Memorandum submitted by the National Association
of Software and Service Companies (NASSCOM)
WORKING TOGETHER, TRADING TOGETHER, ELIMINATING
POVERTY TOGETHER
1. SYNOPSIS
Whilst aid is important, the potential mutual
benefits of trade between the UK and India dwarf the impact of
any government assistance.
Outsourcing is a major component of the UK-India
trading relationship. It is a business driven strategy that (a)
enables UK companies to stay competitive and to focus on their
core strengths and (b) creates jobs, wealth and a ladder out of
poverty for many in India.
Trade between the two countries should be actively
encouraged as a partnership between equals that boosts both countries'
economies and helps reduce poverty.
2. INTRODUCTION
The purpose of this briefing is to help inform
the International Development Committee's inquiry into the UK's
Bilateral Programme of Assistance to India. It concerns itself
only with the role of trade and the private sector, point 14 of
the Committee's inquiry.
The brief outlines the scale and the scope of
the Indian outsourcing sector, sets out how the sector helps reduce
poverty in India, reviews the UK-wide benefits of trade with India
and concludes with recommendations for UK Government.
As the trade body for the Indian outsourcing
industry, the unique contribution that the National Association
of Software and Service Companies (NASSCOM) is able to make to
the debate is that its members are very much the "people
on the ground". They are at the practical centre of the UK-India
trading relationship and first-hand witnesses to the impact the
sector has on reducing poverty in India.
3. THE MODERN
OUTSOURCING INDUSTRY
IN INDIA
A visitor returning to Bangalore, Mumbai or
a host of other Indian cities after a 10-year absence would be
amazed by the transformation. There is still great poverty to
be tackled, but there are now also many examples of world-beating
economic success. Many of these examples are provided by India's
thriving outsourcing sector.
Not that outsourcing is anything new. It forms
part of the wider picture of international trade—which accounts
for around one-quarter of UK jobs—and is a strategy long
adopted by companies around the world to stay competitive. [11]
Whilst outsourcing may not be a new strategy,
cheaper and better global communications allow a broader range
of services to be outsourced than ever before. It is these advances
in communications, combined with liberal economic reforms in India,
a large pool of skilled labour and a relatively benign world trading
system, that have created the right environment for the Indian
outsourcing sector to thrive.
The Indian outsourcing sector is currently growing
by around 30% a year, with estimated total annual revenues now
reaching about $16 billion. The IT sector's contribution to India's
GDP has risen from 1.4% in financial year 1998-99 to 3.0% in financial
year 2003-04—it is a growing slice of an expanding cake.
The sector covers a far wider range of services
than telephone call centres, the popular symbol of the modern
outsourcing industry. Everything from software development to
back office number crunching to sophisticated business processing
operations are also covered by the outsourcing sector.
4. THE ECONOMIC
AND POVERTY
REDUCTION BENEFITS
TO INDIA
Companies outsource to India because the strategy
offers them solid commercial benefits. In doing so, however, they
are also helping promote economic growth and reduce poverty in
the world's largest democracy. It is very much a practical example
of globalisation working for poorer nations as well as the rich.
The economic and poverty reduction benefits
to India of its thriving outsourcing sector are manifold:
— The sector is estimated to already
directly employ around 813,000 staff. If it were not for the success
of the outsourcing sector, the spending power of nearly a million
well paid people would be lost to the Indian economy, something
that would be to the great detriment of the very poorest.
— In addition to the large and growing
numbers employed directly by the outsourcing sector, there are
many more indirect jobs supporting the sector's growth. The (labour-intensive)
construction industry is just one example. Without a booming,
poverty reducing outsourcing sector, there would not be a booming,
poverty reducing construction industry.
— Another hugely significant but immeasurable
benefit is the psychological impact that the success of the outsourcing
industry has on India—and other emerging economies—as
a whole. The sector provides a route for high-flying graduates
to pursue their careers in India, not overseas, and serves as
a beacon of success in a competitive world market.
The fact is that whilst the contribution that
foreign aid makes to tackling poverty in India is greatly appreciated,
its impact is dwarfed by the direct and indirect contribution
made by India's own outsourcing sector. Foreign aid contributes
about $1.7 billion a year to India, whereas the Indian outsourcing
sector alone is worth about $16 billion a year. If rich countries
are serious about helping to achieve the Millennium Development
Goals, they should recognise and support the role of trade and
the outsourcing sector.
5. THE ECONOMIC
BENEFITS TO
THE UK/COUNTRY
COMPETITIVENESS
Whilst the growing practice of outsourcing clearly
has major economic and poverty reduction benefits for India, it
should not be forgotten that it is also a "win-win"
relationship that provides considerable benefits for the UK as
well:
— The first and most obvious benefit
is that outsourcing allows companies to stay competitive. It is
estimated that UK companies can reduce overall costs by between
30% and 70% by outsourcing appropriate functions to India—a
major factor that helps a growing number of UK companies stay
ahead of overseas competitors. Just as importantly, outsourcing
enables UK companies to free up more of their energy and resources
for their core strengths and competencies.
The combined result is that UK companies that
offshore have the potential to offer their customers better value
for money, which in turn means that they have the potential to
grow and take on more staff—a virtuous circle.
— The second advantage of outsourcing
is that it allows UK companies to overcome bottlenecks in the
supply of labour. UK IT and business process outsourcing companies
often struggle to recruit sufficiently qualified staff in sufficient
numbers—a major factor holding back the performance of many
British companies. Business research company, Evaluserve, estimates
that the shortage of domestic labour supply will restrain UK economic
growth by almost half a percentage point a year in the period
between 2003 and 2010—a cumulative total of £110 billion,
or about £1,800 for every man, woman and child in the country.
— Third, a growing Indian economy—of
which the outsourcing sector is an important driver—is clearly
a growing market for UK exporters. India's economy has grown by
an average of 5.5% over the last 10 years, and trade between the
UK and India has grown by two-thirds. Numerous UK companies have
benefited as a result.
6. WHAT THE
GOVERNMENT SHOULD
DO
Rich countries often like to boast about the
size of their aid budgets. And it is true that aid is a vital
component in poverty reduction. Aid, however, is only a relatively
small part of the overall picture. Sustainable poverty reduction
can only take place alongside sustainable economic growth.
The Indian outsourcing sector is an example
of a thriving industry in an emerging economy that, by its very
existence, is helping to fight poverty. The sector has a greater
impact for promoting growth in India than any aid budget, and
also provides the UK—and other rich countries—with
numerous "hard" economic benefits. The Indian outsourcing
sector should be celebrated as an example of globalisation working
for rich and poorer nations alike, not attacked by back-door protectionists.
The UK Government has a creditable role in promoting
a more open international trading environment. It should now seek
to capitalise on the progress that has been made by:
(a) Reaffirming its commitment to an open
world trading system, of which outsourcing is an intrinsic part.
(b) Promoting outsourcing as an example of
world trade working for rich and poor nations alike.
(c) Using its upcoming presidencies of the
G8 and EU to fight creeping protectionist tendencies in some rich
nations and to underscore the importance of trade to meeting the
Millennium Development Goals.
(d) Making it clear that there should be
no political or protectionist barriers to UK public sector organisations
outsourcing functions overseas.
October 2004
11 The terms outsourcing and offshoring are often
used interchangeably. Technically offshoring is the practice of
domestic companies setting up operations overseas, whereas outsourcing
is the practice of companies hiring specialists to undertake specific
tasks. For simplicity, this brief will use the term outsourcing
to cover both practices as they apply to the IT and Business Process
Outsourcing (BPO) industries. Back
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