Pune seems to be gradually losing its cost advantage among software companies. Many think that the rentals in the city are on their way up and could be a big deterrent for further investment.

Sunil Patil, president (Pune region), UBICS, a software company of the UB group, believes that the rentals may spoil the show. “Rentals in Pune for software companies have gone up 300% in three years. We are being offered space at Rs 65 per sq ft, which at $1.50 is the rate in Manhattan,” he said.

He was just echoing the prevailing sentiment among small and medium sized IT product firms that India’s cost competitiveness is slowly getting eroded. The shift in viewpoint clearly underlines the need to graduate to value arbitrage from cost, something many large companies have already achieved.

A CEO of a venture capital-backed software engineering services company tried to put it in perspective: “Outsourcing is a function of costs, in which productivity is a big factor. Overheads in the form of real estate and utilities costs in India are now 25% higher. The economic benefits of working in India are huge, otherwise why would anyone outsource work here? In the past, cost differences used to hover at 40-50%. So, despite the 25% higher overheads, it still made sense to offshore work here.”

Interestingly, he hinted at more of in-sourcing happening, that is work offers being sent back to the US, something which usually surfaces when a major political event in the US is round the corner. But Ganesh Natarajan, chairman, Nasscom, is categorical that India has still not lost her cost advantage. In Tier II cities, it’s all the more visible, he said.