Indian Salaries

The meteoric rise of India's currency, the rupee, might be good news for Indians who travel abroad, but it spells disaster for millions of entrepreneurs like Rajiv Prem, a clothing exporter in this dusty boomtown. Prem has had to close one of his three factories and lay off about 200 workers, more than a fifth of his work force. Most were tailors and seamstresses who made clothes mainly for U.S. retailers, including H&M, Kohl's and Anthropology.

This clearly illustrates what I've been saying for a long time. The rampant replacement of Indian labor for US labor is a temporary arbitrage. Currently, Indian labor is cheap relative to US labor. Like any arbitrage, this encourages buyers (companies) to short the expensive US labor (layoff employees) and buy the cheap Indian labor (offshore). Of course, economics 101 tells us what happens when you do this. US wages go down; Indian wages go up. And due to the overhead of setting up in a foreign country, the wages don't have to become equal (not even close) before it's no longer worth it for US firms to get their labor offshore.

One conclusion is that Cooper Anderson should have a Coke and a smile and ... . Another conclusion is that all the companies that built their business models on offshoring work to cheap Indian labor to compete on price are in for a rude awakening. They'd better find a new way to compete because the long-term consequences of the short-term decision to offshore are starting to come due. Hewitt Associates, which pioneered this model in the benefits outsourcing industry, had a loss of $175M last year. Offshoring doesn't seem to be a panacea for them.