India Outsourcing Growth At Risk From Labor BacklashIndia Outsourcing Growth At Risk From Labor Backlash

India's IT offshore-outsourcing business is projected to grow fivefold to $50 billion by 2008, according to a report published June 16 by Brean Murray Institutional Research. Still, the investment-analyst firm cautions that U.S. political opposition to offshore outsourcing is high among the uncertainties that could slow that growth.

Brean Murray says software and service exports from India for the country's fiscal year ending in March were up 26%, to $9.5 billion. The strongest growth was in business-process outsourcing—also called IT-enabled services—which jumped 59%, to $2.3 billion. The firm is bullish on the stocks of companies such as Infosys, Wipro, Satyam, Cognizant, Syntel, and Ebookers (for which Brean Murray is a financial adviser) and says India is the preferred destination for offshore outsourcing because of its strengths in cost savings, the English language, reference sites, scalability, and government policy.

U.S. companies' need to maintain a complex software infrastructure combined with the pressure to cut budgets will force them to make offshore outsourcing a strategic necessity, the report predicts, noting that India holds more than 70% of the U.S. outsourcing market. If the U.S. economy improves, it would only increase offshore outsourcing to India by freeing up discretionary spending on development projects, Brean Murray says.

Still, the firm listed investments in India-based companies as high risk because of the many uncertainties. A backlash against IT outsourcing because of high U.S. unemployment, for example, could drum up labor-union activity and slow decision-making in the private sector. But it won't stop it, the report says. "Economic compulsions that caused migration of manufacturing to Asia will ultimately prevail."