India's offshoring sector, the world's largest and fastest growing, is dominated by IT services, which play a major role in the country's overall economic growth. In 2004–05, the Indian offshore IT and business-process-outsourcing industry will generate approximately $17.3 billion in revenues and employ an estimated 695,000 people. By 2007–08, that workforce will consist of about 1,450,000 to 1,550,000 people, and the industry will account for 7 percent of India's GDP.¹

Yet clouds are gathering on the offshore horizon. Research by the McKinsey Global Institute (MGI) shows that India's vast supply of graduates is smaller than it seems once their suitability for employment by multinational companies is considered.² (The full report, The Emerging Global Labor Market, is available free of charge online.) In the country's most popular offshoring locations, such as Bangalore, rising wages and high turnover among engineers—the professionals most in demand for IT services—provide evidence that local constraints on the supply of talent already exist. And just as these bottlenecks are developing, other low-wage countries, such as China, Hungary, and the Philippines, are gearing up to challenge India's lead.

But the end of India's offshoring bonanza isn't necessarily at hand. India has other attractive qualities...