Global Services- Lectures 19-20-21

Demographic Transition, Services

Trade & business Process Outsourcing
Prof. Tarun Das, IILM, New Delhi
Formerly, Economic Adviser, Ministry of Finance

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 Contents of this presentation

1. Importance of offshoring for India

2. Dimensions of offshoring
3. Demographic transition
4. Implications for offshoring
5. Policy Issues

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 1.1 New Growth Dynamics through
IT-ITES, Offshoring and BPO
1.Significant growth in R&D, IT-ITES and
offshoring activities leading to explosive growth
in knowledge-based industries.
2.Foreign affiliates established in automobiles,
food processing, electronics, IT, transport,
communications and financial services.
Outsourcing increased in IT, distribution, contact
centres, back office, R&D and manufacturing.
3. India emerged as a major player in IT-ITES and
outsourcing hub due to high quality, skilled
manpower, and low operations cost.
  
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 1.2 Significant Progress of India in
IT-enabled services and BPO
1. Indian IT-ITES-BPO exports recorded a
growth of 38% in 2005-06 on top of 45% in
2004-05 driven by increased off-shoring by
firms from US and Europe.
2. India emerged as the 18th largest service
exporter & increased its share in world service
exports from 0.6% in 1990 to 1.8% in 2004.
3. These exports were led by rapid rise of travel
business, professional, and software services.
4. Indian software exports increased from only
$0.7 billion in 1995 to $23.6 billion in 2005-06
and accounted for 39% of total services
exports. Globally, India ranks Second only to
Ireland in software and IT exports.      
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 2.1 Dimensions of offshoring
• Front office services-Customer services
• Back office operations- book keeping,
accounting, auditing
• IT/Software operations
• Finance and balance sheet recording
• Human resource development
• Knowledge services
These services in general have high share of
wage cost.

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 2.2 Sources of BPOs
• Countries like India, Brazil, China, Dominica,
Israel, Philippines, Rumania, Russian
Federation have witnessed a surge of
Business Process Outsourcing catering to the
needs of developed countries.
• FDI from developed countries in the BPO
sectors of these countries are also growing.
• India remains an important source because
of low operations cost, high quality of
products and services, skilled manpower.
• Favorable time zone difference also help
BPOs run round the clock operations and
better customer services.

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 2.3 Benefits of BPOs
• A study made by Helios Innovations (2004) indicate
that reduction of operating costs is the main factor
for outsourcing.
• Survey Results:
1. Reduce operating costs- 48%
2. Focus on core business- 32%
3. Increase speed to market-5%
4. Improve quality- 5%
5. Conserve capital- 5%
6. Foster innovation- 3%
7. Increase revenue- 2%
___Total- 100%

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 3.1 Unfolding Demographic Transition
1. At present, India is undergoing a favorable
demographic transition.
2. According to the population projections made
by the United Nations, rapidly falling fertility
rates in most developing countries have led
to a "youth bulge".
3. Another study by Jimenez and Murthi
(2006) of the IMF indicates that “In many
middle-income countries and transition
economies, the fertility transition is fairly
advanced and the number of young people is
actually declining (as in China and Thailand).
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 3.2 Unfolding Demographic Transition
4. In others, such as Brazil and Vietnam,
numbers are reaching to a peak or a
plateau.
5. In still others, which are less advanced in this
transition (as in India and the Philippines),
the number of young people will reach the
peak level in the next one to two decades.
6. In yet others (as in Niger and Sierra Leone),
the number of young is expected to grow
continuously into the foreseeable future.

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 3.3 Unfolding Demographic Transition
7. The study further indicates that even many
middle-income countries, where young
people are adequately educated, face
challenges to meet the demand for workers
with higher skills in the global economy with
expansion of investment, output and trade.
8. The share of working age in the total
population will rise in India till 2025, whereas
in much of Asia it will peak around 2010.
9. The UN puts the population’s median age at
around 24.3 years in India, compared to 32.6
in China and 35.1 in Korea. At present, more
than 50% of India’s population is under 25.

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 3.4 Demographic Dynamics
• Population of Europe, Japan and
Australia is already aged.
• Population of China, Hong Kong,
Russian Federation, Singapore is aging
very rapidly.
• Population of India, Bangladesh,
Indonesia, Pakistan, Malaysia is still
young and growing slowly.

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 3.5 Migration
• India, Bangladesh, Pakistan, Sri
Lanka, Thailand, Indonesia and Viet
Nam serve as a pool of migrant
workers to labour shortage countries.
• The number of migrant workers from
these countries to other countries in
Asia have increased from 1 million in
1990 to 5.5 million in 2004.

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 3.6 Share 60+ population in
total population
2000 2050
World 10.0 21
Asia-Pacific 8.8 23
China 10.1 30
India 7.6 21
Indonesia 7.6 22
Japan 23.2 42
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 3.7 Share of 65+ population in
world 65+ population
Region/ Country 2000 2050
China 20.9 22.8
Indonesia 2.4 3.5
India 12.0 16.0
Russian Federation 4.3 2.0
Japan 5.2 2.7
Rest of Asia Pacific 11.7 16.0
Rest of world 43.5 37.1
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 3.8 Share of 80+ population in
world 80+ population
Region/ Country 2000 2050
China 16.6 26.2
Indonesia 1.6 2.7
India 8.8 12.7
Russian Federation 4.2 2.0
Japan 6.9 4.4
Rest of Asia Pacific 12.4 11.6
Rest of world 49.5 40.4
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3.9 Rising share of female in aged
Figure VI
Share of male and female population aged 65+ to total Share of male and female population aged 80+ to total
populationin ESCAPcountries 1950-2050 population in ESCAPcountries 1950-2050
12 3.5

Female Female
10 3.0

Male 2.5
8

2.0
Percentageof total population

Percentageof total population

Male
6
1.5
4
1.0
2
0.5

0 0.0
1950 1975 2000 2025 2050 1950 1975 2000 2025 2050
Years Years

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 3.10 Ratio of Working Population
Figure VIII: Dynamics of working age population in selected economies
Population aged 15-59 for selected Asia-Pacific economies 1950-2050

70

65

India
60
Asia
Pacific
Percentage

55
China

50 Republic of Korea

Japan
45

40
1950 1975 2000 2025 2050
Years

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 3.11 Demographic Transition in
India
• The UN puts the median age of population at 24.3
years in India, compared to 32.6 in China and 35.1
in Korea. At present, more than 50% of India’s
population is under 25.
• Over next 15 years, rich world’s population will fall
slightly, while developing world will acquire 2 billion
extra people. Over that period, working population
(age group 15– 59) in USA will have a shortfall of
17 million, Japan 9 million, Europe 10 million
(counting UK = 2 mn, France = 3 mn, Germany =
3 mn and Italy = 2 mn), Russia 6 million and China
10 million. In 2020, India will face a surplus of 47
million, almost equal to the total world shortage.

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4.1 Demographic dividends” for still
young economies
• Increasing labour force could be an impetus to
higher growth in large developing countries such
as India and Indonesia, as higher work force will
enhance savings, leading to more investment and
output.
• There will be increasing opportunities to export
labour to rapidly ageing economies. It will
enhance remittances and service exports.
• There will be more opportunities and acceleration
in offshoring in services and manufacturing due to
availability of skilled work fore.

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 4.2 Impact on Health, Education,
Insurance and Housing
• More “Consumption dividend” than in the rapidly
ageing economies such as Japan.
• Higher return to capital in young economies
could attract FDI and other foreign capital.
• There will be increasing demand for health and
education services leading to growth of foreign
investment in these sectors.
• There will be need for efficient pension,
provident, insurance and housing funds
encouraging further liberalization of FDI policies
in these sectors.

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 4.3 Implications for
Migration Policy
• Immigration worker flows have already proven
important in Malaysia and Thailand. For
example, foreign workers account for 25 per
cent of Malaysia’s labour force.
• With the rapid ageing, economies such as
Japan, Republic of Korea and Singapore would
experience severe shortages in labour supply in
the coming decades.
• In most of the ageing economies labour
markets are not sufficiently flexible to absorb
migrant workers and to offer the requisite
training on a large scale.
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 4.4 Impact on Offshoring
• All these developments will lead to a pressure
on wage rise at a faster speed.
• If wages of skilled labour in both developing
and developed countries are equalized in
future, offshoring may become a victim of its
own success.
• Developed countries may also take
protectionist measures against migration and
trade in services.
• Many federal states in USA have tries to put
up legal barriers against awarding state
contracts to non-US companies.

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 5.1 Concluding Observations
• No longer capital, cheap labour and natural
resources are regarded as the main sources of
global competitive advantage. Knowledge and
information technology (IT) have emerged as
the principal drivers of growth and comparative
advantage. Higher education helps to achieve
this excellence in IT and other knowledge
based industries.
• According to a recent study by McKinsey and
NASSCOM (also by the Dept. of Commerce),
the total potential global offshoring market is
around US$ 300 billion, of which US$ 110
billion will be offshored by 2010.

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 5.2 Concluding Observations
• India can capture about 50% of this market
and create direct employment for 2.3 million
people and indirect employment for 6.5 million
people. However, high quality manpower
would be required for such jobs.
• Various professional and industry associations
hold the opinion that significant expansion in
higher education is required to meet the
growing demand for technical and
management personnel in future.

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 6.1 Policy Issues-1
• India has gained significantly from offshoring
and the WTO General Agreement on Trade in
Services (GATS).
• There is a need to have a fresh look at Mode-4
(movement of natural persons) under GATS.
• India's focus area in WTO negotiations on
GATS should be to provide effective market
access to its professionals and skilled labour
force in many sectors and to bring about a
symmetry in the movement of capital (Mode-2)
and movement of labour (Mode-4).
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 6.2 Policy Issues-2
• India has comparative advantages in health
care, software, construction and engineering,
technical education, legal and accountancy, and
it would be advisable to negotiate greater
market access for its professionals in these
sectors.
• The availability of market access alone would
not be fruitful if the qualifications to provide
these services from Indian Institutions and
Universities are not recognized abroad.
• At negotiations, it needs to be ensured that
standardization of these qualifications are sorted
out to protect our interest.
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 6.3 Policy Issues-3
• For effective market access to professionals,
India should negotiate for the following:
a) Economic Needs Test should be eliminated.
b) Social security contributions required for
temporary persons needs to be corrected.
c) Administration of visa regimes may be made
more transparent.
d) Specific sectoral commitments in line with
requirements of developing countries.

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 7.1 Review Questions
1. Discuss the impact of demographic change
on India’s services exports and
opportunities for Business Process
Outsourcing.
2. Indicate major demographic dividends India
is likely to have in the next one or two
decades. What would be their impact on
overall growth and development.
3. What would be the impact of demographic
transition in India on health, higher
education and migration, and contractual
savings such as pensions, insurance and
provident funds?

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 Thank you
-Have a Good Day

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