Foreign Investment in India’s Rising BPO Sector

February 11, 2011 Posted by India Briefing Reading Time: 4 minutes

Op-Ed Commentary: Ankit Shrivastava, Dezan Shira & Associates

Feb. 11 – India developed as a target destination for outsourcing in the information technology (IT) services in the 1990’s, but India’s information technology-enabled services (ITES) and business process outsourcing (BPO) industry has grown rapidly in comparison to IT in the last decade.

The Indian BPO division has been increasing at more than 35 percent over the past three years, particularly in the hotspots of Gurgaon (Delhi/NCR region), Bangalore and Chennai. According to the Nasscom McKinsey Perspective 2020 study, the potential market for the ITES/BPO industry is US$630 billion. This sector presents an excellent opportunity for multinational companies to accelerate their growth.

Out of the key flourishing sectors in India – IT, ITES/BPO, pharmaceuticals, technology, real estate, retail industry and the chemical and food sector – ITES/BPO is flourishing partially because of a relatively new class of young Indian professionals who are well educated and literate in English. Overall, India’s advantages in this sector, the same as those well known and tested in IT outsourcing, include a low cost and abundant talent pool. While India faces competition in this sector from countries like the Philippines, Mexico, Malaysia, China, and Canada, it maintains an edge over these other countries due to greater proficiency in:

Techno-able professionals
Cost effectiveness
Superior competency
Business risk mitigation
24-hour service
Economy of scale

The ITES/BPO industry has only existed for a modest ten years. In spite of its fresh arrival on the Indian picture, the industry has grown-up and become a very significant part of the export-oriented IT services and services model. While it originally began as a facility targeted at multinational companies, today it has developed into a broad based business stage backed by leading Indian IT software and service organizations and third party service providers.

Part of the growth in the ITES/BPO industry is due to the National Telecom Policy (NTP), which was introduced in 1999, which deregulated the telecom industry and opened the industry to national and international competition. The governments of various states also provided help to companies to overcome recruitment, retention, and training challenges in order to attract reserves to their region.

Seeing the success of India’s IT industry, the central government recognized the ITES/BPO sector as a key provider to the economic growth and prioritized FDI attraction into this segment by establishing ‘Software Technology Parks’ and ‘Export Enterprise Zones’. Incentives previously enjoyed by the software industry, such as tax holidays, have also been made available to the ITES/BPO sector.

Additionally, the National Association of Software and Service Companies (NASSCOM), which acts as an “advisor, consultant and coordinating body” for the ITES/BPO industry and liaison between the industry and central and state government committees, has provided keen support of the ITES/BPO industry has led to the addition of call centers in the ‘Business Auxiliary Services’ segment, thereby ensuring exception from service tax under the Finance Bill. The national business development goal for 2020 includes constructing a US$225 billion ITES/BPO industry.

To encourage FDI, the Indian government permits full (100 percent) equity foreign direct investment (FDI) in ITES/BPO companies and allows ITES/BPO companies duty-free import of capital goods (under the Export Promotion of Capital Goods scheme). Such incentives in this sector have led to a stable investment inflow by large overseas companies such as Reuters to establish large captive ITES/BPO facilities across India.

The existing ITES/BPO operations of major multi-nationals are also being shaped up to provide to the ever increasing requirement for improved and speedier services. Approximately all of India’s biggest ITES/BPO giants have announced some form of growth and are fast tracking recruitment to plug in the extra vacancies.

According to NASSCOM, if India maintains its current global offshore IT/ITES market status, the IT/ITES/BPO exports from India will exceed US$330 billion by 2020 (nearly 14 per cent of the anticipated global expenditures in this sector). Presently the ITES sector exports, valued at US$47.3 billion, are moving away from dependence on the U.S. market and moving towards fresh and rising markets such as those in Australia and the Middle East.

India-based service providers are respected globally, while most Fortune 500 and Fortune 1000 companies have set up their own BPO units or have outsourced to Indian firms to gather the return of this all around business. The domestic BPO market (in verticals such as, banking, retail, insurance, media, telecom and government) provides an additional US$20 billion in revenues for the services sector as a whole.

According to current estimates, India is the primary ITES/BPO destination in the Asia-Pacific. The ITES/BPO tier, with a current base of 96,000 call centre seats, is expected to grow by 85 percent over the next 12 months to reach a capacity of 1,77,000 seats. Foreign investors would be wise to consider entering the Indian market to take advantage of the developments this industry is generating.

Ankit Shrivastava is a Marketing Executive (India and International Relations) with Dezan Shira & Associates Delhi office. The firm maintains five offices in India and can assist with incorporation, due diligence, legal and tax advisory work. Please india@dezshira.com or download the firm’s brochure here.

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