The Bangalore effect

Roughly 40 foreign companies set up business in the country every month, but unless it addresses its

In the Electronics City business park on the outskirts of Bangalore, hundreds of construction workers are sweating on the scaffolding surrounding a half-built office block. They must work quickly: driven by the outsourcing boom, demand for office space is so high that buildings must now be completed in ten months, rather than the usual 18. Once finished, it will house another multinational neighbour for Intel, IBM, Dell, Motorola, Yahoo, AOL and Accenture.

Over the past five years, western firms have raced to set up IT, back-office and customer service centres in Bangalore, and the infrastructure of India's "outsourcing capital" is creaking under the pressure. The city suffers from frequent power outages, serious congestion, rising costs and an impending shortage of qualified graduates. The story is the same in New Delhi, Mumbai, Chennai and Hyderabad, the country's other outsourcing hubs: they cannot grow fast enough to accommodate the 40 foreign companies that, on average, set up business in India every month.

In an attempt to combat a potentially disastrous squeeze, the government is promoting "second-tier" cities across the country as an alternative to the established business centres. Pune, Kolkata, Chandigarh, Kochi and Jaipur offer outsourcing firms low costs, space for construction and an untapped pool of English-speaking graduates. IBM and Dell are among the multinationals leading the move to smaller cities, which are vying with each other to make room for them: Chandigarh alone has five million square feet of IT space under construction.

If the move to these "mini-Bangalores" works, India may be able to hold on to its four-fifths share of the global outsourcing market for a while. But meeting the demands of a sector that is growing by one-third every year is proving difficult country-wide. Though still low compared to those in the west, wages are rising by 20 per cent a year and competition for employees is fierce. In any year, software services companies lose up to a third of their staff to rivals offering higher salaries and better benefits. Foreign firms such as Hewlett-Packard, Intel and Sun Microsystems can afford to double or triple salaries offered by their Indian counterparts. "We have a problem with an internal brain drain," says Professor M L Munjal, head of mechanical sciences at the Indian Institute of Science, which trains the country's elite technical professionals. "This is the price we pay for globalisation."

The bubble is likely to burst unless India addresses its labour crisis: a recent study warns that it may lose almost half of its market share by 2007. In the cut-throat world of outsourcing, it is perpetually vulnerable to competitors. Dubai is promoting itself to higher-paid legal or medical workers who prefer the lavish Gulf lifestyle - and freedom from income and sales tax - to that of Bangalore or Mumbai. Meanwhile countries from Hun- gary and the Philippines to Malaysia and China are competing for lower-end work. As wages rise, India is even "double-outsourcing" business that doesn't depend on spoken languages - such as computer programming - to engineers in China. For the moment, however, the bulk of its business is safe from its main rival: though cheaper, China is hamstrung by having very few English-speaking graduates.

For the squabbled-over young workers powering the boom, the competition has undoubted benefits: generous salaries are creating a class of western-style consumers. But beyond wide-screen televisions and imported groceries, outsourcing is producing subtler cultural shifts. Young, urban women with well-paid back-office jobs are becoming prized financial assets to their families, opening up the possibility of a career - rather than the usual route of immediate marriage - for thousands of female graduates. However, independence for the few comes at a high price. Many fear that outsourcing is deepening India's already entrenched social divisions, and that the new urban elite may be left stranded when the multinationals' affections inevitably move to cheaper partners.

A day in the life of... the call-centre graduate

Parag Arora, 23, works at the call-centre of a British multinational in Mumbai. He has a BA in economics from Delhi University and earns around 3,000 rupees (£38) a week

4pm Parag works nights to coincide with office hours in Britain and the United States, and so wakes up in the afternoon. He shares an apartment with three other call-centre workers.

5pm Breakfast/lunch: paratha (a type of bread stuffed with vegetables), dhal (lentil soup), subgi (a cooked vegetable dish) and idli (a fluffy rice cracker dipped in savoury sauce).

5.30pm Parag relaxes with friends, plays computer games, does some shopping or goes to the cinema.

11pm The journey to work on the bus should take only 20 minutes, but the streets are often choked with traffic.

12 midnight The ten-hour shift begins with a short team meeting on targets before the workers don their headsets. Parag deals with credit card queries such as payment problems. Workers must aim for an average call-handling time of two and a half minutes - the system also monitors how often customers are put on hold (putting someone on hold implies you need to ask for help). More than 2,000 people are employed in the call-centre and around 700 work on any given night.

5am A half-hour break and a meal in the packed canteen: similar dishes to lunch (Chinese food is also popular). Workers are permitted another two 15-minute breaks during their shift.

10am Parag leaves work. The shifts are hard to adjust to, as they change every few weeks; invariably they involve working far into the morning. He works a five-day week but his days off vary.

11am Bed.

A day in the life of... the subsistence farmer

Lakhi Ram Meena lives in the village of Kulephi, Rajasthan. He earns between 250 and 300 rupees (£3-£4) a week

5.30am The whole family - Lakhi, his wife and their four children - gets up before dawn. Breakfast is chai (black tea with milk and spices) and a chapatti.

6am Lakhi and his family head out to the fields to finish harvesting the winter crop of maize, mustard and vegetables. He raises two crops each year: the monsoon crop, which is planted in May and harvested in November, and the winter crop, planted in November and harvested in March. All the work is done by hand.

11am The family returns from the fields to tend the animals - cattle, goats, sheep and chickens - which are kept next to the house. Each cow is worth between 8,000 and 10,000 rupees (£100-£130). Animals are the family's only valuable assets, and are frequently sold off when crops fail. Drought is common in Rajasthan, and Lakhi must expect to lose 75 per cent of his crop every other year.

12 noon Lunch: goat's milk, vegetables, pulses, ghee and chapattis.

12 noon - 5pm Household tasks: cleaning the family's mud-and-concrete home, preparing food and fetching water (most homes in this part of India have sporadic electricity supply but no running water). In summer, Lakhi buys water from tanker trucks that visit the drought-stricken villages.

6.30pm Supper: same dishes as lunch, with chicken or mutton for religious festivals.

7.30pm Lakhi goes to join the village men who gather to discuss the day and drink chai outside.

9pm Bed.