India edgy about outsourcing newbies?

India's fears that other countries are undercutting its dominance of the global outsourcing market have pushed it into extending a tax break for software companies say consultants.

The finance minister for India, Palaniappan Chidambaram, decided to extend the tax holiday enjoyed by software companies in the country by one year to March 2010, although this decision must be ratified by parliament.

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Pierre Audoin Consultants (PAC) argues this is a reflection of nervousness about countries such as the Philippines and Vietnam, where tax exemptions are threatening to beat India on the cost competitiveness that allowed it to dominate the global outsourcing market.

It said the decision was taken in the face of hard lobbying by Indian outsourcing industry group Nasscom, which had warned that not extending the tax holiday would result in the loss of 400,000 jobs as outsourcers went elsewhere.

But the consultancy says India must be prepared to let go of the exemption and accept the short term growth shrinkage as the country's outsourcing market matures.

Nick Mayes, senior consultant at PAC, said in a statement: "Phasing out the tax breaks will not cause the Indian suppliers to up sticks and make wholesale moves elsewhere.

"Even if they can find cheaper labour or more generous tax incentives in other countries, they will struggle to find a similarly large supply of experienced technical and language skills."

He added: "The latest set of quarterly results from India's top services suppliers disappointed investors but they also showed that they are winning larger, more complex deals and are now genuine international players."

Mayes said that margins and growth rates, while reduced, will continue to far outstrip those of Western companies.

But Som Mittal, president of Nasscom, argues the extension is necessary to buy the country's outsourcers time to ensure their services remain competitive.

He said: "This is particularly beneficial for BPO [business process outsourcing] companies and the small and medium segment, who have been greatly impacted by the rupee appreciation, inflation and signs of slowdown of US economy.

"A year's extension [will be] useful as it will give us time to come up with other workable and acceptable options for the future."

He added it would help stimulate new development centres and associated infrastructure in India's less developed cities.