India may soon lose the status of being the most preferred destination for business process outsourcing.

A Deloitte Research report indicates that India's biggest challenge in the short-term, ironically, is its own success. While on one hand wage inflation is retarding India's potential in terms of cost competitiveness, a rapid growth in off-shoring is creating a shortage of qualified labour.

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Faced with the rise in salary bills, Indian suppliers have started sub-contracting their routine processes to China to capitalise the prevailing lower wage rates there.

Salary hikes in India, which in 2003 were in double digits, far outpace the global average.

Increasing demand for offshoring is driving wages up, thereby reducing the potential cost savings.

Last year, according to Deloitte research, more than half of India's IT employees received at least a 10 per cent salary hike with the top 10 per cent of the workforce receiving an average rise of more than 40 per cent.

In contrast, most IT employees in the US received a salary rise of five per cent or less. Salaries for call centre staff have risen by 25 per cent over the past 12-18 months in India.

Though salaries in the US are still, on an average, nearly 10 times higher than those in India ($80,286 versus $8,593), the gap is sure to diminish over time. "India is by far the most popular offshoring location and is currently the default choice both in the communication sector and elsewhere. We expect this will change over time," the report said.

At the same time, the global research outfit has predicted that by 2008 the global communication industry alone will employ more than 275,000 people nearly representing five per cent of the industry's projected global workforces.

Staff turnover is a growing concern and local companies are finding it difficult to recruit qualified workers.

"One common approach for starting a new off-shoring company is poaching an incumbent's workforce by offering higher wages. Certain positions that required technology degree are now being offered to anyone who can speak English and use a computer," the report added.

Deloitte's four-tier offshoring supply countries list puts India as a distant leader in the first tier. The second-tier, which comprises 'challengers' with moderate offshoring capabilities, includes Canada, China, Czech Republic, Hungary, Ireland, Israel, Mexico, Northern Ireland, the Philippines, Poland, Russia, Spain and South Africa.

The third-tier, which comprises 'Up-and-comers' positioning for offshoring with limited experience, are Belarus, Brazil, Caribbean, Eqypt, Lativia, Mauritius, Singapore, New Zealand, Ukraine and Venezuela. The fourth-tier comprises 'neophytes' with countries such as Bangladesh, Cuba, Sri Lanka, Thailand, Korea, Malaysia and Vietnam.