Dec. 20 (Bloomberg) -- McKinsey & Co. has come up with an assessment of India's potential in software and back-office services; for the country's policy makers, the consulting firm's report is both a pleasant dream and a rude wake-up call.

Between now and 2010, $110 billion of technology and call- center work will move to developing countries. India's share of such ``off-shored'' tasks may be more than half, or $60 billion, McKinsey has estimated.

The government in New Delhi, however, shouldn't take the favorable prognosis for granted. India, McKinsey's researchers say, ``confronts a potential shortage of skilled workers in the next decade or so.''

To maintain its global share of 65 percent in information technology and 46 percent in business-process outsourcing, the country will need 2.3 million professionals by 2010.

According to McKinsey's calculations, India may face a deficit of as many as 500,000 workers. As much as 70 percent of the shortage will crop up in call centers and other back-office businesses, where proficiency in English is the No. 1 prerequisite for landing a job.

People within the Indian outsourcing industry are aware of the problem: A number of executives cite high employee attrition and galloping wages as signs that the labor market for undergraduates in India is getting tighter.

It isn't obvious why that should be so.

In a country where millions of educated young people are unemployed, why do call centers feel compelled to give pay raises of 10 percent to 15 percent a year? Why don't they boot out the highly paid workers and grab the eager aspirants?

Education in Disarray

And why do they offer their employees free dance lessons on top of a $4,000 annual wage -- worth $36,000 when adjusted for purchasing power in the local currency -- when they can't pass on the increase in costs to the U.S. bank or the European insurance company that is paying for the call centers' services?

The answers may have a lot to do with India's education system. A labor shortage is bound to surface unless India's colleges can produce more employable graduates.

McKinsey makes just that point. Currently, only about ``10- 15 percent of general college graduates are suitable for employment'' in the outsourcing industry, it says.

There are two ways to ease the crunch. First, increase college enrollment. Second, improve the effectiveness of the three-year university programs so that more graduates are suitable for call-center jobs. The solutions are related.

Dropout Rate

About 8 million students in India begin their undergraduate studies each year. That means only about seven out of 100 youths aged 17 to 23 seek higher education. In most developed countries, the ratio is at least 50 percent.

Poverty, a big part of the reason for student drop outs, is by no means the only explanation. There's also a huge incentive problem.

``The net value addition at college in India has become so low, that it actually makes sense for an 18-year-old to say: `Instead of hanging out in the canteen I'd rather start working,''' Rashmi Bansal, who edits JAM, a Mumbai-based youth magazine, writes on her personal Web site.

The globally renowned Indian Institutes of Technology and Indian Institutes of Management are islands of excellence; they produce India's technological and managerial elite. The foot soldiers of India's knowledge economy are produced in lesser institutions, the so-called affiliated colleges.

That's where the bottlenecks are emerging.

Affiliated Colleges

Educators such as V. C. Kulandaiswamy, a former university vice-chancellor, have identified the affiliated-college system as the scourge of higher education in India.

A typical Indian university has scores of -- sometimes several hundred -- related colleges.

The university administers examinations and distributes degrees. Other than that, ``the entire higher education in India takes place only in the ill-equipped, understaffed, affiliated colleges'' that produce 89 percent of India's undergraduates, Kulandaiswamy wrote in May in India's Hindu newspaper.

Large, single-campus universities that have economies of scale must replace the affiliated colleges, most of which don't even have decent libraries.

Regardless of whether they want to become scientists or customer-service agents, all university students in India should be able to pick up the minimum English language skills required for call-center employment. That doesn't happen now.

No Quick Fix

There is no quick fix.

In fact, quick fixes, such as requiring affiliated colleges to offer a business-process outsourcing curriculum, wouldn't work. The colleges would make a hash of it just as they have made a hash of all liberal arts and vocational programs.

Even if India's policy makers woke up today to the massive education challenge that faces them, they wouldn't be able to ease the white-collar labor crunch by 2010.

The back-office industry will, therefore, have to keep finding ways to boost productivity and hope that efficiency gains will somehow be enough to pay for the wage binge.

Last Updated: December 19, 2005 14:42 EST