More on outsourcing and wage inflation

An article in today's Financial Times, "Are India and China up to the job?", emphasizes the point in my earlier post - although only 10% of the $300bn market for global offshoring is currently being tapped, labor shortages in India and China are kicking in. With the industry struggling with annual employee turnover rates approaching 40 per cent, wage inflation is rising. Wage increases in India were the highest among Asia-Pacific countries. In the IT sector, pay inflation this year is expected to reach nearly 20 per cent.

The result is more expensive managers, a phenomenon that has put paid to the localisation strategies of many multinationals. Localisation was meant to save money by replacing expatriates on large packages with cheaper locals, but good
Chinese managers now command a similar premium. "There are some very alented Chinese leaders coming through," says Mr Mullinjer. "I have done a number of management searches where these guys are getting paid no differently to western expats. In some cases they're making more. It is a huge jump over what we saw five to six years ago."

With India and China both still enjoying spectacular growth, their shallow talent pools have yet to cut into headline GDP numbers. But such shortages are chipping away at their emerging economic strengths. The talent crunch will threaten India's knowledge-based and services-driven growth story. In China's case, it undermines Beijing's aim to re-tool its economic model to build the domestic service sector and wean itself off reliance on manufacturing exports. For both, capturing the demographic dividend may prove far harder than they expected.

India has over a billion people and will soon have the world's largest number of young people. However, many of the country's population is still engaged in low-income activities. It is imperative that the country work toward providing education to its young people and invest in their capabilities. It must also extend its position as a skilled service provider to develop a more broad-based employment model that effectively leverages the education and skills of the majority of its population.