Indians have been getting the biggest pay hikes for the last five years – and as per various studies, the trend will continue this year as per ET. Couple this with the multitude of job openings in the Indian market – thanks to an exploding IT services and retail industry – and its clear that Indian workers are in the drivers seat.
Inflation and rising interest rates aside, I think the pay hikes have several other adverse effects:
1) I think sooner or later, Indian companies are likely to be hit by the Dell effect.
A few years ago, Dell seemed to be invincible. Powered by a super efficient supply chain model, they started offering previously unheard of rebates to the customers. The savings for the customer kept increasing every year and Dell tramped HP and other PC providers in terms of market share. Eventually, their aggressive pricing strategy started affecting their revenues and hurting them badly. Dell has become a victim of its own aggressive pricing strategy.
Similarly, I think the IT services industry in India is going to be hit adversely by the consistent pay hikes. The genesis of the entire offshoring industry lies in the cheap labor,low cost benefit rationale. As the pay hikes continue, either the operating margins are going to take a hit or more simply – offshoring will lose its cost benefit factor. Thanks to a booming job market, the pay hikes are not serving the purpose of employee retention either. When you couple the pay hikes with the strengthening Rupee and the 2007 budget (to start taxing the IT exports), the offshoring industry – which gets 60% of revenues from foreign exchange – seems to be heading for troubling times ahead.
2) The increasing pay hikes makes it difficult for small startups to compete. It is difficult for a startup to match the compensation packages provided by some of the IT services companies. As a result, attracting and retaining the right talent becomes a major challenge for small startups. This in turn impacts the entrepreneurial ecosystem.
3) Thanks to the fat pay hikes, more and more people are getting complacent with their cushy lives. Why would a person making several lacs of rupees give up his comfortable lifestyle and venture into the uncertainties of entrepreneurship ? This stifles innovation.
The offshoring industry has built a brand image for India – the low cost services provider who can churn out IT graduates similar to a manufacturing assembly. Innovation, research and entrepreneurship have taken a backseat. Yes, the IT services industry has brought the riches and set the economy booming. However in my opinion, innovation and entrepreneurship would yield higher dividends in the long term.
If these pay hikes come back to haunt and jeopardize the IT services industry, I for one, wouldnt be wondering Why ?
