Wage Inflation Shrinks Indian Outsourcing Companies Margins as Labor Cost Arbitrage Reduces

Labor Cost Arbitrage is the biggest reason for the growth of the Indian outsourcing industry.The outsourcing revolution in India which started though technology outsourcing has spread to the legal,medical and other fields as well. Medical Billing, Coding and Transcription has become a big business besides Legal Outsourcing of work.Globalization of finance and trade has been much more rapid than the globalization of labor which faces many hurdles.The spread of Internet and improvement in Communications has made this hurdle moot as many high cost services in India are being performed virtually over the Internet.However this arbitrage which has bought billions in profits to global corporations and rise of new companies such as Infosys,TCS and others is disappearing.Rising Wage Inflation in India caused by a multitude of factors including the Bernanke Money Printing has led to shrinking of the margins.

Infosys  which is India’s leading IT company is forecasting a massive reduction in its high margins as increasing attrition rates and higher wages cuts its profits.Higher competition has prevented the company from raising its prices as MNCs like IBM,Accenture shift most of their operations to lower cost locations in India.While the issue is not being faced by some companies like TCS who have lower margins anyway,smaller and medium sized IT companies like Mphasis,Mindtree have faced these issues for a longer time.The main reason is that the wage differences between Indian and US workers are reducing.Even China has facing massive wage inflation whic hhas shifted production to other lower wage countries like Bangladesh and Vietnam

Margins may shrink 300 bps: Balakrishnan

Infosys Technologies on Friday said it is expecting margins to shrink by close to 300 basis points (bps) next fiscal on account of low utilisation, rupee appreciation and wage inflation. The company, which saw its margins shrink by 100 bps in the last quarter of FY11, is projecting a 400 bps drop for the first quarter of FY12, the company’s chief financial officer said.