The increasing cost of labour in India is forcing the country’s largest software services provider to hire 5,000 employees in Mexico.

Tata Consultancy Services (TCS), which opened a software development centre in Guadalajara, Mexico, last week, will outsource the first 500 jobs from India in this financial year. A further 4,500 jobs will follow over the next five years.

A talent supply crunch in the booming services sector in India, coupled with a sharply appreciating rupee against the dollar, is threatening to knock the country off its perch as the world’s leading outsourcing centre.

“We see costs rising in India and people becoming less available,” Gabriel Rozman, president of TCS in Latin America, Spain and Portugal, said. “That’s why we’re going to places like Latin America, which has professionals and reasonable costs.”

Mexican salaries are up to half those in the United States, where TCS employs about 12,000 people. In addition, more than half of the group’s $18 billion (£9.03 billion) revenues come from the US and having a centre in the same time zone means that its pro-grammers can service customers more quickly.

TCS is not the only software group to express concern at the rising cost of doing business in India. It and severakl of its rivals, including Wipro, Infosys and Satyam, have set up operations in China, where an excess supply of well-trained software engineers has kept salary inflation under control.

India’s IT companies are struggling to cope with wage inflation of about 15 per cent a year while the country’s universities – which are churning out more than two million software engineers a year – cannot keep up with the demand for new recruits.

The rupee has gained 9.2 per cent against the dollar this year, eroding the earnings of Indian companies that generate a large proportion of their sales in the US. The National Association of Software and Service Companies (Nasscom) the trade body for India’s $48 billion IT industry, has said that the rupee’s surge will blunt the country’s competitive edge.

A survey published this week by the Federation of Indian Chambers of Commerce and Industry found that export prices of Indian products in 11 sectors had become uncompetitive by an average of 10 to 12 per cent relative to competing countries because of the hardening rupee. Metal manufacturers have suffered profit margins falling from 12.6 per cent to just 1.6 per cent. Food processing exporters are losing market share to countries such as Brazil, Pakistan and China.

“If you would have asked me two years ago, I would have never said the rupee would strengthen this much,” Mr Rozman said. “Nobody was smart enough to predict it.”

Moving jobs

— Tata’s decision to outsource 5,000 jobs to Mexico highlights a growing trend for companies to scout beyond India for cheap and skilled labour

— India’s appeal as an outsourcing centre for the back-office functions of companies such as Barclays, British Gas and BT, is being eroded by the convenience of alternatives in Eastern Europe

— Smaller time zone differences, strong language skills and a sharper understanding of their clients needs, have added to the appeal of Romania, the Czech Republic and Hungary

— Infosys Technologies and Wipro, the Indian software giants, have both expanded their operations in the Czech Republic and Romania respectively, to meet this surge in demand

— Virgin Atlantic, Lloyd’s and Thomas Cook already outsource their IT functions to Eastern Europe

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