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Indian IT SMEs shifting to Philippines: Study

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CIOL Bureau
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BANGALORE, INDIA: The medium IT/ITeS enterprises in Bangalore and Hydrabad are shifting or expanding their bases to Philippines, reveals a study by the Assocham (Associated Chambers of Commerce and Industry of India).

The survey says India's top IT hubs — Bangalore and Hyderabad — are losing its sheen, owing to concerns pertaining to infrastructure, cost of doing business and availability of skilled labour.

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The driving forces are multitude, ranging from ease of doing business, availability of abundant English speaking workforce at lower wages, better infrastructure to government incentives,” says D.S. Rawat, national secretary general, Assocham.

It is imperative for governments to quickly initiate remedial measures on war footing to stem the loss as the capital flight will not only severely affect the growth and employment, but threaten India's leadership in the knowledge industry,” he pointed out. 

Also read: Indian IT sector to grow despite uncertainty

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According to the Assocham Eco Pulse (AEP) study titled 'Sustaining India’s IT/ITeS Leadership', the prevailing macroeconomic and sectoral conditions have been resulting in a shifting of ITeS/BPO industry away from India to Philippines, especially from Hyderabad and Bangalore. Such a trend is yet not being noticed in the National Capital Region and Pune.

The chamber study said, it is an undisputed fact that in India has evolved as a major GDP contributor and plays a vital role in employment generation and export promotion. The sector helped the nation to create Brand Equity. As a proportion of national GDP, the IT/ITeS sector revenues have grown from 1.2 per cent in 1997-1998 to an estimated 6.4 per cent in 2010-2011. Its share of total Indian exports (merchandise plus services) has increased from less than 4 per cent in 1997-1998 to 26 per cent in 2010-2011.

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India is presently a premier destination for the global off-shoring market of IT/ITeS, accounting for almost 55 per cent in 2010 as compared to 49 per cent in 2005. The country has emerged a dominant player in global IT services outsourcing with increase in its share to 70 per cent in 2010 from 52 per cent in 2005.

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On the other hand, India’s share in BPO sourcing market has declined from 45 per cent in 2005 to 34 per cent in 2010, albeit it continues to be the leader in this space.

Rawat said that the country’s prominence as an IT/ITeS hub is declining owing to diminishing employable talent pool, high cost of doing business due to inefficiencies of power, transport, security, concentration in metros due to inadequate infrastructure in other towns etc.

Currently, over 90 per cent of total revenues of the sector are generated from Tier I locations, which are nearing peak capacities in terms of infrastructure support. Therefore, there exists a pressing need to fast-track the development of alternate delivery locations in Tier II and III cities.

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Indian IT/ITeS sector has invested and developed world class facilities, extensive talent development initiatives, disaster recovery and business continuity, high cost of transport, enhanced security, captive power generation, UPS and other equipments which have over all created a cost disadvantage of 10 — 15 percent as compared to other emerging markets. Hence, India is hard pressed to manage its competitiveness in the wake of rising costs and increasing competition.

The IT/ITeS sector is essentially that of less capital intensive and has lot of flexibility in operations, thus, it can be relocated in a very short time. Therefore, there exists a real threat to the country in terms of its swift relocation to other competing locations like Philippines, Vietnam, China, Poland, Hungary, Mexico, Brazil, Egypt, to name a few. Already, many MNCs and Indian companies are setting up centres in these countries.

Presently ITeS/BPO firms are finding the retention of the suitably trained employees a big problem. Apart from this, the deficient infrastructure, law and order issues, and shrinking margins in the light of increasing costs have forced the Indian firms to explore emerging geographies.

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Among all the available alternatives, Philippines is presently offering most suitable alternative to Indian IT/ITeS firms. These smaller firms typically employs 15 to 18 people, both technical and support staff, each. Thus flight of each small firm would result in a loss of about 12 to 15 jobs. In addition, there is a loss of their contribution to the GDP.

Additional job creation in the Indian IT/ITeS sector was estimated as 2.4 lakhs during the 2010-11 fiscal. This was about ten per cent of the present level of employment in the sector. Therefore, the flight of smaller software firms outside the country would affect the growth and employment prospectus enormously.