New Economist

Offshoring financial services: 'Build, optimize and release'

The BBC News reports on a Deloitte study which claims an offshore boost for the UK finance sector

The shifting of UK financial services jobs to developing countries such as India and China has saved the sector about £1.5bn a year, a study suggests.

Accountants Deloitte said the number of financial jobs going overseas over the past four years had increased 18-fold. More than 75% of major financial institutions have operations overseas, compared with fewer than 10% in 2001.

Chris Gentle, associated partner for financial services at Deloitte and author of the study, said: "Financial institutions need to re-engineer business processes, or risk simply transferring offshore the legacy inefficiencies of older, onshore processes."

The Global Financial Services Offshoring Report 2007 finds signs of strong growth and growing maturity:

The offshoring industry is growing up quickly. Most major financial institutions now operate a sizeable, low-cost offshore delivery function. The industry’s cumulative cost savings for the last four years have risen sharply, propelled by an 18-fold increase in offshore headcount.

Over 2006, average total headcount offshore doubled to six percent of total group staff. More than half of all financial institutions surveyed are now saving more than 40 percent for each business process offshored.

But there's more to come: as the industry grows, offshoring and sourcing decisions should not be "based purely on cost arbitrage grounds":

In future, the best offshoring strategies cannot be based solely on financial gains from labor arbitrage. Otherwise the legacy inefficiencies of older, onshore processes may simply be transferred offshore.

...Enter Phase II: The DTT GFSI group’s analysis has identified three phases to an offshoring journey for financial services institutions: Build, Optimize and Release. Organizations can realize the full value from their offshore operations only when all three phases are complete.

As financial institutions enter the second offshoring phase, their efforts are on streamlining migrated business processes. The impact of this application on best practices is becoming evident across all financial services. A select group of financial institutions – offshoring’s stars – has successfully deployed aggressive offshoring strategies, resulting in the transfer of more than five percent of group headcount offshore and achieving bottom line savings in excess of 40 percent. In some instances these savings have been equivalent to three percent of their total cost base. Other institutions, that have failed to apply the best practices have, in some instances, experienced a decline in their operational performance. This has put their prospects of realizing full future value from their offshoring operations at risk.

Deloitte's are clearly using this report to tout for business. But the trends they point to are no less real for that. Six per cent of staff may not sound that much, but if it has doubled in just four years it could easily double again.

India rising

If the Indian economy has been growig at such a robust pace, why has government debt risen so much? World Bank economists Marina Wes, Brian Pinto and Gaobo Pang answer the question in WB Policy Research Paper 4241: India rising - faster growth, lower indebtedness

Over the past 25 years, India's economy grew at an average real rate of close to 6 percent, with growth rates in recent years accelerating to 9 percent. Yet by 2005-06, the general government debt-to-GDP ratio was 34 percentage points higher than in the 1980s. The authors examine the links between public finances and growth in the post-1991 period. They argue that the main factor in the deterioration of government debt dynamics after the mid-1990s was a reform-induced loss in trade, customs, and financial repression taxes.

Over time, these very factors plus lower entry barriers have contributed to stronger microfoundations for growth by increasing competition and hardening budget constraints for firms and financial sector institutions. The authors suggest that the impressive growth acceleration of the past few years, which is now lowering government indebtedness, can be attributed to the lagged effects of these factors, which have taken time to attain a critical mass in view of India's gradual reforms.

Similarly, the worsening of public finances during the late 1990s can be attributed to the cumulative effects of tax losses, the negative growth effects of cuts in capital expenditure that were made to offset the tax losses, and a pullback in private investment (hence, growth and taxes), a situation which is now turning around. Insufficient capital expenditures have contributed to the infrastructure gap, which is seen as a constraint especially for rapid growth in manufacturing. The authors discuss ongoing reforms in revenue mobilization and fiscal adjustment at the state level, which if successfully implemented, will result in a better alignment of public finances with growth by generating further fiscal space for infrastructure and other development spending.

India: caste out

Latest story from India is about rent-seeking with a difference - a group seeking to have their social status lowered in order to benefit from government affirmative action quotas. Amelia Gentleman reports in today's International Herald Tribune on the the Gujjar community, who are Fighting their way to the bottom in India

NEW DELHI: A fight for the right to be downwardly mobile exploded this week in north India, as a powerful community of Indian shepherds asserted that the best way to rise up in modern society was to take a step down in the regimented class hierarchy.

Tension over the still-rigid caste classifications, which underpin the Indian social system, spilled over into riots across the state of Rajasthan, with at least 23 people killed during clashes with the police. By Friday evening, protests had spread to the outskirts of the capital, New Delhi.

This was not the usual show of anger at the ever-prevalent discrimination faced by members of lower-caste groups. Instead, it stemmed from controversy over a demand from the Gujjar community of farmers and shepherds to have their low caste status officially downgraded, relegating them to the bottom classification in the caste ladder.

If Gujjars were to be shunted into the Scheduled Caste category, a classification that includes Dalits (once known as untouchables) and tribal communities, they would qualify for greater privileges under India's affirmative action program, which was designed to lift up those groups that for centuries were viewed as "pollutants," ostracized by mainstream society and prevented from accumulating wealth.

Quotas of university places and lucrative government positions are reserved for members of the Scheduled Castes under the system that was created when India became independent 60 years ago. Although the Gujjar caste is also eligible for some privileges because of its position in the second-from-bottom grouping - known in bureaucratic lexicon as Other Backward Classes - its leaders point out that members would enjoy much better preferential treatment if it were demoted to the lowest rung.

Sachin Pilot, the Congress Party member of Parliament for the region where six people were killed by police gunfire Tuesday and a member of the Gujjar caste, said as many as 70,000 protesters were still blocking the road out of Jaipur.

"Most people don't realize that India's new economic prosperity is not shared by the vast majority," he said in a telephone interview. "The Gujjars feel they have been very deprived. Access to quotas would give the community a sense of hope."

India's coming retail battle

I have posted before about Wal-Mart's planned retail foray into India, and Reliance's ambitious expansion plans. But there is plenty of resistance to these attempts to modernise retailing. The FT's Amy Yee reports today on The retail battle:

Labour groups and farmers’ advocates in India have found a new ally to resist Wal-Mart’s imminent entry into the country. At a conference this week in New Delhi the head of a major US community activist group spoke alongside leaders of labour and trade groups about the threat posed by Wal-Mart and big local retailers.

“It is important to learn lessons that other countries in the world have learned,” Wade Rathke, head of US community group Acorn, warned participants at the dramatically titled ‘National Convention to Resist the Corporate Hijack of Retail’. “We need protection and regulation to prevent the kinds of abuses that are customary from businesses of this size.”

In a curious example of the globalisation of anti-globalisation, Acorn is helping Indian labour groups and farmers’ advocates strategise against Wal-Mart’s entry into the country, adding fuel to a brewing movement against the expansion of big retailers in India.

Acorn ...has spearheaded a campaign that has blocked Wal-Mart from opening stores in Florida. Mr Rathke cites several allegations that have made Wal-Mart a lightning rod in the US and other countries, including the dislocation of local businesses and low wages for employees.

...The audience consisted of several hundred small hawkers, traders and village delegates from across India who spoke little English (a Hindi translator conveyed Mr Rathke’s warnings). “A year ago hardly anyone here had heard of Wal-Mart. That’s changing now,” said Mr Rathke.

Speakers at the conference also included leaders of the Confederation of All India Traders, the National Hawkers Federation and the Centre for Indian Trade Unions among other groups who are busy honing their campaign against big retailers, which include not only Wal-Mart but also local players such as Reliance and Pantaloon, owner of stores such as Big Bazaar and Central.

This coalition for “retail democracy” is meeting with politicians in Delhi and planning a nationwide rally this summer. It contends that big retailers in India threaten the livelihoods of 40m people involved in small businesses.

But not everyone is opposed to large stores:

Sriperumbudur: India's Shenzhen?

If you build it, will the investors come? Bloomberg columnist Andy Mukherjee ask whether Sriperumbudur in India's Tamil Nadu state may be India's answer to Shenzhen. If so, it will need political will and administrative savvy, he writes:

There's much optimism in India about the transformation of a small hamlet of paddy fields and wetlands in the south of the country into a global electronics hub. Local media say India may have found its equivalent of China's Shenzhen, or at least a miniature version of it.

It's indeed possible that Sriperumbudur in India's Tamil Nadu state may start churning out as many mobile phones in three years as Shenzhen in southern China does now. That won't be a mean feat, considering Shenzhen makes one out of eight handsets sold anywhere in the world.

The question is whether India has the political will and the administrative savvy to take Sriperumbudur to its full potential. It took a leader of Deng Xiaoping's foresight, and the might of China's command-and-control economy, to create Shenzhen. Who will bat for Sriperumbudur, which sends one lawmaker to the 545-member parliament, in democratic India?

The globalisation of managerial pay

While many complain about globalisation in the West, in developing economies it is seeing rewards for managerial and professional staff take off. Andrew Taylor reports in the Financial Times that Pay to ‘race ahead’ in Asia and E. Europe

The pay gap between professional staff and managers employed in emerging Asian and eastern European economies and those working in more mature markets is narrowing rapidly after taking inflation into account, according to research published on Monday.

Forecasts of wage increase in more than 50 countries, published by global consultants Hay Group, reveals that real pay, after allowing for local cost of living, is predicted to race ahead in Asia and eastern Europe this year compared with the “developed old economies” of western Europe and the US.

Faster wage growth reflects “the wealth creation being generated by rapid economic acceleration in China, India, the former Eastern Bloc and the Baltic states,” says Hay.

...According to Hay’s research, the real pay of senior mangers in China is forecast to rise by “an impressive” 8.9 per cent this year. Earnings of professional staff after adjusting for inflation are predicted by 7.9 per cent administrative workers and by 7.8 per cent for professional staff.

Extremely high pay rises in India last year also look set to continue in 2007 with real earnings of senior managers forecast to rise by 6.9 per cent, it says.

Real pay in eastern Europe is also rising “at a rate far above that in the west,” The biggest rises this year are expected in Bulgaria where average real increase of 6 per cent are predicted for managers, professional staff and administrative workers.

Scott Marlowe, general manager for Hay in the Czech republic says: “While wages are growing from a much lower level for manual and administrative workers, pay levels for managers are closer to western standards.

...Salary increases in western Europe by comparison are forecast to be much “ much more moderate” this year. Real pay rises for managers, professional and administrative staff are expected to average less than 1.5 per cent in Germany, Italy, Spain and France and just 1.5 per cent in Britain.

US workers are also expected to fare worse “with predicted increases of just 1.4 percent across all three categories. ...“Much like their colleagues in Europe, American employees cannot look forward to stellar pay rises in 2007.”

A classic example of supply and demand at work. This will not only reduce the brain drain in those countries, it also increases the rewards for human capital - which can be no bad thing.

Booming India

For those wondering when the Indian economy might start to rival China's hectic pace, there have been some encouraging signs lately. Yesterday saw India’s sovereign credit rating upgraded. The FT's Jo Johnson reports from New Delhi:

India finally regained full investment-grade status on Tuesday after a hiatus of more than 15 years, as Standard & Poor’s followed the lead of Moody’s and Fitch in removing the speculative tag from its sovereign credit rating.

The upgrade is symbolic for reformers in the government. S&P had downgraded India’s sovereign rating to junk status in May 1991, during the balance of payments crisis that triggered the start of the reform era.

...Fitch raised India’s rating to investment grade in August 2006, while Moody did so for its foreign currency borrowings in January 2004. Gurchuran Das, an economic commentator, said: “This is long overdue. S&P have been overly cautious.”

The upgrade will open the country’s capital market to a wider investor base, but is unlikely to trigger a re-rating of asset values as both fixed-income and equity investors had priced in the fiscal progress that prompted the move.

India’s financial establishment hailed the change. P. Chidambaram, finance minister, said he was “happy” at the rating agency’s “acknowledgement of India’s improving macroeconomic stability and strength”.

But it's not all good news, as Johnson's piece points out:

India has been a conundrum for rating agencies, which have had to weigh up its weak public finances against its rapid growth, surging foreign exchange reserves, low external debt and easy access to a captive domestic debt market.

India’s public finances are much weaker than those of comparably rated sovereigns. It has a ratio of public debt to GDP – at 85 per cent – that is more than three times higher than China’s. Its interest bill consumes 30 per cent of revenues.

Today India's central bank raised its growth forecast to 9 per cent, raised the official repo rate for a fifth time in a year to curb inflation, and warned of further “signs of overheating”. Cherian Thomas from Bloomberg reports:

China vs. India - part 2

The Economist's latest Economics Focus compares China and India. The piece, Reading the tea leaves, concludes that "India's boom may be less impressive than it seems":

India has been swept by optimism that its economy can do as well as China's. A recent article in the Economic Times claimed that the growth in India's total factor productivity (TFP), the efficiency with which inputs of both labour and capital are used, had accelerated, whereas China's had slowed owing to wasteful investment. As a result, the article boasted, rising productivity—the main driver of long-run economic growth—is now running neck and neck in the two economies. Close inspection of the numbers, however, reveals that China remains well ahead.

Both India and China have large populations, low incomes and rapidly rising GDP, yet the composition of their growth has been quite different. A recent paper* by Barry Bosworth and Susan Collins, of the Brookings Institution in Washington, DC, explores the sources of expansion in both countries, breaking down total GDP growth into increases in inputs of labour and capital, and gains in TFP. In the period 1993-2004, China's GDP grew by an average of 9.7% a year, India's by 6.5%. Employment increased faster in India than in China, but this was more than offset by a much slower rise in output per worker: only 4.6% a year, compared with 8.5% in China. This reflected both stronger capital investment in China and much faster growth in TFP, which increased at an annual rate of 4% against India's 2.3% (see left-hand chart). Contrary to the popular claim that China's TFP growth has slowed, the authors find that it has accelerated from a pace of 3.6% in 1978-93.

These figures challenge the conventional wisdom that China's growth is more dependent than India's on investment than on efficiency gains. Over the past decade TFP has in fact accounted for a bigger slice of GDP growth in China than in India. Thanks to economic reforms, India's TFP growth has improved from its paltry 0.2% a year in the 1960s and 1970s before the economy was opened up, but it is still much slower than in China. Worryingly, the figures also show that India's TFP grew more slowly in 1999-2004 than in 1993-99. Since 2004, TFP growth has probably spurted (the figures are not yet available), but this may reflect a cyclical boom.

The relative performance of the two countries varies by sector (see right-hand chart). In agriculture, China has enjoyed much faster productivity growth. Indeed, India's TFP growth in farming has fallen since 1993, dragging down overall TFP growth because agriculture still employs a large share of the population. In 1978 it accounted for 71% of workers in both India and China. Now the respective figures are 57% and 47%. India therefore has huge scope to sustain rapid growth by shifting workers from agriculture to more productive jobs in industry and services.

According to conventional wisdom, Chinese workers have shifted largely from farming to factories, whereas India's growth has been driven largely by services, from call centres to writing software. In fact, jobs in services have expanded more strongly in China than in India. Since 1993 the rate of increase of China's service-sector jobs has been four times that in industrial jobs and has exceeded that in India. China's real output of services has not only grown almost as fast as its industrial output, but also faster than India's services.

Indeed, a larger proportion of workers is employed in services in China than in India. However, the share of services in GDP is much smaller in China (33%, against India's 50%), because Chinese industry is so much more productive. India's industrial workforce, including small firms in the informal sector, has been growing much faster than China's—by 3.6% a year since 1993, against only 1.2% in China—but its industrial output has lagged behind China's because its productivity has grown more slowly. This is due in part to rigid labour laws, which prevent the most efficient use of workers, and to a lack of modern infrastructure. Since 1993, China's industrial TFP has grown by an annual average of 6.2% compared with a measly 1.1% in India—barely any faster than before the economic reforms of the early 1990s.

* “Accounting for Growth: Comparing China and India”

Britain and India: Left for dust

As Chancellor Gordon Brown finishes his first trip to India, The Economist publishes a piece pointing out how that while Britain hopes to profit from its old ties with India, "thus far it has been disappointed".

And yet while India is keeping its part of the deal, growing at 8% a year, Britain has thus far been slow to profit. A report by the House of Commons select committee on trade and industry recently declared that British business had been left behind. Exports have grown slowly compared with those from other big economies (see chart): a baffling mixture of scrap metal and pearls has constituted almost two-thirds of Britain's sales to India recently, the select committee found.

British firms have also been unadventurous investors. Just 0.5% of their foreign direct investment has gone to India in the past few years, although India's share picked up in 2005.

Half of one per cent FDI? How pathetic.

But Britain's failure to invest in (or export to) India is hardly unknown. The most interesting part of the article, Chasing an elephant, discusses those "successful, dynamic immigrants from India who provide a good link to the country they left behind":

Indians began arriving in Britain in large numbers shortly after their country gained its independence in 1947. More than 60,000 came before 1955, about a fifth of whom were whites born in India. This first generation drove buses and worked in foundries and textile factories. Their children moved into white-collar jobs. Later arrivals opened corner shops or ran post offices. The flow peaked between 1965 and 1974, boosted by Idi Amin's decision to expel some 90,000 Gujarati Indians from Uganda, after an angel had told him to do so in a dream. Of the 1m people in England and Wales who described themselves as Asian British (Indian) in the 2001 census, most were born in Britain.

Hotel India: No vacancies

India's growing economy is creating shortages in many areas. The latest? Hotel rooms. New York Times reporter Anand Giridharadas writes that "demand for hotel rooms is soaring in India as its economy blossoms".

Foreigners are flooding in to cut deals, attend conferences or just discover the caves of Ajanta and the sands of Rajasthan. The rise of low-fare airlines is also bringing domestic air travel within reach of more Indians, who, until recently, had little chance of ever boarding a jet.

Yet for all those travelers, India offers only 110,000 hotel rooms. China has 10 times as many, and the United States 40 times as many. The New York metropolitan region alone has about as many rooms as all of India.

The shortage is pushing peak season rates for basic rooms into the stratosphere, by Indian standards, and attracting some of the world’s best-known names in hotels — Accor, Hilton, Wyndham, Pan Pacific — to invest heavily in India.

“There’s enormous potential here,” said Dennis Oldfield, the general manager for the Indian branch of Accor, a French group with 4,100 hotels worldwide. Accor has plans for up to 200 hotels in India within a decade.