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Outsourcing and its Effects on the Indian Economy

Outsourcing to India seems to be an obviously beneficial choice for both the outsourcing country and India. Comparative advantage theories dictate that when a country such as India is able to make a product or service more efficiently than another country such as the U.S. through different inputs such as cheap yet high quality labor, then acquiring the goods from India will result in benefits for both the U.S. and India. In this case, India can provide IT services for U.S. companies more efficiently than if the U.S. companies tried to provide it themselves. Countries trade in order to gain from the differences in resources and technology and to take advantage of a countries comparative efficiency. The United States benefits through lower operational costs and the ability and freedom to concentrate on its own comparative advantages and expand into new businesses, while India increases the employment rates of its citizens and receives a positive investment in their economy which allows for substantial economic growth. Employees in the outsourcing sector receive wages that are better than the average wage in India. Although outsourcing is beneficial in many ways, there are some disadvantages to companies and countries that practice outsourcing, such as the U.S. and the U.K. "Various studies show that 20% to 35% of IT outsourcing contracts are not revived after they expire. Needless to say that most customers in these cases are not satisfied with the quality and/or price of the services." Exactly what the benefits and drawbacks are for both India and the United States in this relatively new partnership will be the discussion of this final research paper.

The outsourcing of IT and business process's to India from the United States began in the 1990's in response to the "dot.com" boom and the "Y2K" crisis. Since the high demand for programmers, coders, and testers was unmet in the U.S. labor pool, companies shifted their IT services abroad,