Outsourcing News from the World over

Saturday, June 04, 2005

How Indian are Indian exports?

India's merchandise exports have almost doubled in the last three years to $80 billion, and exports of software/IT-enabled services have almost tripled to $17.2 billion. People the world over suddenly see India as a potential economic superpower.

It is gratifying that Indians are seen as world-class. The knee-jerk protectionism of our early socialist decades, was based on the false premise that Indians are inferior and must be protected from superior white men. After 15 years of economic liberalisation, we now know that, despite many shortcomings, Indians can beat the best in the world. However, a closer look suggests that this may be a chauvinistic, misleading way of looking at things. This view assumes that our exports are made by Indians. That is no longer so.

The fastest-growing export sector is the outsourcing of business services called BPO (business process outsourcing) or ITES (information technology enabled services). These span a huge range of services from simple call-centres to engineering and R&D services. They are growing so rapidly that one day they will surely overhaul software exports. In 2004-05, computer software exports rose 30.4 per cent, but service outsourcing exports rose even faster by 44.4 per cent.

In the last three years, jobs in outsourcing have grown by 52.5 per cent annually, more than double the growth of 23.6 per cent in software. Software employs only for a small high-tech elite, whereas outsourcing employs a wide spectrum of people including some without college degrees, and is spreading to every city in every state. It could eventually become India's biggest single business employer with over 10 direct jobs and another 25 million indirect ones.

What is not so well known is that two-thirds of our outsourcing exports come from captive Indian units of multinational corporations. The entire industry was kick-started by General Electric, and others followed. So, India's most dynamic export sector is not Indian at all but foreign-owned. In official economic terms, such service exports are Indian exports. But in pure business terms, they are the internal trade of MNCs.

Now, the aim of these MNCs is not to promote the Indian economy or employment. They are simply looking for ways to cut costs. Thus the private profit of MNCs has become the driving force of India's biggest boom industry, increasing jobs and dispersing benefits all over the country.

Indian software giants like TCS, Infosys and Wipro are India's biggest exporters. Yet, foreign companies now account for 30 per cent to 35 per cent of software exports. Every big name in the world has opened an Indian unit, from Microsoft to Oracle to SAP. Here again, what look like Indian exports are also the internal trade of MNCs.

Nasscom says India's software-BPO exports have penetrated 400 of the Fortune 500 (the 500 biggest US corporations). Another way of putting it would be that 400 of the Fortune 500 have penetrated India.

This shows that globalisation is not a zero sum game, in which the gains of one side are the losses of the other side. Both sides gain. There are some short-term losers in the US whose jobs travel to India. But US living standards rise only because workers are constantly forced out of lower-productivity jobs into higher-productivity ones. Every year, the US destroys 32 million jobs and creates 32.5 million jobs. The net result is a richer, more productive USA.

Adam Smith would have smiled at the way outsourcing equates the private profit of MNCs with the public interest of a poor developing country. It is a succinct demonstration of his theory of the "invisible hand" which, in competitive conditions, converts private profit into social good.

Something similar is happening on a much smaller scale in manufacturing. Traditional exports like textiles and diamonds are almost wholly Indian-owned. But the big boom in auto exports owes a lot to MNC outsourcing. Suzuki and Hyundai have converted India into a global sourcing points for several of their models. Ford at one point exported twice as many cars as it sold in India. Global auto ancillary manufacturers such as Delphi and Visteon are ramping up Indian operations for meeting global needs, and MICO (a subsidiary of Bosch) is investing Rs 1,000 crore to make India its global source for a new range of fuel injection devices. POSCO of Korea plans a $12 billion steel plant in India, almost entirely for export.

Finally, India is emerging as a global R&D hub, for MNCs no less than Indian companies. Several drug MNCs have become partners with Indian companies to develop and test new drugs. General Electric, Suzuki, Timken and Siemens are among those with major R&D centres. India's comparative advantage is now recognised as being brainpower, not cheap labour. So MNCs are shifting their R&D and design functions to India.

How Indian is this R&D? Is it Indian or American? Well, it is both. Globalisation has made old distinctions obsolete.

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