Over the last 5 years, IT wages have been rising in India.  And for good reason!  Indian programmers are now some of the most experienced IT professionals in the world.

However, if alarmist blog posts are to be believed, this signals the beginning of the end for the still-nascent IT industry in India.   When Indian salaries are higher than American salaries, the incentive to offshore is gone.

Although I disagree with this premise for several reasons (the subject of future blog posts, I guess), I thought it would be interesting to try to figure out when the (cue horror film music) ‘Death Of Outsourcing’ is gonna go down.

So I channeled my undergraduate economics degree (ceteris paribus!!!) to figure this out.

Figuring out salary rates is easy.  But, if people are acting rationally (which economic professors are beginning to realize is a rare occurrence), they will consider more than just cost. Value must be factored into our equation.

Now, value is a subjective thing, but thanks to online marketplaces like oDesk, we can use ratings to understand the general value that customers are getting from the US and India.  We’ll use numbers from oDesk as our example.

For a variety of reasons, this is an admittedly flawed example,  but it serves our thought experiment just fine.

[For those who don't know, oDesk is an online marketplace that connects people looking for IT work with those providing it, like an eBay for IT.]

According to oDesk, Indian workers are paid an average of $11/hour, whereas American workers are paid $17.50.  There is a similar differential in value.  Indians received an average rating of 4.12 (out of 5), while Americans received an average rating of 4.48.

So, using these figures, you get a couple of simple insights:

In the oDesk marketplace, offshoring still makes rational sense, and the difference in value is surprisingly low.

Okay, okay, okay, there are several reasons this is flawed:

But, this example of one marketplace is still useful, and if you allow for a greater difference in value, the implications of the equation are clear:

If salaries are going up, value better go up even more.

More importantly, salaries ARE going up.  It’s inevitable, and demand for Indian IT will continue to push them up further.   And, other IT destinations such as Vietnam are now offering reasonable alternatives for low-level work.

Indian companies will be beaten on price, but they can continue to differentiate themselves by providing stronger experience, niche specialization, and seasoned communication/management.

It will be the companies that fight the urge to cut corners and compete on price who will succeed. Focus on improving value, and the long-term view is rosy.

Although there is some skewing going on (I believe English proficiency is self-reported), the infographic is fascinating.  

the map

the full oconomy 

A year ago, this relatively small, forgettable city in the heart of India did not have an air-conditioned cinema. In the sweltering heat of May, the rich here were known to fly one hour to Mumbai, the financial hub of India, to see a movie. There they stocked up on Levi’s jeans and Domino’s pizza and other big-city treats that Nagpur failed to provide.

But in a social experiment highly unusual for this most unplanned of countries, the Indian government has handpicked Nagpur to be fattened and primped into an international metropolis. (via)

Can you fake development?  More importantly, can you fake development if you’re not China? 

The key ingredient it seems, are the malls:

Nagpurians marvel at how, with every new mall, the young discover wants they never had before. They work harder to afford those wants. More malls are built to satisfy them. And after a time, the cycle acquires its own momentum.

In the end, it all comes down to rocking the right pair of jeans:

Vishwas Chaknalwar, a builder, put it this way. “Once you wear Pyramid
clothes,” he said, referring to a new mall here, “you cannot wear
anything else.”

Since college, I always suspected this.  No economic journal will ever be able to explain global economic development more clearly than Biggie Smalls (NSFW).

Full IHT Story

bcm has been operating out of Chandigarh for over 4 years.  It looks like people are starting to catch on (CNN):

“The IT industry is excited about Chandigarh’s potential as an emerging
IT destination,” said Kiran Karnik, president of the National
Association of Software and Service Companies (NASSCOM), India’s top
trade body for the IT industry. “Already, many IT companies have begun
operations there or have plans of doing so, making it one of the new
‘hot spots’ for the IT industry,” he told Reuters by email.

Current investment in the park, located on the outskirts of the city,
is 7 billion rupees ($165 million) and in two years it is expected to
touch 30 billion rupees ($711 million), Brar said.

“There is no doubt that a lot of people are trying hard to sell
Chandigarh as the next Silicon Valley in India,” said Simran Aujla, an
IT professional.

Chandigarh is one of India’s most well-planned cities.  Unfortunately, that plan maxes out at around 500,000 people.   Wikipedia on the the architect’s initial vision:

Le Corbusier divided the city into units called ’sectors’, each
representing a theoretically self-sufficient entity with space for
living, working and leisure. The sectors were linked to each other by a
road and path network developed along the line of the 7 Vs, or a
hierarchy of seven types of circulation patterns.

Because of this well-executed plan, Chandigarh has always been my favorite city in India.  After having worked with a few firms in helter-skelter Bangalore, moving our main office to Chandigarh felt like relocating to a day spa.

For better or worse, this is all about to change.  Over the next two years, a massive influx of large companies, employees, and Marutis with custom horn sounds is going to begin a fast, loud transition.  I am happy for Chandigarh.  But, it makes me think.  Time to relocate to Goa?

…newspapers are struggling in Europe and America, but in India, as in China, they are booming.

I love this quote by M.J. Akbar (editor of Asian Age)

The language of aspiration is English and the medium of aspiration is the newspaper, so an English newspaper is almost a ladder on which this class seeks to rise.

(I can picture my little cousin, checking out a story on the Ambanis and plotting world domination)

While newspapers in industrialized countries continue to lament the loss of their audience to up-to-the-minute online competitors, India boasts 300 large newspapers…and seems to be adding new ones every week.

The future looks bright. At best, a mere 300m of the country’s billion-odd people are middle class; only 60% are literate. As the untutored crowds learn to read, they are likely to reach for a newspaper.

Besides, Indian papers are searching for ways to appeal to the illiterate class anyways:

Competition is forcing once-staid publications to spice up their content. Mumbai’s Midday tabloid has introduced a bikini-clad version of Birtain’s topless “page-three” girls, called the “Midday mate”.

The article also helped me understand why these newspapers have such atrocious websites…it’s easy to forget: only 1.2% of India’s population is online.

Laying the tracks, but still not riding the trains.

Of course, the press jumps on a story like this as a sign of “how, despite a thriving tech industry, Bangalore is just not Silicon Valley”.  If a shutdown is what it takes to reach that epiphany, you deserve a cookie.

Unfortunately for Bangalore, recent targeting by terrorist groups might place the city of baked beans closer to New York in the global imagination.

Bangalore’s issues may also speed the inevitable (and ongoing) push to other cities in India. As if the gridlock on outer ring road wasn’t enough motivation already.