Compensation

Employee compensation is the largest cost component for any outsourcing operation whether it is web development, application maintenance, human resource outsourcing or customer care.  A typical project or outsourcing effort will include a number of junior resources, and some high-skilled, senior oversight and project management.  Junior resources typically provide the largest cost savings and India is no exception. In the information technology area, software engineers/ web developers with 1-4 years experience are about 11% of those in the US. Annual salaries vary across locations and skill levels, but typically range between 230,000 and 400,000 rupees or $5,000 to $9,000 US dollars.

Senior, more experienced resources are in shorter supply in India and thus the difference in cost is not as large.  Senior software engineers/ web developers with 10 to 20 years experience are about 30% the cost of comparable resources. Salaries vary more dramatically than junior resources and can range from 800,000 to 1,800,000 rupees or about $17,000 to $40,000 US dollars.  Similarly, IT project managers with 10 to 20 years experience are about 30% of comparable resources in the US and salaries range from 1,000,000 to 1,600,000 rupees or about $21,000 to $35,000 US dollars.

Salaries in the BPO sector are comparable. Junior voice and non-voice resources are about 10% to 17% of their US counterparts.  At the more senior levels, high skilled BPO employees and operations mangers command about 21% to 27% of their American colleagues.

Real Estate and Taxes

Other common outsourcing costs are typically lower in India, but there are some exceptions.  Office occupancy costs vary across cities and from central business districts to the suburbs. Most Indian outsourcing operations will have lower occupancy costs than similar US operations, however high end real estate in major Indian cities can be significantly more expensive than similar office space in the US. For example, office occupancy costs for grade A, prime location office space in Mumbai, the financial capital of India, goes for $121 per square foot per year, more than double that of downtown New York.  Costs in Bangalore are much more reasonable and range from $34 per square foot in the central business district to $17 in the suburbs.

Taxes in India can be high and companies pass these costs on to their customers in the US and Europe. Corporate tax rates are about 34%, higher than many other outsourcing locations.  Indirect taxes i.e. value added taxes (VAT) are relatively low at 12.5%.  However, India has a range of other taxes that small businesses must bear and the effective rate is almost 65%, worse than almost all other outsourcing locations.

Software Engineer / Web Developer: 11 percent of US
Source: PayScale, SourcingLine, February 2010

Senior Software Engineer / Web Developer: 29.6 percent of US
Source: PayScale, SourcingLine, March 2010

IT Project Manager: 29.9 percent of US
Source: PayScale, SourcingLine, March 2010

Junior BPO Resource: 10 percent of US
Source: PayScale, SourcingLine, March 2010

Skilled BPO Resource: 21.2 percent of US
Source: PayScale, SourcingLine, March 2010

Operations Manager: 27 percent of US
Source: Payscale, SourcingLine, March 2010

Customer Service Representative: 17 percent of US
Source: PayScale, SourcingLine, March 2010

Customer Service Manager: 23 percent of US
Source: PayScale, SourcingLine, March 2010

Office Occupancy Cost (CBD): 61.9 US$/sf/yr
Source: CB Richard Ellis, Colliers International, SourcingLine, March 2010

Office Occupancy Cost (Suburbs): 15.3 US$/sf/yr
Source: Colliers International, SourcingLine, March 2010

Note: Occupancy costs are an average across the cities of Mumbai, New Delhi and Bangalore.

Corporate Tax Rates: 34 percent
Source: KPMG, October 2009

Indirect Tax Rates: 12.5 percent
Source: KPMG, October 2009

SMB Effective Tax Rate: 64.7 percent
Source: Doing Business (World Bank), 2010

India is considered one of the top outsourcing locations not just because of low costs, but also for the large English-speaking workforce.  The workforce is close to half a billion people, second only to China and three times the size of the United States.

Work Force and Offshore Outsourcing Sector Size

Based on this workforce and its early entry into the global sourcing market, India has built the largest export sector for IT services. India exports about $50 billion in computer and IT related service. This is about four times that of the United States and almost an order of magnitude greater than any other location. In the BPO sector, India has a leading position, but not as dominant as in IT. Based on the IMF measures of the export of miscellaneous business services, an imperfect proxy for BPO services, India is in the top three, but falls behind the United States and China. 

Education and Skills

The rapid growth in outsourcing to India has been built on the availability of educated and skilled workers. India's universities produce almost 3 million new graduates each year with about 16 percent focusing on science and technology. The total number of graduates is similar to that of the United States and only second to China.

The challenge in India is variability. India has some of the most competitive universities in the world such as the India Institutes of Technology. However, many university programs are substandard and estimates by McKinsey and NASSCOM indicate that only 25%-40% of Indian graduates are readily employable. To combat these challenges over the medium-term, the large India players have set up massive pre-employment training programs.

Language

Another significant advantage for India is the prevalence of English language skills. English is typically the language of instruction at Indian universities thus most university educated Indians have a good grasp of English. However, if you have experienced the performance of a low end Indian call center, you know that the quality of English language skills can vary. Exact figures on the share of Indians that can speak English differ, but here we have referenced English As a Global Language which estimates about 20% of the population.

Technological Readiness

The level of technological readiness of Indian resources is relatively good. India has very low home based internet access rates, however the impact is minimized via high accessibility in universities and the workplace.

In summary, one of the key benefits to outsourcing to India is its large, relatively skilled, English-speaking workforce. However, India's education infrastructure is under increasing strain and without improvements India will see slower IT and BPO growth rates and higher costs in the not too distant future.

Total Workforce: 467 million
Source: CIA World Factbook, 2009

Total Offshore Outsourcing (IT & BPO): 47,000 million US dollars
Source: NASSCOM, SourcingLine, 2009

Exports of Computer & Information Services: 49,378.9 million US dollars
Source: IMF, 2008

Exports of Misc. Business Services: 16,655 million US dollars
Rank: 3 of 24
Source: IMF, 2008

Adult Literacy: 66 percent of population
Source: UNESCO, 2009

Expenditures on Education: 4.4 percent of GDP
Source: UNESCO, 2009

Annual University Graduates: 2,700 thousands
Source: NASSCOM, 2006

Annual Science & Technology Graduates: 16 percent of total
Source: NASSCOM, SourcingLine 2006

English Speaking Population: 19 percent
Source: English as a Global Language, 2003

Note: In 2001 census 86 million listed English as their second language and another 39 million as their third language(total 125 million)

Internet Access: 6.9 users per 100 inhabitants
Source: International Telecommunications Union, 2009

Broadband Internet Access: 0.4 subscribers per 100 inhabitants
Rank: 23 of 26
Source: International Telecommunications Union, 2009

The business and economic environment in India has room for significant improvement and is a drag on the IT and BPO sector. In our ranking across over a dozen criteria, India is in the bottom quarter with the likes of Indonesia, Egypt and the Ukraine.

Economic Competitiveness: 4.3 GCI score
Source: The Global Competitiveness Report, 2009

Macroeconomic Stability: 4.2 GCI Score
Source: The Global Competitiveness Report, 2009

Quality of Roads: 3.1 index (1-7)
Source: The Global Competitiveness Report, 2009

Quality of Electric Supply: 3.2 index (1-7)
Source: The Global Competitiveness Report, 2009

Mobile Phone Penetration: 29.4 subscriptions per 100 inhabitants
Source: International Telecommunications Union, 2009

Rigidity of Employment: 30 index (0-100)
Source: Doing Business (World Bank), 2010

Cost of Firing Employees: 56 weeks of salary
Source: Doing Business (World Bank), 2010

Overall Ease of Doing Business: 133 rank (1-183)
Source: Doing Business (World Bank), 2010

Complexity of Starting a Business: 30 days to register a start-up
Source: Doing Business (World Bank), 2010

Complexity of Paying Taxes: 271 hours per year
Source: Doing Business (World Bank), 2010

Corruption Perceptions: 3.4 CPI index
Source: Transparency International, 2009

Procedures to Enforce Contracts: 46 number
Source: Doing Business (World Bank), 2010

Time to Enforce Contracts: 1,420 days
Source: Doing Business (World bank), 2010

Cost to Enforce Contracts: 39.6 percent of claim
Source: Doing Business (World Bank), 2010

Intellectual Property Protection: 3.6 index (1-7)
Source: The Global Competitiveness Report, 2009

Software Piracy: 68 percent
Source: BSA-IDC Global Software Piracy Study, 2009