India is likely to capture 56 per cent share of offshore business process outsourcing business by 2006 with the demand for BPO services increasing at an annual growth rate of 50 per cent during 2004-06, according to a report by rating agency ICRA.

However, the prospects of a BPO backlash in the US may act as a constraining factor for the offshore BPO market and in such a scenario, India may be able to capture only 42 per cent share of the offshore market by 2006, the report said.

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The size of the Indian BPO market is likely to be around $9-12 billion by 2006 and will employ around 400,000 people, ICRA said in its Indian BPO industry report.

Indicating a consolidation trend within the industry, the report points out that even though there are a large number of BPO players in the Indian market at around 400, the percentage of third party vendors to total BPO players have declined from 57.4 per cent in FY 2001 to 42.2 per cent in FY 2003 while that of captive players have increased from 42.6 per cent to 57.8 per cent during the same period.

The relative decline in the share of third party vendors maybe explained by the mergers and acquisitions currently taking place within the industry, it said.

With a projection of 50 per cent annual growth for the BPO industry over 2004-06, the ICRA report said that established BPO players are likely to move up the value chain in quest for better price realisation.

For BPO service providers, moving up the value chain is critical, given the attrition rates in the industry, which are on an average higher in low value-added segments (in call centres) as compared to higher value-added segments like engineering, the report said.

As these Indian firms scale up rapidly, ICRA expects that some of the big players in the market may use the IPO route to raise funds for moving up the ladder.

It said a number of countries have emerged in the BPO segment like Australia, the Philippines, China and Ireland. However India is favourably placed as far as competitiveness is concerned.

Even as the Indian BPO industry is poised for growth, a major inhibiting factor may be the potential US backlash because of the fear of the potential job losses, the report adds.

Even though the bills tabled in the US refer to the state government business getting outsourced, the report states that the backlash may have a dampening impact on the BPO business in India.