In particular, India must watch out for the current trend of foreign exchange outflows exceeding inflows while foreign direct investment (FDI) into China accelerates. China attracted $309 billion in FDI in 2007 and has already received $200 billion this year. The World Bank’s recent report on the “ease of doing business” has ranked India 120th out of 178 countries. High costs are affecting Indian companies’ ability to compete against companies in China and other emerging economies such as Brazil, Mexico or even Malaysia and Indonesia. When the Anil Dhirubhai Ambani Group (ADAG) company Reliance Communications wanted to expand its network by 20,000 towers quickly, it turned to China for import and installation of the towers at a much lower price. Another ADAG company, Reliance Power — which has projects of 28,200 MW in the pipeline — is buying a majority of its capital equipment from China.

The government, though, doesn’t think India must remain a low-cost destination. “We don’t want to be a low-cost destination for everything and everyone forever,” says Jayant Dasgupta, joint secretary at the Ministry of Commerce & Industry. “Cost and wages are increasing. It’s the law of economics. So be it.”

Services, which accounts for 54 per cent of India’s GDP, is one frontier the country has to guard dearly. The sector has been hit by facilities and manpower expenses, which account for 65-70 per cent of costs. Several MNCs — including Nokia and Dell — have shut their captive business process outsourcing (BPO) units in India. “HR costs are growing at 15-20 per cent every year; globally, they grow at 2-5 per cent,” says Tanmay Kapoor, partner of business advisory at Ernst & Young (E&Y). In most areas of the services sector, CEOs in India are actually earning more than their counterparts in the US. The Rs 34-crore Cairn India’s CEO Rahul Dhir’s remuneration in 2007 was nearly Rs 7 crore. The median for a CEO’s salary in the US is $1.1 million (Rs 4.4 crore).

Sectors that run the maximum risk of migration are those where wage costs are disproportionately high. In the animation industry, wage costs are as high as 65 per cent, compared to 40-45 per cent in IT/ITeS. Minimum salaries for animators have gone up from Rs 5,000 per month a few years ago to Rs 16,000-20,000 per month. “We accounted for 17.5 per cent annual growth in wages; we have to re-evaluate our project costs,” says Suresh Kumar, chairman of Compact Discs India, south Asia’s largest animation company by revenues and order book.

A bigger challenge for companies is that demand-supply imbalance is raising employees’ salaries without adding to their skill sets. When London-based Axiom Estates was hiring its India staff, it analysed the wages versus skill sets of candidates in India, the UK and the US. It eventually hired the top level from the UK and the US and placed them in India. “We found that for that price, the skill level wasn’t that good in India,” explains Rajesh Goenka, chairman & CEO of Axiom Estates, which sells Indian real estate properties to buyers around the world.

Then there is the workforce inefficiency. “Labour in India is far more inefficient than labour in any developed country,” says Gaurav Taneja, partner at E&Y. A survey by Kelly Services, the world’s fourth largest recruitment company, last year said people efficiency in India (measured by financial performance against targets and deliveries) was barely 50-60 per cent against the global average of 80-90 per cent. “If you account for the cost of hiring, attrition, training and inefficiency, India will rank very high,” says Dhirendra Shantilal, Asia-pacific head of Kelly Services.

EXORBITANTLY HIGH: The rentals at Mumbai’s Bandra-Kurla complex are one of the highest in the world

Sale prices have also shot up from Rs 8,297 per sq ft to Rs 47,647 per sq. ft, according to Cushman & Wakefield. “Real estate costs are so much out of sync with global rates that it’s impossible to do business in India,” says Subbu Narayanswamy, partner at McKinsey India. This has applied the brakes on India’s ambitious retail rollout. “In purchasing power parity measure, revenues are one-third those in Manhattan,” says the executive director of a company who is seeing the rollout of a retail chain.