Friday, October 20, 2006

What happens when India runs out of people or future outsourcing impacts

I recently read an article in the Wall St. Journal - a sr. industry leader indicated that India could handle the shortgage of 500,000 skilled workers needed for employment in it's outsourcing centers by training science graduates to handle technical / engineering tasks. The article also noted that several large Indian firms were building outsourcing centers in China and developing operations in Eastern Europe.

What I found particularly fascinating is that India's outsourcing engine has run up against infrastructural constrainsts on labour supply. With such a large population and still a large wage gap to be arbitraged, it's most likely that India industry and government efforts to train more skilled professionals will, over time, expand India's ability to meet outsourcing demand.

Nonetheless, the immediate hurdle presents something interesting.

India has been an aggressive player in outsourcing for at least 10 years - professionally I had not seen substantial presence until about 10 years ago, maybe 12. Assuming other players in the outsourcing economy pickup where Indian labour supply is short and India is able to increase the number of its engineering graduates, we'll probably see another hurdle in 5-10 years.

Rationally, the short term impact of labour shortages in the outsourcing market would be as follows:

1. Increased wages domestically within India
2. Increased cost for outsourced services (thought not likely to be dramatically high, just yet)
3. Entrance of more Eastern European economies into the outsourcing business (though costs are more likely to be higher than in either India or China)
4. Pressure on outsourcing companies to increase value added services to maintain profit margins
5. Exploration by outsourcers of additional markets (medicine: radiology, pathology?, etc...)

The net impact on the American economy would be:

1. Increased cost of outsourced services - but not enough to destroy the appeal
2. Decreased productivity games in American businesses (less to be gained from outsourcing)
3. Slight relief to American workers most vulnerable to outsourcing
4. Overall negative impact (but small at the moment) on American economy due to reduced productivity gains

The biggest challenge for the outsourcing industry and India in particular is to expand the skilled labour supply. This may be a significant undertaking depending on the Indian government's commitments to market and efficiency reforms - as a matter of fact - government support of an export business often flies in the face of market reforms. This may in fact be condundrum.

My investments in IIF have had stellar performance since July. I am hoping the 500,000 science graduates can perform in engineering roles and help boost my ETF. Oddly, IIF has significantly outpeformed RNE. I believe Putin's efforts to decriminalize portions of the Russian economy through the creation of megalithic enterprises may one day (in the future) help establish better capital markets - however, the means of his current efforts smack far too heavily of direjisme than democracy.

Have a great weekend,

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