Current Economic Statistics and Review For the Week 
Ended May 07, 2005 (19^th Weekly Report of 2005)

  I

Highlights of  Current Economic Scene

CORPORATE SECTOR

• Corporate performance

o       Of the 1,000 companies with net profits of over Rs 100 crore that have announced so far their results, 30 firms have cornered almost 72 per cent of the net profit and 52 per cent sales during the last quarter of 2004-05. Overall, these 1,000 companies have posted a 49 per cent rise in net profit during the quarter, matching its net profit growth of 48 per cent in the quarter ended March 2004.

•      New ventures

o       The Rs 15,000 crore Tata Motors has created a new compact commercial vehicle segment in the domestic automobile market with the launch of its mini-truck, ACE. This mini truck, designed in-house and developed at a cost of Rs 180 crore over four years, is targeted at rural and urban users.

o       In a mass signing of MoUs for the steel projects, Orissa government has signed pacts with different parties envisaging a combined steel capacity of 2.2 million tonne at an estimated investment of Rs 2008.70 crore. Most of the parties are small industrial houses compared with the mega steel projects proposed by steel majors such as Posco, Tata Steel, Essar and Jindal.

o       Solaris Chemtech, a Gautam Thapar company, has announced a Rs 120 crore investment over three years for increasing the production capacity of bromine and speciality bromine chemicals. Bromine is predominantly used by consumer durables companies to make their products flame-retardant.

o       The Director-General of Civil Aviation has issued a licence to operate a scheduled airline to Kingfisher Airlines of Vijay Mallya. The airline is to start operations from May 9.

o       Taj Hotels Resorts and Palaces has marked its entry into Southeast Asia by entering into a management contract with the Rebak Island Marina Berhad, to operate and manage the Rebak Marina Resort, a 106-room premium resort in Langkawi in Malaysia . Simultaneously, the management will work with the owners to undertake a comprehensive US $ 5 million upgradation and renovation program, which is scheduled to be completed over a period of 12 to 18 months.

o       Sponge iron manufacturer Monnet Ispat is planning to invest Rs 1,400 crore for setting up sponge iron units in Orissa and Jharkhand. The company has signed MoUs with the two state governments for setting up an integrated steel plant and a 250 mw power plant.

o       The Murugappa group has drawn up a capital expenditure plan of Rs 650 crore in 2005-06, directed largely towards its sugar, fertilizers and manufacturing operations.

o       VIP Industries Ltd, which took over UK based Carlton Travels Goods last year, will be launching the Carlton brand  of luggage in India within a year’s time.

o       Oil & Natural Gas Corporation (ONGC) has made three oil & gas finds, one in  shallow waters off the western shore and two in the deep waters in Krishna Godawari basin on the east coast. 

o       Bharat Petroleum Corporation Ltd has received clearance to build a long-delayed, 6-million-tonne-per-annum refinery in Bina in Madhya Pradesh at a cost of Rs 750 billion. BPCL will build the refinery in partnership with Oman Oil Company Ltd and expects to complete the unit by 2009.

o       Reliance Infocomm has decided to go slow on setting up Reliance WebWorld, a chain of retail stores for digital entertainment and communication and a one-stop-shop for its products and services

•        New ventures by foreign companies

o       American business magazine Fortune is exploring the possibility of syndicating in Indian newspapers or magazines that would ultimately lead to an Indian edition.

o       Sun Microsystems, a US based $ 10 billion software major, has stated that that it will double its R&D employee base in India over the next two years from the current 1,000 professionals in Bangalore.

o       Daikin Airconditioning India , the wholly owned subsidiary of US $ 6 billion Daikin of Japan, is targeting Rs 500 crore turnover by the end of 2010.

 •         Merger & Acquisitions

o       The Goenka controlled RPG Enterprises will be retaining 48 and Dairy Farm International the remaining 45 of the 93 Foodword stores. RPG enterprises will call the retail stores carved out of the Foodword chain ‘Spencers Supermarkets’. Dairy Farm International will float a new company for it stores. At a later stage, Dairy Farm will be divesting a 51 per cent stake in the new company to an Indian partner as the government’s current foreign direct investment policy does not allow an overseas company to have a majority stake in a retail chain.

o       Energy giant Royal Dutch/Shell and German chemicals group BASF will be selling their Basell plastics joint venture to a set of investors for $ 5.7 billion. BASF and Shell will be selling their 50:50 venture, the world’s top producer of polypropylene, to New-York-based Access Industries and the Chatterjee Group after the US political pressure scuttled a potential sale to an Iranian company.

o       Century Enka, the Rs 1,123 crore joint venture between the Accordis group and the BK Birla group, plans to launch a buyback programme exclusively for non-resident shareholders, including the foreign promoters.

o       DIC India Ltd (formerly coats of India ), a subsidiary of Dainippon Ink & Chemicals , Japan , is planning to merge , it subsidiaries DIC Coatings India and Rohit Industries with itself. The company will invest Rs 10 crore in the year to increase the news inks capacity of its Noida unit.

o       Thermax has informed the BSE that it will consider the amalgamation of its wholly owned subsidiaries and early redemption of 6 per cent of the redeemable preference shares in its board meeting of May 11, 2005. 

o       The Birlas are believed to be in the process of untangling the cross holdings in Pilani Investments & Industries, the Birla family’s investment arm that holds shares in all major Birla companies and close to a 37 per cent stake in Rs 2,540 crore Century Textiles. The untangling of cross-holdings is expected to be announced by the end of June.

o       Singapore-based Flextronics International, a leading electronics manufacturing services company, plans to acquire the remaining holding in its Indian unit Flextronics Software Systems Ltd (FSS), previously known as Hughes Software Systems Ltd, for close to Rs 600 crore.

o       The Reliance Group has scaled up its holding in Reliance Energy ltd (REL) by 4.99 per cent stake to 52.64 per cent.

o       VSNL has received all regulatory approval in the US , including that of the Federal Communications Commission (FCC), for its proposed acquisition of Tyco Global Network.

o       Gail India , National Thermal Power Corporation (NTPC) and the Maharashtra State Electricity Board (MSEB) are slated to takeover the 2,184 Mw Dabhol power project (though not the Dabhol Power Company).

o       Sonata Investments has picked up a shade over 5 per cent stake in the RPG Enterprises-controlled music company Saregama India trough open market purchase. The corporate identity of Sonata has remained unknown. Market sources speculate that the firm may be linked with Reliance Capital.

o       Oracle, is acquiring PeopleSoft development centers in Bangalore for an undisclosed amount.

o       Jindal Vijaynagar Steel is considering acquisition of three companies, Euro Coke & Energy Pvt Ltd (Euro Coke), Euro Ikon & Steel Pvt Ltd (Euro Ikon) and JSW Power Ltd (JPL).

o       Unilever has pulled out of tea company Rossell Industries by offloading its 97.5 per cent stake for an undisclosed sum. MK Shah Exports, a leading exporter and tea plantation firm, has purchased the shares. 

o       Cisco Systems has picked up a strategic stake in India-Games, a mobile-games publisher in Mumbai, marking the first Indian acquisition by the US telecommunications network equipment manufacturer.

o       The Bharuch-based J B Chemicals and Pharmaceuticals Ltd (JBCPL) has entered into a development and supply agreement with Pharm-a-Care Laboratories Pvt Ltd (Pharm-a-Care), an Australia-based over-the-counter company. Under the agreement JBCPL will sell its drugs in Australia through the marketing network of Pharm-a-care.

o       Stride Arcolab has informed BSE that it has acquired 90 per cent stake in Medgene Pharmaceuticals. Medgene is engaged in the business of biotech and biopharmaceuticals.

o       Tile major H&R Johnson ( India ) Ltd has acquired a 50 per cent stake in two Gujarat-based tile manufacturing companies – Anitque Granito and Specific Ceramics. Antique Granito is based in Morbi while Specific Ceramics is an Ahemdabad-based company. This is the first time a multinational is investing in Morbi.

o       MindTree Consulting, has acquired Linc Software, a specialist in application development and maintenance for IBM AS/400 series servers-based IT systems. MindTree, bigger by Linc will explore new geographies and businesses made possible by the acquisition.

•         Policy issues

o       A five-judge constitution bench of the Surpeme Court , by a split verdict 3:2, has ruled that companies committing criminal offences can be imposed fine, though they could not be imprisoned as they are juristic persons. Directors and others in charge of the companies  which committed the offences can, of course, be imprisoned.

o       Indian Petrochemicals Corporation Ltd (IPCL) has informed the BSE that Anil Ambani has ceased to be a director of the company when the  board “considered, noted and took on record’” his resignation on January 20. In a related development, the ministry of company affairs is examining whether any regulation has been violated in conveying to the Registrar of Companies the IPCL’s decision to accept the resignation of Anil Ambani.

o       Indian Oil Corporation (IOC) would have to give Indian shipping companies preference while chartering vessels to carry its oil imports. The company was bound by the Directorate General of Shipping guidelines, according to which any kind of competitive bidding favoured Indian shipping companies.

o       The Comptroller and Auditor-General of India said that the disinvestment ministry under Arun Shourie had deviated from practice while disinvesting the Airport Centaur and Juhu Centaur hotels of Air-India.

o       Food and Drug Administration (FDA) in Maharashtra has asked Johnson & Johnson (J&J) to stop using the word “baby” on its products  or procure a certification  from the Drug Controller of India permitting it to do so.

•         Company issues

o       Tata sons project, the “people’s” car is set to become a reality by 2008. It is in the prototype stage. Its cost will be somewhere between a motorcycle and a car.

o       Bajaj Auto may move the Supreme Court to stall Bajaj Tempo’s move to change the name of the company to Force Motors after having failed to obtain a stay order on the issue from the Bombay High Court.

o       Royal Airways Ltd, which plans to start a low cost carrier ‘Spicejet’, is planning to raise $ 90 million through an issue of foreign currency convertible bonds (FCCBs) in the international markets in June.

o       The role and responsibility of Anil Ambani as vice-chairman and managing director of Reliance Industries appears to have become another source of acrimony between him and his elder brother Mukesh Ambani, the company’s chairman and managing director.

o       The US-based SC Johnson & Son has consolidated its consumer products business under one company, Karamchand Appliances, in which its owns 50 per cent of the equity. The Delhi-headquartered company, which produces the AllOut insect control product, has been identified as SC Johnson & Son’s investment vehicle for the Indian market.

•         Company results

o       Due to the increasing burden of subsidies, GAIL ( India ) Ltd could only manage a 4 per cent increase in net profit at Rs 1,947 crore in 2004-05. The turnover of the company was at Rs 12,435 crore.

o       Hindalco’s net profit for 2004-05 was Rs 1,329 crore on a turnover of Rs 9,523 crore.

o       Kochi Refineries Ltd (KRL)’s net profit increased 51 per cent to Rs 842 crore as against Rs 555 crore in the previous year. Gross turnover was at Rs 15,451 crore.

o       Maruti Udyog Ltd, India ’s largest carmaker reported a 57.44 per cent increase in net profit for 2004-05 to Rs 853.63 crore compared with Rs 542.18 crore in 2003-04. Total income was at Rs 11,353.87 crore.

o       Cement major Associated Cement Companies (ACC) has recorded a 89 per cent increase in its standalone net profit at Rs 378.39 crore for 2004-05 from Rs 200.24 crore in the previous year. Total income grew to 1155.02 crore.

o       Chambal Fertilisers & Chemicals has posted a 49.01 per cent increase in net profit at Rs 186.25 crore for 2004-05 compared with Rs 124.99 crore in the previous year. Total income increased to Rs 2,631.90 crore.

o       Bhushan Steel & Strips Ltd’s net profit was higher by 70 per cent at Rs 153.35 crore over that of Rs 90.30 crore in the previous year. Revenues were at Rs 2,867.90 crore.

o       Monnet Ispat has reported a growth of 337 per cent in net profit at Rs 123.83 crore for 2004-05 for a turnover at Rs 777.77 crore.

o       Essar Power has posted a 97 per cent increase in net profit at Rs 119 crore for 2004-05 compared with Rs 60 crore last year. Net sales were up to Rs 735 crore.

o       Century Textiles & Industries posted a net profit of Rs 109.63 crore for 2004-05 compared with Rs 76.59 crore last year. Total income increased to Rs 2,539.69 crore.

o       Kirloskar Brothers net profit is up 88.6 per cent to Rs 49.96 crore  for 2004-05 from Rs 26.49 crore on sales of Rs 733.04 crore.

o       Dr Reddy’s Laboratories net profit declined steeply to Rs 21.1 crore in 2004-05 from Rs 247.4 crore in the previous year. Total revenue decreased to Rs 425.2 crore.

o       Satnam Overseas reported a 38.47 per cent rise in net profit at Rs 17.96 crore for the year 2004-05 were sales dipped  5.37 per cent to Rs 503.58 crore.

BANKING HIGHLIGHTS

o       Export Import Bank of India has reported a 13 per cent rise in its net profit at Rs.258 crore for 2004-05 as against Rs.229 crore in 2003-04. Loan sanctions aggregated Rs.15,853 crore as compared to Rs.9,266 crore in the previous year. The bank will be paying Rs.65.44 crore as dividend to the government. In the recent past, Exim Bank raised $250 million through euro-dollar bond issue and $50 million equivalent by way of euro-yen floating rate notes (FRN) issue. Outstadning foreign currency resources were in the order of $1.4 billion. In the current financial year, the bank plans to raise Rs.3,000 crore through various financial instruments, including bonds and term deposits in the domestic market and foreign currency resources aggregating $800 million.

o       In accordance with the finance ministry’s announcement in the Union Budget 2005-06 regarding access to ECB by qualified NGOs engaged in micro finance activities, the Reserve Bank of India (RBI) has issued a notification, allowing non-government organisations (NGOs), to raise funds through external commercial borrowings (ECBs) to the extent of $5 million during a financial year. The funds should be used for lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building. According to the eligibility criteria laid down by RBI, in addition to involvement in the micro finance activities, the NGOs should have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorised to deal in foreign exchange. Further, they would require a certificate of ‘due diligence’ on ‘fit and proper’ status of the board/committee of management of the borrowing entity from the designated authorised dealer (AD). RBI further said that ECB funds should be routed through normal banking channels from internationally recognised sources such as international banks, multilateral financial institutions and export credit agencies. Furthermore, overseas organisations and individuals complying with the laid-down safeguards may also lend to ECBs. However, the framework, drafted by the RBI to enable NGOs to access the automatic route of ECB window, addresses concerns regarding whether the borrower is genuine, whether ECB funds are utilized for genuine purpose, credentials of the overseas lender of ECB and systemic implications of such ECBs flows including the risks of foreign currency borrowings by such entities.

INSURANCE

o       RBI in its notification to banks dealing in foreign exchange has allowed foreign insurance companies to set up liaison offices in India subject to regulatory approval.

TELECOM

o       Bharti Tele-Ventures Ltd. (BTVL) has recorded 135 per cent increase in its annual net profit to Rs.1,439 crore from Rs.619 crore in 2003-04. The company would invest around Rs.4,000 crore in the current fiscal for strengthening its existing network and for expansion of its services in new towns and cities.

o       The Mahanagar Telephone Nigam Ltd. (MTNL) has posted a 5.27 per cent increase in its fourth quarter net profit to Rs.323 crore compared to Rs.307 crore in the corresponding quarter of the previous fiscal. However, for the financial year 2004-05, the company’s profit after tax (PAT) declined by 26 per cent to Rs.946 crore.

o       Cellular service provider, BPL Mobile will be investing Rs.625 crore as capex during the current fiscal year. This will spread across its four cellular circles of Mumbai, Maharashtra , Kerala and Tamil Nadu.

o       The country’s leading telecom operator, Bharat Sanchar Nigam Ltd. (BSNL) is contemplating to invest Rs.20,000 crore this fiscal mainly for rolling out broadband, internet, cellular and 3G services. Earlier, BSNL had announced that it would invest Rs.75,000 crore in its overall operations over the next three years. In the fiscal year 2004-05, BSNL invested Rs.9,000 crore. The investment for this year would mostly come from internal accruals along with a mix of either equity or debt. The company is targeting 30 lakh internet subscribers and 10 lakh broadband subscribers by the end of this year. The company is also looking at rolling out its pilot project on 3G (third generation technology) in the current fiscal. BSNL has a total of 19 lakh internet subscribers and 47,000 broadband subscribers. The company is floating a tender for 40 million lines (of which 3G will be a major component) and a tender for 5 million broadband lines (worth Rs.1,750 crore). The company’s revenue for the last fiscal year 2004-05 was over Rs.36,000 crore and net profit was over Rs.8,000 crore. However, BSNL will have to improve its customer service and technology to sustain its position in the telecom industry as private companies are becoming more customer-oriented.

FINANCIAL MARKET DEVELOPMENTS

•         Capital Markets

•            Primary Market

o       Following the approval of the Supreme Court for the IPO of Shopper’s Stop by staying an interim order of the Shillong Bench of Gauhati Court restraining the IPO, the issue opened on April 28 and closed on May 4. The offer has been oversubscribed by 17.89 times with bids received for 10.30 crore shares as against 57.55 lakh equity shares on offer in the price band of Rs 210 and Rs 250.

•            Secondary Market

o       After a gap of five weeks, the stock indices have closed in the positive territory; the BSE sensex registered a gain of 234.04 points to end the week at 6388.48 and NSE nifty gained 75 points to end at 1977.50. A variety of factors buoyed the market sentiments such as impressive quarterly results of some companies, FII purchases, approval of central government to lift 10 per cent cap on voting rights in private sector banks and lower international oil prices. The market, however, remained impervious of the rise in domestic inflation rate and firming up of US Fed rate by another 25 basis to 3 per cent.

o       There has been a rise in the daily average turnover of BSE this week as compared to the previous week from Rs 1,739.97 crore to Rs 1,800 crore, while the daily average turnover of NSE has fallen from Rs 4,325 crore to Rs 3,581 crore.    

o       Among the sectoral indices of BSE, barring BSE FMCG all the other indices have ended the week with positive returns; the highest gains were registered by BSE Tech (5.21 per cent) and BSE IT (5.20 per cent), followed by Bankex (4.75 per cent) and BSE PSU (4.45 per cent). The BSE sensex registered higher gains at 3.80 per cent than the BSE mid-cap and BSE small-cap indices gaining 2.28 per cent and 3.10 per cent, respectively.

o       Sebi has threatened to impose stiff penalties on companies failing to comply with corporate governance norms of appointing the requisite number of independent directors by December 31, 2005. This deadline has been

o       deferred twice in the past, but this time the Sebi is expecting to stick to this new deadline. 

o       During the week, FIIs have been net investors of Rs 35.60 crore with purchases of Rs 2,779.20 crore and sales of Rs 2,743.70 crore; they have been net sellers on three days out of five trading days. Even the mutual funds have been net buyers to the extent of Rs 401.83 crore, with purchases of Rs 1,103.76 crore and sales of Rs 701.93 crore; they have been net buyers on all the trading days of the week.

o       The asset under management (AUM) under the mutual funds has increased from Rs 149,521 crore in March 2005 to Rs 158,422 crore in April 2005. 

o       The IndoNext platform of BSE launched recently to create liquidity in the small and medium-sized stocks, has seen its lowest average daily turnover in April since its launch in January; it has fallen from Rs 114.46 crore in March 2005 to Rs 102.69 crore in April 2005.  

o       BSE has revised its penalty structure imposed on its members, based on history of their violations and profits accrued from violations. BSE has listed eight types of violations; they include fictitious trading, creating artificial volumes, price manipulation, manipulation of order books among others.     

•         Derivatives                                  

o       The trading in F&O segment of NSE continued to remain lacklustre with the daily average turnover ruling around Rs 8,000 crore during the week.

o       Nifty futures for May expiry continued to trade at discount to the NSE nifty, however, it has narrowed down indicating firm outlook for the market.

o       For the week under review, the FIIs have been net buyers on both the futures and options segment of NSE to the extent of Rs 1,005 crore and Rs 168 crore, respectively.

•         Government Securities Market

•           Primary Market

o       In the auction held on May 3 for 7.55 per cent 2010 and 7.50 per cent 2034 for notified amounts of Rs 6,000 crore and Rs 2,000 crore, respectively, the cut-off yields have been set at 6.99 per cent for the 5-year paper and 7.97 per cent for the 29-year stock.

o       The RBI has reset the rate of interest on floating rate bond 2016 at 5.66 per cent (base rate of 0.04 plus variable rate of 5.62 per cent, average rate of last three auctions of 364-day bills) for the period May 7, 2005 to May 6, 2006.  

o       The yields set at the auction held on May 4 of 91-day and 182-day treasury bills has been higher at 5.20 per cent and 5.33 per cent, respectively, as compared to the yields set at their previous auctions at 5.12 per cent and 5.29 per cent, respectively.

•           Secondary Market

o       During the week, the call rate ruled in a range of 4.91 per cent to 5.02 per cent while the repo rate ranged between 4.75 per cent to 4.86 per cent. However, the overnight CBLO rates ruled higher in a range of 4.71 per cent to 5.10 per cent.

o       Following the higher than expectated cut-off set at the central loan floatations, the market sentiments turned buoyant with the yields easing across the maturity spectrum. But, as the inflation rate rose to 5.91 per cent during the week ended April 23 from 5.64 per cent in the previous week, the yields firmed up. The weighted average YTM of 7.38 per cent 2015 rose from 7.14 per cent on April 29 to 7.25 per cent on May 6.  

o       Also, since June 2004 the US Fed rate has been hiked for the eighth consecutive time by 25 basis points to 3 per cent.

•         Foreign Exchange Market

o       During the week, the rupee-dollar exchange rate oscillated between appreciation and depreciation, however, the rate appreciated by the end of the week from Rs 43.65 on April 29 to Rs 43.44 on May 6. The rate has been influenced by factors like the expectations of Yuan revaluation following the Chinese finance minister statement that the yuan’s revaluation would take its own time and also due to the weakness of dollar against the euro and the yen despite the hike in US Fed rate as the expectations of higher inflation rate have been subdued. 

o       The six-month annualised forward premia for US dollars eased from 1.73 per cent on April 29 to 1.58 per cent on May 6 due to narrowing of interest rate differential.  

COMMODITY FUTURES

o       NCDEX has launched a composite agri-commodity index, which reflects on the performance of underlying segment. The base of the index is 1000 and base-year is 2001. The index is to be updated twice a day. The index consists of sub-group cereals, pulses, oilseeds, plantation crops, fiber crops, spices and other widely traded commodities including sugar, guar and guar seeds. The selection of the sub-sectors would be based on their relative size indicating the value of production and the net deliverable supply of the commodity and the reference period for the commodities would be 2001.

o       Despite the shortening of trading timing for all agricultural commodities from 10.am to 11 pm, to 10 am to 5 pm, the daily futures trading volumes have increased from April 25 to April 28 on two major commodity exchanges: NCDEX and MCX from Rs 1655 crore to Rs 2116 crore and from Rs 1661 crore to Rs 1882 crore, respectively. 

o       The Forward Markets Commission (FMC) has proposed that all intermediaries that trade on the futures exchanges should compulsorily register with it.

PUBLIC FINANCE

•        Finance Bill

o       The Finance Bill, which was cleared in the Lok Sabha, has retained the two controversial proposals put forth by the finance minister during Budget 2005-06- the fringe benefit tax and cash withdrawal tax. However, both the taxes have undergone some modifications.  

•        Fringe Benefit tax (FBT)

o       The changes in the fringe benefit tax are as follows:

o       The Fringe benefit tax rate has been retained at 30 per cent. According to the finance minister, the effective increase in the incidence of tax on the corporate sector, assuming that every company gives every benefit listed to all the employees, would be around 1-1.5 per cent. The share of expense on sales promotion, including publicity, which is to come under the fringe benefit tax, has been reduced from 50 per cent to 20 per cent. Some sectors have been extended tax benefits under the FBT regime. Software companies and pharmaceutical companies have been given some tax benefits, by reducing the taxable value on conveyance and boarding and lodging to 5 per cent as against 20 per cent for other sectors. Hotels have been allowed to calculate fringe benefit on hospitality on 5 per cent of the expense instead of 20 per cent for other sectors. Construction companies have to pay fringe benefit tax only on 5 per cent of their conveyance, tours and travel spending instead of 20 per cent for others. Companies engaged in carriage of goods and passengers by motorcars have to pay FBT on 5 per cent of the spending on repairs, maintenance, running (including fuel) and the depreciation thereon. Other changes seen in the FBT system includes, sales promotion expenses other than those advertisements in the print or electronic media or on buses and trains, press conferences, business convention, participation and fairs would be taxed. All payments to ad agencies would be exempted. Similarly, expenses on meeting statutory obligations or for mitigating occupational hazards would be out of the purview of the FBT.   

•           Cash Withdrawal Tax

o        The cash withdrawal tax has also undergone some changes. Withdrawals from savings account would be exempted from cash withdrawal tax. Individuals and Hindu Undivided Family withdrawing above Rs 25,000 in a day from a current account and corporates withdrawing over Rs 1 lakh a day would be required to pay a tax of 0.1 per cent. The tax would be levied on withdrawals from all banks instead of only scheduled commercial banks as proposed earlier. Withdrawals from the term deposits would also attract the cash withdrawal tax. Defending his decision regarding the cash withdrawal tax the finance minister has said that the implementation of this tax would lead to a transition to cheque economy from the current cash economy and would reduce the possibility of black money in the economy. Earlier on, the finance minister had suggested tax on withdrawal of cash on a single day of over Rs 10,000 or more from banks at the rate of 0.1 per cent.

•            Others tax changes

o        Income tax exemption for women has been raised to Rs 1.35 lakh from Rs 1.25 lakh and for senior citizens to Rs 1.85 lakh from Rs 1.5 lakh. The higher exemption limit would cause an expected loss of about Rs 400 crore for the ex-chequer.

o        The revised rates are as follows:

o       Excise duty on molasses has been cut from Rs 1,000 per tonne to Rs 750 per tonne.

o       All parts of computers, including laptops and central processing units, to be subjected to a 7 per cent import duty.

o       Optional excise duty on nylon tyres has been cut to 8 per cent.

•           Impact of the FBT

o       The Indian corporate sector is likely to face an additional tax burden of Rs 650 crore in 2005-06 on account of the fringe benefit tax. However, if the effective rate of incidence increases by 1-1.5 per cent as mentioned by the finance minister, then the additional tax burden would be around Rs 1,500 crore- Rs 2,200 crore. Under the FBT, all contribution made by the companies towards superannuation scheme will be taxed at 30 per cent. As a result of this, many companies are contemplating about doing away with the superannuation schemes and instead, handing over the money to the employees every month, in order to save on tax. If the contribution is given now to the employees as allowance, the money will not be taxed. However, with the implementation of the FBT, the money is taxed twice: first when the company pays a tax of 30 per cent at the time of making the contribution; and second, the employee will pay an income tax of 30 per cent on maturity. Companies are trying to devise ways to share the burden of the FBT between the employees and the employers.

•         CAG report

o       The Comptroller and Auditor General (CAG), in a report tabled in the parliament has criticised the finance ministry for non-recovery of direct tax demand worth over Rs 88,000 crore and foregoing Rs 39,704 crore in Customs duties for various export promotion schemes during 2003-04. It has also blamed the government for lapses like short levy and irregularities in assessment that led to a shortfall in revenue collection. Of the total tax demand of Rs 1,93,106 crore, about Rs 88,017 has remained uncollected. The percentage of recovery of tax demands declined to 19 per cent in 2003-04 from 22 per cent during 2002-03. The government also lost Rs 795.27 crore in duty due to failure to recover benefits of export incentives under the advance licensing schemes and EOU from defaulting exporters. Customs duty forgone due to adhoc exemptions’ increased to Rs 258 crore. Short or non-levy of excise duty totalled to Rs 1,897.94 crore in 2003-04. The CAG has further criticised the government for making ‘optimistic’ projection despite falling short of budget estimates year after year.

o       The CAG has termed the Rs 63 crore expenditure on the ‘ India shining’ media campaign as unauthorised. The expenditure was incurred on the campaign by diversion of funds. According to CAG, the economic affairs department drew money from the Consolidated fund of India , without presenting a demand before parliament.

•         VAT update

o       The Empowered committee is likely to put in place a new regulatory mechanism for a uniform floor rate (FLR) regime. The regime will make it mandatory for all the states to tax petroleum products like diesel at 20 per cent. Certain industries, like automobile component manufacturers in the non-VAT states are at a disadvantage vis-à-vis their counterparts in VAT compliant states. When manufactures from non-VAT states   transport their products to the VAT states, they are unable to claim refund of the four per cent inter state sales tax or CST. In contrast, manufacturers from states having implemented VAT get a full CST refund, thereby giving them a price advantage of 4 per cent over manufacturers from non-VAT states.

INFLATION

o       Inflation rate, based on wholesale price index, has maintained the rising trend and it has further risen to 5.9 per cent during the week ended April 23, 2005 from 5.6 per cent registered during the previous week. The annual inflation rate was at 4.3 per cent in the corresponding week last year.

o       The WPI has risen to 191.9 from the last weeks’ level of 191.2 (Base: 1993-94=100) during the week in review. The index of primary articles’ group has risen considerably to 188.6 from the previous week’s level of 187.1, mainly due to a rise in the prices of food articles. The index of fuel, power, light and lubricants group has gone up marginally to 293.2 from the previous week’s level of 292.7. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight has risen fractionally to 170.4 from the previous weeks’ level of 170, especially due to rise in the prices of basic metals, alloys and metal products.

o       The latest final index of WPI for the week ended February 26, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 188.9 and 5.06 per cent instead of the provisional levels of 188.7 and 4.95 per cent, respectively.

o       After a reasonable decline in the inflation rate in March 2005, it has consistently moved up during the last couple of weeks. Although the RBI has projected point-to-point inflation rate to be around 5 to 5.5 per cent during 2005-06, it had cautioned against international oil price pressures, which may in turn necessitate domestic oil PSUs to hike prices of petrol and diesel in coming weeks.

LABOUR

o       The Finance Ministry sources have said that even though there are four crore Employees Provident Fund (EPF) account holders, not every one will get to reap the higher benefits of 9.5 per cent rate during old age; but only those relatively well-off will be benefited. This is because, about 2.93 crore EPF members accounting for 84.6 per cent of the total EPF membership have balances less than Rs. 20,000 and own only 16.98 per cent of the total accounted corpus. While a high rate of interest is not of much benefit to a majority of account holders, it is advantageous to 15.4 members holding large balances and owning over 83 per cent of the total accounted corpus. Thus, by dropping a large number of members to take the real benefit of high interest rate, the scheme does not serve a large social purpose in terms of social security to a large number of members.  

EXTERNAL SECTOR

o       According to a survey by Federation of Indian Chambers of Commerce and Industry (Ficci), exports from India had grown much faster than the growth in production in 2004-05. The survey on ‘manufacturing competitiveness’ for the financial year 2004-05 revealed that India has been witnessing a phase of export-led growth. This reflects the new competitiveness of its manufacturing sector.

o       According to a statement by the government sources, the RBI has started maintaining a major portion of foreign exchange reserves in the euro, in addition to dollar.

o       Japan has rejected around 28 containers of shrimp worth Rs 20 crore, exported from India on the ground of traces of antibiotic residue. Two years back, European countries had rejected around five containers of shrimp on the same ground.  

o       Foreign Investment Promotion Board has approved 29 foreign direct investment proposals worth Rs 146.9 crore, in the areas of information technology, commerce, fertilisers and bio-technology.

o       The willingness of the government to allow 100 per cent FDI in the biotech sector has evoked mixed reaction in the industry. Firms who wanted to invite FDI for infusion of frontier technologies, have reacted positively. On the other, hand smaller firms have raised fear that a liberal FDI regime could lead to a hostile takeover.

o       The long pending bill on a comprehensive legislation for Special Economic Zone (SEZs) has been passed by the cabinet on May 4,2005. It has come as a relief to exporters, who have been waiting for the law to be in place for more than two years.

CREDIT RATINGS

o       Crisil has assigned AA/stable rating to Gammon India’s Rs. 25 crore non-convertible debentures issue; the rating reflects the company’s well-established position in the domestic construction industry.

o       Icra has assigned an A1 rating to Polycab Wire’s Rs. 50 crore short-term debt programme, taking into account the company’s strong market position as the largest producer in the domestic market for low tension and high tension electric cables. The rating also considers the favourable cost structure accruing from benefits of economies of scale and locational advantages in terms of sales tax benefits and lower power tariff.

o    In an another exercise, Icra has retained its MA- rating for Sakthi Finance Ltd’s (SFL) fixed deposit and non convertible debenture programmes, given the steady quality of assets and SFL’s ability to grow profitably in its target segment (truck financing)

o       Care has upgraded the rating assigned to JSW (Japan Steel Works’) Power’s Ltd. Rs. 100 crore secured NCD issue to A- (SO) from BBB+(SO). The upgrade mainly takes into consideration the guarantor Jindal Thermal Power’s (JTPCL) improved operational and financial position.

Theme of the week:

The Indian BPO Industry

The idea of outsourcing has its roots in the 'comparative advantage' theory propagated by David Ricardo in 1817. Ricardo's theory on international trade focused on comparative costs and looked at how a country could gain from trade when it had relatively lower costs (i.e. a comparative advantage). In the manufacturing sector, shifting of industrial location to colonies was a kind of outsourcing. During the Industrial Revolution, the western countries like the UK and Portugal initiated such outsourcing by shifting their manufacturing to countries providing cheap labour, like India .

Onshore outsourcing

More recently, in the beginning of the 1970s, companies started outsourcing their non-core activities (basically services) in order to achieve economies of scale and efficiency and enhance their earnings. Outsourcing of services began with the services moving out of the companies to third-party providers but within the boundaries of the country, which were termed as ‘onshore outsourcing’. In short, outsourcing in the services sector can be defined as an organization entering into a contract with another organization to operate and manage one or more of its business processes.

Particularly, in the USA , information technology (IT) based outsourcing has been a popular management tool for decades. IT-related outsourcing has evolved since 1960 and has diversified to various IT applications.

Evolution of IT-related outsourcing has occurred in following phases:

• 1970's – elements of IT operations

• 1980's – entire IT operations

• 1990's – alliances/tie-ups

• 2000's - IT-enabled services

Offshore outsourcing

The advent of the internet and its widespread use brought about new possibilities for businesses all over the world. Besides, the overall development of telecommunications during the 1990s and the expansion of network capacity brought down the cost and increased the ease of communication across continents. As a result, the real time communication emerged as the cheapest means of communication. In the US , computerisation started long ago, and by 1990s most of the information was in the digital format, making it easier to be transferred from place to place, from person to person. Most importantly, there has been a sharp increase in the availability of telecommunication bandwidth, accompanied by an over 50 per cent decline in the cost of data transmission during the last decade. This created a possibility of transfer of work offshore, thus, effectively utilizing the labour arbitrage.

Evolution of Business Process Outsourcing (BPO)

Over the years, the meaning of the term 'outsourcing' has undergone a sea change. In the initial stages, only basic non-core processes were outsourced. This trend started with the outsourcing of data-entry kind of processes and other voice-based services (call centre) for customer support. Technological developments, especially in IT and telecom sectors over the succeeding years, have facilitated offshore outsourcing possible and even economically desirable. In the next stage, companies started outsourcing their processes like collections and technical support services. Subsequently functions like claim processing and data processing were added to the list of processes that could be outsourced. In the final and current stage, corporations and companies are outsourcing functions like finance and accounting, human resource (HR) administration and complex banking and financial transactions. Over a period the list of processes that could be outsourced have increased, as a result of which BPO emerged as a major cost-cutting tool for multi national companies (MNCs) in the manufacturing and services sectors.

Definition

Business Process Outsourcing (BPO) is the delegation of one or more of IT-intensive business processes to an external provider that in turn owns, administers and manages the selected process based on defined and measurable performance criteria. In short, BPO is the act of giving a third-party the responsibility of running what would otherwise be an internal system or service. The terms Information Technology Enabled Services (ITES) and BPO are often used interchangeably. However, ITES involves outsourcing of business processes that can only be combined with Information Technology (IT). Such services are delivered through a telecommunication or data network or other electronic media. Therefore ITES is a subset of BPO.

The business processes of the company may be broadly classified as ITES and Non-ITES processes. These processes may be further sub-grouped into three major categories.

(i)   Core-processes

(ii)  Critical non-core processes and

(iii)  Non-critical non-core processes

Advantages of Outsourcing

Offshore outsourcing is the biggest advantage to corporates and companies the world over, as it is a unique tool for economising on their operational expenses. Companies started outsourcing their non-core activities (basically services) in order to enhance their earnings and shareholders value. The economic rationale from the firm’s point of view is quite compelling. Moving cumbersome non-core activities, which require substantial capital investment and other resources of the firm, to a third party could free up those resources for better deployment. For instance, the firm may use the freed capital to fund increased research activity in its core business. Companies around the world have realised that to remain ahead, they need to reduce costs, provide the best quality, use the latest high-tech skills, and most importantly, be reliable and innovative. Benefits derived from BPO can be summarized as follows:

1. Avoid capital expenditure

2. Avoid the cost of chasing technology

3. Operational cost control

4. Reduce overheads, free up resources

5. Save on manpower and training costs

6. Productivity Improvements

7. Access to expertise

8. Improved accountability

9. Improved HR

10. Spread risks

11. Increase customer satisfaction

12. Offload non-core functions

13. Improve speed and service

14. Provide value added services

15. Opportunity to focus on core business

16. Reduce the overall IT management burden while retaining control of strategic decision making.

Peter Drucker, the management thinker, brings in a fresh perspective to the gains of outsourcing. He propounds that outsourcing greatly increases the quality of workforce that is retained by the company. He elaborates his view by citing the example of a total quality control specialist, who would be busy just 6 weeks in a year if employed by a firm, but would be working for 48 weeks if the job were outsourced. Although, the main rationale for outsourcing is cost cutting, it brings in ‘better effectiveness’. In short, BPO enables the outsourcer to reduce costs and increase quality in non- core areas of business and utilize its expertise and competencies to the maximum.

Evolution of BPO in India

The Indian BPO industry has evolved significantly over the part few years. Despite its recent arrival in India , the BPO industry has grown phenomenally and has now become a major segment of the export-oriented IT software and services sector. It initially began as an activity confined to MNCs, but today it has developed into a broadbased business platform backed by leading Indian IT software and services organisations and other third- party service providers.

The ITES/BPO market expanded its base followed by the entry of Indian IT companies worldwide. The evolution growth of the BPO industry in India has been predominantly facilitated by the success of the Indian IT sector in servicing Fortune 500 clients. The BPO market of the present day is characterized by the existence of these IT giants who are able to leverage their broad skill-sets and global clientele to offer a wide spectrum of services. The spectrum of services offered by Indian companies has evolved substantially from its humble beginnings, like call centre, data entry and customer support. Today, Indian companies are offering a variety of outsourced services ranging from customer care, transcription, billing services and database marketing, to web sales/marketing, accounting, tax processing, transaction document management, telesales/telemarketing, insurance claims processing, HR hiring and biotech research.

Although the IT industry in India existed since the early 1980s, it was the early and mid 1990s that saw the emergence of outsourcing. The Indian BPO industry is currently in the fourth phase of growth.

First Phase: In the early 1990s multinational corporations (MNCs) established wholly-owned subsidiaries in India for customer and technical support services and tele-marketing services. Some of the earliest players in the Indian market were American Express (1993), British Airways (1996) and GE Capital. Medical transcription was one of the first outsourced services to India .

Second Phase: In mid-1990s, established software services companies and non-resident Indians (NRIs) ventured into the BPO business. The established customer care and transaction services continued to grow rapidly because of labor arbitrage and process efficiencies. Being fully satisfied with the quality and efficiency of the services rendered by the Indian BPOs, MNCs began outsourcing their complex transaction services like data-processing, accounting and data conversion processing to India . Tier-I cities, namely, Mumbai, Bangalore , Chennai, Delhi and Hyderabad were the preferred destinations for BPO companies. 

Third Phase: At the end of the 1990s, the BPO industry in India ventured into a number of diversified activities like insurance claim processing, risk management, analysis and tax consulting thus witnessing a rapid growth. Tier-II cities, namely, Jaipur, Pune, Indore, Mangalore, Mysore and Kolkata emerged as favorite destinations for BPO companies as they offer some cost benefits compared to Tier-I cities. In the third phase, Indian BPO industry witnessed mergers and acquisitions (M&As) activities within the industry.

Fourth Phase: In the current phase of evolution of the BPO industry in India , there is an increasing trend of overseas acquisitions. Indian companies are acquiring small to medium-size businesses in overseas locations; these acquisitions are probably in the nature of a market entry strategy. Moreover, Indian BPOs, apart from consolidating their presence in traditional verticals such as customer and technical support, data-processing and complex transaction services, are now diversifying into new verticals such as offering more critical services in the same domain and by expanding service portfolio by moving into sophisticated areas like accounting, insurance, data analytics, research, banking, financial analysis and risk management. In short, Indian BPOs now have begun offering more knowledge-based services. In addition, now the shift of Indian BPO industry is from cost to quality.

Services being offered by Indian BPOs

Currently Indian BPOs are offering a wide range of services, ranging from the traditional customer support, telemarketing to high-end knowledge-based services, which includes complex transactions and data analysis. (see Table 1)

Indian BPO market

Other than MNC-BPO units there are a host of Indian players operating in the BPO market. These include venture capital funded BPO entities, Indian specialists, Indian IT industry subsidiaries, Indian non-IT industry subsidiaries and few from Indian companies in the financial sector. An important group of Indian players in the BPO market includes subsidiaries of Indian IT majors. Such majors include companies like Infosys, TCS, Wipro and Satyam. While, some of these companies like Infosys and Satyam have established dedicated BPO subsidiaries, others like TCS have entered the BPO market through joint ventures. Wipro and HCL have entered the business through acquisitions. The segment of Indian non-IT industry subsidiaries includes entities established by large Indian business conglomerates. This segment is the latest in the Indian BPO market (for example, ICICI Onesource, Jindal Transworld and so on).

Performance of the Indian BPO industry

The ITES-BPO industry has witnessed phenomenal growth since 1999. The ITES-BPO exports of the Indian BPO market was $600 million in 1999-00, which surged to $1.5 billion in 2001-02. Furthermore, it increased by 42 per cent from $2.5 billion in 2002-03 to $3.6 billion in 2003-04. The ITES/BPO segment contributed 29 per cent of the total IT software and services export from India in 2003-04.

In 2000-01 there were around 70,000 people employed in the ITES/BPO business. In 2002-03 the total number of people employed increased to 1,71,100 (0.17 million) of which 65,000 (38.0 per cent) were employed in customer interaction services. Finance and payment services accounted for 20.5 per cent whereas HR and administration accounted for 15.8 per cent.

In the year 2001-02, around 20 per cent of the software professionals were engaged in ITES-BPO sector that increased to around 30 per cent in 2003-04.

BPO: The Top Rankers

WNS has emerged as the top BPO company in India , Wipro Spectramind is in the second position, followed by Daksh e-Services, Convergys and HCL 

Technologies according to a survey done by Nasscom. The ranking is on the basis of revenue generated by the BPO companies in 2003-04, as per US GAAP. In addition, the other parameters for the survey were employee size (Operation level executives), cost to company, overall satisfaction score, training, salary and compensation and appraisal system. A list of top fifteen BPO companies in India is given below.

 WNS Global Services of the WNS Group has become the first third party business process outsourcing (BPO) firm to have crossed the US $100 million mark. The firm has posted revenues of $103 million, for the financial year 2003-04. Established in 1996, the firm serves clients in travel and transportation, insurance, healthcare, shared services and knowledge services sectors. The company has its offshore delivery centres in Mumbai, Pune, Nasik , Ipswich (UK) and Colombo , as well have sales and marketing offices in London and New York .

Quality Standards and Performance Metrics

Outsourcing to India offers significant improvements in quality and productivity for overseas companies on crucial parameters such as number of correct transactions, number of total transactions, total satisfaction factor, number of transactions per hour and average speed of answer. Surveys by Nasscom have also revealed that Indian companies are better focused on maintaining quality and performance standards. The ITES-BPO industries are most sensitive in incorporating internationally accepted standards of quality assurance.

 The Nasscom survey has also found that about 50 per cent of Indian companies have implemented varied levels of ISO (The International Organisation for Standardization, which conceives sets of quality management standards) such as ISO 9002, ISO 9001, ISO 9001:2000, ISO 9001:2001. The survey also says that 45 percent of Indian service providers have certifications like Six Sigma (a disciplined, statistical quality control method that measures the number of defects compared to the opportunities to make defects) and CMMI (Capability Maturity Model Integration - which is a process improvement method that provides a set of best practices that address productivity, performance, costs and customer satisfaction.) Moreover, a lot of organizations are upgrading their quality standards from the ISE 9000 to the new ISO 9000:2000, and from the CMM framework to the new CMMI framework. At present, ninety percent of ITES-BPO companies have specialized quality departments that are responsible for ensuring accurate, reliable services to their customers. By attaining global quality standards and international performance certifications, 16 Indian BPO companies have been ranked as the best managed BPOs amongst the top 50 BPO vendors in the world.

 Mr. Kiran Karnik, president of Nasscom, who has been chosen by Forbes magazine as the ‘face of the year’ (in December 2003) said, ''Offshore outsourcing was triggered by the intention to cut costs, but now it's not just driven by cost factors''. Nasscom is now helping (US companies) to tap Indian talent that is scarce in the United States . The new mantra of offshore outsourcing to India is quality solutions. When processes are offshored to India , companies not only get the advantage of low cost but also experience improvement in productivity and quality.

Captive Centres

 At present, the MNC captive units constitute the largest segment of the Indian BPO industry (Table 4). American Express, which is operating in India since 1993, is the oldest MNC captive unit in the country. General Electric (GE) established its captive unit in 1998. GE is now the largest BPO employer in India , with its staff strength in excess of 12,000 employees.

Even as MNCs with existing Indian operations have set up BPO facilities in the country, there are others that have hitherto no Indian operations but have now established captive BPO facilities in India . For instance, America Online started its Indian operations in 2002 and is reported to have been employing around 2000 people at the end of July 2003. 

Captive BPO units in India have several advantages, like assured markets and easy access for diversifying to value added services. For instance, GE’s Indian operations have moved up the value chain and have now added employees for actuarial support, data modeling and portfolio risk management. A potential advantage is that with the scope of BPO services expanding, the captive BPO units in India may offer their services in the open market. As a result, captive BPO units can turn into profit centres from the cost centres that they are now.  

Incentives for BPOs

 Witnessing the success of India 's IT industry followed by the rapid growth of the BPO industry, the central government identified ITES/BPO as a key contributor to economic growth. In order to attract foreign direct investment (FDI) in this segment the government is establishing ' Software Technology Parks ' and 'Export Enterprise Zones'. Benefits like tax-holidays generally enjoyed by the software industry were also made available to the ITES/BPO sector. Furthermore, Nasscom is creating platforms for the dissemination of knowledge and research in the BPO industry through its survey and conferences. Nasscom also acts as an advisor, consultant and coordinating body for the ITES/BPO industry and liaisons between the central and state government committees and the BPO industry. These measures have led to a steady inflow of investments by large foreign companies such as Reuters, for establishing large captive ITES/BPO facilities across India . Moreover, the existing ITES/BPO operations of major multi-nationals are also being ramped up to cater to the ever-increasing demand for better and speedier service.

Mergers and Acquisitions (M&As)

 There is an increasing trend towards Indian BPOs acquiring small and medium size business in the domestic as well as overseas locations. In the mid nineties foreign companies were acquiring stake in Indian BPOs, while some MNCs tied up with Indian companies for setting BPO units. For instance, the UK-based insurer, Aviva Plc, become the first financial entity in the Indian BPO market to tie up with three BPO outfits – the Mumbai-based WNS Global Services, the Delhi-based EXL and the Bangalore-based 24X7.

 Since 2001, Indian BPO industry has been entering a new phase in the M&As market. To facilitate business expansion worldwide, Indian BPOs are moving organically to overcome the hurdle of customer acquisition, which is rather difficult to do from India . Several Indian BPOs are acquiring small to medium-size business in different countries, particularly, in the US . Acquisitions by Indian BPOs are probably in the nature of a market entry strategy. HCL, pioneered the process by a buying a BPO company in Northern Ireland four years ago. Essar has picked up a 40 per cent stake in the Aegis Communications group. In addition, Datamatics, Godrej and Intelenet have acquired BPO businesses overseas. In September 2004, ICICI OneSource has acquired a 51 per cent stake in US-based Pipal Research, a company focusing on high-end customized business research, analytics and information services. In addition, recently ICICI OneSource has acquired a New York based consumer debt collection agency Account Solutions Group.

 Hotspot cities for BPOs in India

 In the mid nineties, Tier-I cities namely, Bangalore , Mumbai, Chennai, Delhi and Hyderabad , were the favourite destinations of BPO companies.

But, during 2000-05, Tier-II cities emerged as the favorite destinations for the IT and ITES companies as they offer a cost benefit of over 30 per cent compared to Tier-I cities. Tier-II cities like Jaipur, Pune, Indore , Mangalore, Mysore and Kolkata had gained attention but now cities like Mohali-Chandigarh, Triruvananthapurum, Coimbatore and Kochi are the new cities to catch up. As per Nasscom report, the other tier-II cities – Ahmedabad, Aurangabad and Baroda , are also seen making it to the list of destinations for IT and ITES companies in a couple of years. Tier-II cities now account for 15 per cent of the total information technology (IT) and information technology enabled services (ITES) exports from India . They generated exports of $2.55 billion of the total exports of $17 billion estimated for fiscal year 2004-05. Further, exports from these cities are likely to go up to 30 per cent of India ’s total IT and ITES exports by 2007-08.

Backlash: A worrying phenomenon

 Thousands of jobs are moving to Indian BPO units since 1995. Especially US is losing the maximum number of jobs, as the US outsourcing constitutes around 60 per cent of the global BPO market. As indicated in Table 9, around 1-lakh jobs moved offshore in 2000. In the year 2004 more than 4 lakh jobs were migrated offshore.

For the US companies India is the one of the most preferred destination for offshore outsourcing. Consequently, there has been an uproar in the US against outsourcing of ITES-BPO related work, claiming that the country was loosing jobs, particularly to India . The debate over whether outsourcing leads to loss of job in the US continues unabated. The issue attracted public attention at a time when the US economy was passing through a prolonged recession, leading to slowdown in economic growth and increase in unemployment. There are critics in the US clamouring for a ban on outsourcing jobs to other countries. The resent backlash in the US against outsourcing BPO to India is a combination of politics and lack of awareness on the advantages of globalisation. The government IT contracts is a big market for Indian BPO companies in the US . Few state governments have banned their work being outsourced abroad (offshore outsourcing). As a result, TCS has lost a $15 million government contract in Indiana State .

 However, Information Technology Association of America (IITA) - counterpart of Nasscom in the US - has also stated that outsourcing will result in increased cost savings, higher demand for US exports and better growth in gross domestic product (GDP). These are the findings of a study report on ’The impact of offshore IT software and services outsourcing on the US Economy and the IT Industry,’ sponsored by ITAA. Global Insight, a research firm conducted the study. The study found that raising barriers to worldwide outsourcing would adversely impact US workers and US firms. If all global sourcing of software and ITES services have terminated completely, the impact would be to slow the US economy and actually reduce the number of new jobs available to American workers.

Critical Issues

 Presently Indian BPO industry is shifting both ways – a vertical movement (offering more critical services in the same domain) and a horizontal movement (expanding service portfolio by moving into sophisticated areas like analytics and complex transactions); these will continue to be so. Even as the Indian BPO industry is poised for growth, a major inhibiting factor is the high attrition rate in the Indian BPO companies. In addition to high attrition rate, Indian BPO companies have to overcome the possible challenges of the potential BPO backlash, and more importantly, competition from other countries.

As per Gartner, an international research firm, India will lose its current market share in the BPO business from 80 per cent to 55 per cent by 2007 owing to lack of clear strategy and competition from countries like China . Various countries like Ghana , Fiji , South Africa , Mauritius , Malaysia , Philippines , Australia , New Zealand and China have now understood BPO’s potential to create new jobs and have put together integrated strategies to develop BPO business. In addition, India might face competition from small, highly developed economies like Singapore , New Zealand and Ireland , which offer excellent infrastructure, education systems, and business-friendly low-risk environments that make them attractive offshoring locations. India BPOs may possibly lose business to some of these countries, as its long-term plan for improving infrastructure and increasing the supply of quality employees, leaves much to be desired. Additionally, poor infrastructure adds to the cost of doing business in India .

 Furthermore, in just four to five years of BPO business in India , there is already a huge staff attrition problem. Therefore, at present, high attrition rate is the major concerned issue in the Indian BPO industry. Indian BPO companies are offering hefty salaries and other benefits and privileges to its employees, like subsidized food and transportation, company leased accommodation, recreation and cafeteria facilities, performance-based incentives, flexi-time and employee referral scheme. Inspite of all these benefits, the attrition rate in BPO industry is vastly high. Some of the reasons attributable to high attrition rates are:

1)      lack of opportunity for growth

2)      no personal life (owing to working in night-shifts)

3)      desire for pursuing higher education and

4)      involves intense physical strains.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

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