LABOR SHORTAGES EMERGE IN SOUTH INDIA

UNCLAS SECTION 01 OF 02 CHENNAI 000317

SIPDIS

SIPDIS

STATE FOR EB AND SCA/INS
USDOC FOR ANESA/OSA/LDROKER/ASTERN

E.O. 12958: N/A
TAGS: ECON ELAB EIND EINV EFIN PGOV IN
SUBJECT: LABOR SHORTAGES EMERGE IN SOUTH INDIA

REF: CHENNAI 00289


1. SUMMARY: Five years of rapid economic growth in south India has
increased the demand for skilled labor. Businesses are aggressively
recruiting talent from elite schools, at the same time training up
recruits from lower ranked institutions in an effort to get them
ready to contribute. But the region is beginning to experience
labor shortages and wage inflation, threatening one of south India's
major competitive advantages driving its recent growth. END
SUMMARY.

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RAPID GROWTH LEADING TO LABOR SHORTAGES
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2. The rapid growth of south India's automotive, textile,
pharmaceutical, and information technology sectors has stretched the
region's strong human resource base (reftel). A survey by the
Confederation of Indian Industries showed 18% growth in revenues for
the automotive sector and 25% for information technology for the
period of October 2006 to March 2007. A University of Madras study
reported that growth in these sectors ranged from 15% to 65% per
year between 1997 and 2002. According to the University of Madras
study, strong growth has resulted in labor shortfalls ranging from
5% to 15% (depending on skill level). Contacts from across all
sectors report that skilled labor is becoming increasingly scarce.



3. Labor shortages have had impact on wages. The Deputy Registrar
of the Indian Institute of Technology (IIT) Madras told post that
starting salaries for its graduates had jumped by 30% between 2005
and 2006. He attributed the increase to recruitment of IIT
graduates by major multinational financial institutions such as
Goldman Sachs, Credit Suisse, and Lehman Brothers. He said that
more than 200 over the 1,200 graduates in the class of 2006 were
hired by such financial institutions.


4. Reversing the normal flow, labor shortages have forced some
Indian information technology (IT) companies to look to the United
States for talent. Tata Consultancy Services is in the process of
recruiting 1000 graduates from colleges across the United States.
Infosys Technologies has over 200 U.S. citizens in an orientation
program at its Mysore facility. This effect is not limited to the
big players in Indian IT: a senior vice president of MindTree, a
relatively small consulting firm, told post that it was now looking
to recruiting in the United States.

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SCRAMBLING FOR ELITE GRADUATES; TRAINING UP THE REST
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5. South India prides itself on producing a huge number of college
graduates; Tamil Nadu government officials often note that the state
produces more engineering graduates each year than the entire United
States. While graduates of south India's celebrated educational
institutions such as IIT and Anna University are much sought after,
business leaders report concerns over the quality of graduates from
lesser institutions. An official from India's Planning Commission
told reporters that only a fraction of India's 3 million graduates a
year are actually employable. The Regional Director of the Tamil
Nadu chapter of the well-respected National Association of Software
and Service Companies (NASSCOM) told post that in south India only
12% of graduates are ready for employment. An executive from
Hexaware Technologies, a software developer, agreed with NASSCOM's
bleak assessment. He blamed the poor quality of graduates on the
rapid growth of private colleges which admit students on the basis
of their financial background rather than academic performance.


7. With poor quality in the low ranks, graduates from elite
institutions are in high demand. In order to attract the best and
brightest university graduates, companies in south India seek to
establish strong brand identities on university campuses by
sponsoring research projects and summer internship programs, as well
as through aggressive on-campus recruitment activities. The
president of IBM India, Shankar Annasamy, told post that it allows
students from IIT Madras access to high end computers to test their
software in return for an opportunity to assess and recruit students
from the school. Shashun Chemicals, a pharmaceutical manufacturer,
has a summer placement program that provides opportunities to
post-graduates from a broad range of educational institutions.
Shashun's Managing Director told post that the program affords an
opportunity for the candidates and the company to assess each other.



8. Most companies cannot rely on graduates of elite institutions
alone to fill out their ranks. As such, they are forced to take on
graduates who require additional training before they can begin

CHENNAI 00000317 002 OF 002


work. In the business process outsourcing, information technology
and information technology services sectors, the requisite English
language skills are often lacking. Hexaware's representative told
post that engineering graduates often lack the English language
skills needed to communicate with the company's clients. Hexaware
spends an average $1000 and $1500, the equivalent of three months
salary, to improve recruits' communication skills.


9. Recruits in the manufacturing sector tend to be even less
finished. Textile sector recruits, for example, tend to be students
who did not complete their degrees. The South India Mills
Association has a rigorous program aimed at imparting technical
skills and a proper work ethic to these recruits. After the
training program, recruits go on to work as apprentices at local
mills before being brought on board as full time staff. In the
automobile sector, Hyundai India's managing director said that his
company had to invest in further training to bring recruits up to
company standards due to the poor quality of many graduates.


10. COMMENT: South India's high skill, low cost human resource base
has been a major reason for its economic growth, especially in
information technology and manufacturing (reftel),but the rapid
pace of expansion has resulted in labor shortages. These shortages
threaten continued growth by cutting into one of south India's
primary competitive advantages. Individual industries and business
chambers are working on solutions but such approaches are
necessarily limited in scope. Educational institutions and
governments need to address on a broader level the low rate of
employability of the vast majority Indian graduates. U.S.
universities, community colleges, and vocational training
institutions have a long history of success in this area. There is
scope for collaboration between Indian and U.S. institutions to help
solve potentially damaging labor shortages in south India while
providing opportunities to U.S. educational institutions to function
in India. END COMMENT.

HOPPER