Buy-side outsourcing customers are bracing for the fallout of a spiking inflationary cycle in India, which recently hit a 16-month high and outpaced 20 other leading economies around the world. India’s wholesale-price inflation rate reached nearly 10 percent in February, triggering increased angst among clients whose professional operations rely in part on a wide range of outsourced services – from the contact center to sophisticated finance and accounting functions.
Nearshore Americas heard from two separate India Inc. customers this morning who are worried that inflation will put greater strain in direct terms on the contracts they hold with providers in the region as those providers may be forced to further increase wages to keep up with the cost-of-living expenses for employees. Attrition, always a threat in an economy that is rapidly adapting to exploding demand for domestic services, is clearly a concern as employers vie for skilled professionals. Recent data indicates that wages – especially for mid to senior level executives – have risen sharply in India over the last year.
According to consulting firm AlixPartners, labor costs are increasing faster that the rate of productivity gains in China (12 percent wage inflation) and India (20 percent). In comparison, productivity is outpacing the rate of wage costs in the United States.
Latin America economies are by no means immune to the risk of inflation as these economies – just as their counterparts in Asia have experienced – will move to climb out of the recession through disciplined monetary policy.
India monetary officials, at first criticized for not moving fast enough to stem the inflationary spike, are taking more aggressive steps to manage economic risk. It is highly unlikely current inflationary pressures will permanently dent the labor arbitrage advantages which have been the hallmark of outsourcing’s attractiveness in India. However, the fact that customers will have one more thing to inquire more deeply about when investigating long-term commitments in India cannot come as good news for providers in the region.