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ITES counters Rs appreciation by moving to Tier II/III cities

ITES counters Rs appreciation by moving to Tier II/III cities
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First Published: Mon, Sep 17 2007. 03 51 PM IST
Updated: Mon, Sep 17 2007. 03 51 PM IST
New Delhi:To counter twin effects of rupee appreciation and expiration of Software Technology Park of India (STPI) scheme, IT & ITeS are moving to Tier II and III cities hoping to cut operational costs by 15%. This will help them survive and maintain profit margins, according to a paper presented by Assocham on ‘Outsourcing industry strategies to counter appreciation of rupee’.
Recent appreciation of ‘Rs’, especially against the ‘$’ has come as unwelcome news for BPO industry, which is working on the thin margin lines to maintain its competitive advantage. They have to walk the tightrope between rising property rates, escalating wages and appreciating Rupee.
The rupee has appreciated around 10% but this is considered too rapid for the IT/ ITeS industry to absorb. To counter this effect, BPO companies can extend their operations in non metro cities, which could provide them 15% cost advantage.
Bigger companies are moving towards non metro cities as part of their expansion plans. This will push up employment and income; consequently, increase in expenditure and investment will lead to growth and development of Tier II & III cities. Industry expects this trend to increase around 200,000 jobs (direct & indirect) by 2009.
Key Findings
* In metros and large cities, IT & ITeS are already impacted with saturation and rupee appreciation has shrunk their export revenues in recent past
* STPI scheme is expiring in March 2009 as a result of which, ITeS will cease to avail of various tax incentives to the extent of 25% which will put additional burden on their margins and reduce their revenues by concentrating their operations within metros and large cities
*ITeS companies have started moveing towards II and III tier cities of Lucknow, Kochi, Varanasi, Mohali, Jamshedpur, Allahabad, Chandigarh, Deharadun and Mysore and the like so that these keep getting outsourcing assignments from their respective clients that would lead them to cut their operational costs by about 15%
*The shift is more pronounced from BPO hubs in cities like Gurgaon, Bangalore, Hyderabad, Delhi, Noida, Chennai and Kolkata.
* ITeS exports in 2006-07 were estimated at $6 billion (Rs24,000 crore) but continued rupee appreciation could marginally erode them and its impact could be curtailed only if the government extends the STPI scheme benefits for another 10 years so that technology exporters keep getting their tax incentives
* Outsourcing sector in India showed commendable growth attributed to low cost of labour and large talent pool that is likely to be affected if this scheme is not extended, moreso when China and Philippines are offering huge tax incentives to attract outsourcing companies
* ITeS sector is one of the country’s largest employment generator in the organized sector, employing around 7 million people directly and indirectly and according to estimates this could go up to 10 million by 2010 and that 30-40% of total employed, are women
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First Published: Mon, Sep 17 2007. 03 51 PM IST