It didn't take long before India's white-hot outsourcing market peaked, at least that's what The New York Times is suggesting. The problem -- believe it or not -- is a labor shortage. India is awash in people, but most of those people cannot write code or speak English well enough to staff a call center telephone. Those who have these highly marketable skills are demanding and receiving higher pay ... thus defeating the primary advantage of outsourcing -- cheap labor. The problem is so severe that some Indian companies are reportedly considering outsourcing their outsourcing to China and other Asian countries.

Having just visited India in January, I suspect that this story is a bit premature, but it signals something important about the rapid development of India. Outsourcing was never intended to be a permanent stop for India. Instead, it is a way station on the road toward greater prosperity for a much larger segment of the population, people who will never write code or speak English. In my view, the importance of outsourcing to India is twofold: (1) it develops technical and managerial talent which will build a new generation of indigenous Indian firms; and (2) it facilitates the growth of the still slender consumer class, a development that must occur alongside the development of indigenous firms. India is well-positioned to move quickly toward prosperity, if only the Indian government will stand clear.

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