The Indian IT outsourcing industry is now facing a new kind of threat - wage inflation and loss of tax cuts.
Salaries on Indian IT workers are one of the fastest rising in the world. According to a survey by ECA International Indian IT workers will get an average annual salary hike of 12% in 2007. If inflation is taken into consideration, the real wage increase will be around 7%.
Currently there is a shortage of qualified IT workers in India and many of the IT majors are accepting recruits with non-IT qualifications.
Till now Indian IT companies have enjoyed preferential treatment from the government. The Software Technology Parks of India (STPI) policy has allowed IT companies certain exemptions from income tax and customs duty exemption on capital goods imports. The STPI policy is set to end in 2009. If this happens, IT companies, in order to protect their revenues and bottomlines, would have to relocate to SEZs (special economic zones) - which will continue to enjoy exemptions even after 2009. However relocating is not a viable option for small and medium size companies.
If current wage inflation trends continue and STPI related issues are not sorted out, Indian companies may soon start expanding their operations to other low-cost countries such as China, Philippines and the Latin American countries. Many big companies like TCS have already started expanding to China and other Asian and Eastern European countries.
