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I was listening to a Bloomberg News podcast this weekend, and the topic of discussion was outsourcing. Prof. Jagdish Bhagwati was one of the guests. The discussion was on familiar lines, centering largely around the politics and the economics of outsourcing.

What set me thinking was an rather interesting point raised by Prof. Bhagwati. He alluded to the fact that the system of higher education in India was superior to that in China, and that this is one attribute in which China cannot surpass India in a generation. He said something like, “It is not like putting up a factory; an education system is developed over many decades.” My own experiences made me resonate with that point.

Maybe I am being very biased here; but the first thing that comes to mind when I think about outsourcing to China is cheap labor. Huge factories employing thousands of people who learn a skill, do as instructed and ask few questions, if any. In fact, I cannot think of China without the name Wal-Mart flashing across my mind.

India evokes a different set of associations. Probably because I owe my daily bread / rice to it, software comes to mind. A highly skilled labor force that produces high quality work. While in Indian terms, the cost of employing such a labor force is high, favorable exchange rates ensure a win-win-win for all parties involved (the outsourcer, the vendor and the employee).

The above comparison is definitely skewed. It seems to imply that there are 1 billion Indians who are kick-ass programmers, while there are an equal number of laborers in China who toil everyday under inhuman conditions. That is not the intention of the comparison. However, most people would agree that, a comparison of the labor force in both countries that are involved in an outsourcing relationship would reveal that the average Indian is more a knowledge worker than the average Chinese.

That doesn’t convey much either. Knowledge workers in India tend to gather in the big cities. The top 20 urban agglomerations in India together hold about 130 million people. Even assuming that one in twenty people from these places works in an outsourced IT relationship, we are looking at around 6 million knowledge workers. I think that the actual numbers would be much lesser. Various sources on the Internet peg this number close to 2 million (directly) and another 3 million (indirectly).

So, as a percentage of the population, less than 1% (more like 0.5%) are knowledge workers. I didn’t look up or estimate the number of Chinese workers (semi-skilled, factory workers) as a percentage of the country’s population, but it would be much higher than India’s 0.5% as per the above estimate.

These numbers make very interesting reading, from a variety of perspectives. Firstly, social inequality. There are a large number of people in China who earn moderate wages as a result of outsourcing.  So, in theory, the inequality in not as pronounced as in India’s case where a small number of people earn much higher when compared against the average.

Secondly, India’s edge is in the services sector, while China’s is in manufacturing. The former can be replaced more easily than the latter. As other countries gain ground on India, the chances of jobs involving skilled labor moving away from her shores is much higher compared to the chances of a big manufacturing unit shutting down in China.

The only conclusions that I can draw from this half-baked analysis are these: India’s tremendous lead in offshored services pales in comparison against China’s lead in manufacturing. So, the question India is faced with is, do we compete against a tightly regulated China on her strengths, or do we use our knowledge leadership to diversify to an extent where we force China to constantly play catch-up?