Comparison of India's Cost Advantage with Other Countries in Establishing GCCs
Future of work

Comparison of India's Cost Advantage with Other Countries in Establishing GCCs

By 
Aushini
|
November 28, 2024
clock icon
4
 minute read

Introduction:

Today, GCCs in India, constituting more than half of the GCCs worldwide, are focused on delivering niche capabilities and knowledge. A significant factor driving this trend is India's substantial cost advantage. 

Along with this paradigm shift, the cost of operating a GCC has steadily increased over the years, with GCCs having to balance innovation spending and the cost of operations. There is a significant increase in cost pressure due to rising salaries, the surge in global inflation, investment in state-of-the-art workspaces, and the adoption of high-end technology.

India offers a significant cost advantage compared to other leading GCC locations, making it an attractive destination for global organizations

Breaking Down the Cost Components:

To accurately assess cost advantages, it is crucial to dissect the various cost components involved in setting up and operating a GCC. Key areas of focus include:

Infrastructure:

  • India's growing role as an R&D hub has led to the establishment of labs and 'Do-it-Yourself Garages' by GCCs to foster innovation and foster collaborative workplaces. 
  • The trend is to provide advanced infrastructure, including digital workspaces, to keep the millennial workforce engaged. 
  • The 'One Global Experience' policy has improved infrastructure in India's GCCs. 
  • Additionally, GCCs have implemented green initiatives like solar panels, smart switches, motion sensors, and adaptive lighting systems to conserve electricity in the long run.

This has resulted in centers reporting as much as 30-50% infrastructure cost savings.GCCs operate at 150% capacity utilization in the hybrid working world, reducing facility costs per FTE.

  • Optimal seat utilization has helped in rationalizing the rental cost per FTE despite the rising rents in Grade A office spaces
  • Floor space utilization on account of rising headcount, and lower rents in SEZs (10% to 15% lower than market) have further contributed to a reduced per FTE cost
  • GCCs have endeavored to rationalize the AMC expenses by modifying the lease agreements.
  • Companies are procuring combined care packages to lower AMC expenses per FTE
  • Global procurement of licenses and applications has led 16% to a reduction in maintenance costs 

IT Assets have increased to ~ 16%

  • In the current age of internet and virtual collaboration, companies have shifted to higher network bandwidth
  • Companies are pivoting towards providing high-end services leading to increased requirements for advanced machines and cloud migration, and higher spending on hardware and software
  • Reduced refresh period for IT assets to minimize downtime incidents impacting employee productivity has increased hardware cost.

Human Capital

The people cost in GCCs has risen due to the demand for niche skill talent and the growing importance of 'pay for performance'. The average salary increase for niche talent was 1.8 times higher than other employees. 

  • GCCs are collaborating with recruitment agencies to fulfill niche resource requirements, increasing hiring costs. 
  • They are also investing in employee wellness programs, including digital wellness platforms and hot skill/retention bonuses, which increased discretionary costs from 8% in FY2017 to 12% in FY2018. 
  • Increased CTC due to an increase in retention bonuses, joining bonuses, deferred income plans, insurance coverage, allowances, etc.
  • GCCs have moved to virtual training platforms which have increased the L&D cost coverage, allowances, etc.
  • GCCs are focusing on upskilling their existing workforce rather than hiring highly qualified individuals, increasing training costs.

Travel

A different scenario for employees

  • Organizations are increasingly shifting to virtual collaboration eliminating the need to travel for official purposes.
  • Local transport costs have decreased significantly due to people working remotely, thereby reducing the need for commuting

A different scenario for global leaders

India's leadership in emerging markets and next-gen products has led to a rise in travel for global roles. 

  • Indian GCCs have increased product ownership and P&L responsibilities, leveraging international travel to understand global markets and customers. 
  • More Indian techies and leaders are attending global tech conferences and summits.
  • Global leaders are visiting India centers, rather than headquarters.

Comparison with Other Countries

China

Strategic advantages: 

Offers specific tax incentives based on the nature of activities undertaken such as:

  • Research and development-based
  • New/high technology-based
  • Investment based
  • Software enterprises

Reduction of withholding tax on dividends from ~10% to 2-8% based on an applicable tax treaty.

Strategic disadvantages: 

  • China's geopolitical tensions and intellectual property concerns pose risks.
  • Post-COVID-19 numbers show weak recovery. Growth targeted at nearly 5% with a focus on domestic growth and disruptions in the supply chain.
  • India’s median age is 28, lower than China's by 11 years
  • Investments in India grew 3.8x over 2020, faster than China’s (1.3x)
  • 50% lower wages than in China

Philippines

Strategic advantages: 

  • Offers income and investment-based incentives to GCCs; expected reforms to reduce the standard corporate tax rate from 30% to 25%
  • A strong English-speaking workforce facilitates seamless global communication and integration.
  • A strategic location provides a gateway to the ASEAN region's growing consumer market.
  • Withholding tax on dividends of 30% may be reduced to 10% or 15%, depending on tax treaties.

Strategic disadvantages: 

  • Limited infrastructure development can hinder supply chain efficiency and operational capabilities.
  • The country's susceptibility to natural disasters can disrupt operations and increase risk.

Eastern Europe (e.g., Poland, Romania)

Strategic advantages: 

  • Offers Incentives like Principal Hub (“PH”) income tax exemption, tax relief for new investments and nonrefundable grants for initial investments are available.
  • Access to the EU single market offers growth opportunities and regulatory alignment.
  • The withholding tax on dividends is reduced from ~19% to 15% based on the applicable tax treaty; in certain cases, it may even be reduced to 0%.

Strategic disadvantages: 

  • Smaller domestic markets compared to major economies like India may limit growth potential.
  • In Europe, productivity growth was fractionally negative and, as a result, unit labor costs rose in line with wages
  • Recession/BREXIT, aging population, and saturation of Poland will drive more European companies to set up India GCCs.

Southeast Asia (e.g., Vietnam, Malaysia)

Strategic advantages: 

  • Offers corporate tax relief for R&D investment, i.e., double deduction for qualifying R&D expenditure
  • Malaysia does not tax dividends in the hands of shareholders.
  • Emerging economies have been more proactive in attracting investments. For instance, Vietnam has signed FTAs to boost its textile exports.

Strategic disadvantages: 

  • While India has made some gains because of reshoring, countries such as Vietnam and Taiwan have been even greater beneficiaries. This is because these economies are already deeply integrated into China’s supply chains.
  • India’s relatively higher power cost compared with China and Vietnam places it at a disadvantage from a manufacturing standpoint.

Latin America (e.g., Mexico, Brazil)

Strategic advantages: 

  • Access to the US market through NAFTA/USMCA offers significant opportunities.
  • Rich in natural resources, providing potential for cost advantages and supply chain security.
  • Programs in the area of the green economy, like Brazil’s “Green Allowance” Programme.

Strategic disadvantages: 

  • The Brazilian labor market presents serious structural problems.
  • The Government of India, as well as the Reserve Bank of India, have a very supportive policy and regulatory framework (with emphasis on financial inclusion, and livelihood promotion) which has provided the steam for the growth in GCC. In Brazil, financial inclusion needs to advance more in terms of regulatory framework.
  • While Spanish and Portuguese dominate, indigenous languages and regional dialects can complicate communication and knowledge transfer.

India's Labor Cost Advantage

India's IT industry has witnessed substantial growth, leading to a rising tide of salaries. However, compared to global counterparts, the cost of hiring IT talent in India remains significantly lower.

  • Tier I Cities: While metropolitan areas like Bengaluru, Hyderabad, Pune, and Gurgaon offer a higher standard of living, salaries for IT professionals, though competitive, are generally lower than in Western countries.
  • Tier II and Tier III Cities: These cities present a compelling cost-benefit proposition. While the talent pool might be slightly smaller, salaries are considerably lower, making them attractive locations for cost-conscious organizations.

Skill-Based Variations: Salaries vary widely based on skill sets. While niche areas like AI, data science, and cybersecurity command premium salaries, overall compensation remains lower compared to global benchmarks

Comparison with Other GCC Hubs

To understand India's competitive edge, a comparative analysis with other popular GCC destinations is essential:

  • Philippines: Known for its English proficiency, the Philippines offers lower labor costs than many Western countries. However, India often presents a more extensive talent pool and a wider range of IT services.
  • China: While once a low-cost leader, China's labor costs have risen significantly. India continues to offer a more cost-effective option while maintaining a large pool of English-speaking talent.
  • Eastern Europe: Countries like Poland and Romania offer skilled labor at competitive rates. However, India's size and diversity of talent, coupled with lower overall costs, provide a distinct advantage.

Southeast Asia: Nations like Vietnam and the Philippines present lower labor costs. Yet, India's mature IT ecosystem and larger talent pool often tip the scales in its favor.

Impact of Currency Fluctuations on Labor Cost Competitiveness

Currency fluctuations can significantly impact a country's labor cost competitiveness. 

  • A depreciating Indian Rupee can enhance India's cost advantage, making it more attractive for foreign investors. 
  • Conversely, an appreciating Rupee can erode this advantage. 

Therefore, organizations setting up GCCs in India need to closely monitor currency trends. Organizations must incorporate sophisticated financial modeling to assess potential impacts and develop contingency plans to mitigate risks.

India's economic trajectory, underpinned by a robust domestic market, a burgeoning middle class, and a conducive business environment, paints a promising picture for the Indian Rupee (INR). 

Several macroeconomic indicators point to a strengthening INR in the medium to long term:

  • Economic Growth: India's consistent GDP growth rate outpacing global averages positions the country as a resilient economic powerhouse.
  • Foreign Direct Investment: The influx of foreign capital strengthens the INR, reflecting increased investor confidence in the Indian economy.
  • Export Performance: A diversified export basket and growing global demand for Indian products contribute to a favorable trade balance, supporting currency appreciation.
  • Inflation Management: The Reserve Bank of India's (RBI) commitment to price stability enhances INR's credibility and attracts foreign investors.
  • Digital Transformation: India's rapid digital adoption is driving economic growth and financial inclusion, creating a solid foundation for currency stability.

These factors collectively contribute to a positive outlook for the INR, making it an increasingly attractive currency for global GCC investors.

Conclusion

India’s substantial cost advantage, coupled with a growing pool of skilled talent and a supportive business environment, positions the country as a compelling destination for global GCCs. While rising operational costs pose challenges, India’s lower labor costs, particularly in tier-II and tier-III cities, and the potential for currency appreciation continue to bolster its competitiveness. Comparative analysis with other GCC hubs underscores India’s strengths in terms of talent availability, cost-efficiency, and a conducive ecosystem.

Related Posts

Future of work
Future of work
Future of work