Outsourcing is a big part of the Indian economy. But as the global business landscape shifts and the outsourcing industry evolves, how much will it continue to contribute to India's rapid-fire growth? As wages increase, does outsourcing in India become a less attractive proposition?

Despite changes in both the U.S. and the global economy, outsourcing, which has been a driver of the Indian economy, will continue to fuel growth. That's the view of Pinakin Patel, client portfolio manager for Far East equities at J.P. Morgan Asset Management, a unit of JPMorgan Chase (NYSE:JPM). "I think outsourcing from a Western perspective is here to stay," Patel said in a recent interview. "The Indian economy will continue to be an important outlet for that."

Punita Kumar-Sinha, chief investment officer of The India Fund (NYSE:IFN) and the Asia Tigers Fund, and senior managing director of The Blackstone Group (NYSE:BX), says that although IT companies in India have seen an increased emphasis on hiring locally in the U.S., most have not felt a large degree of protectionism that could potentially hurt them.

"Outsourcing has been quite resilient, and IT stocks have done well this year, contrary to views that Indian outsourcing in IT is highly dependent on the U.S. economy," Kumar-Sinha said in a recent interview.

Anh Lu, portfolio manager for T. Rowe Price's New Asia Fund (PRASX), recently met with Indian IT juggernaut Infosys Technologies (NASDAQ:INFY). Lu said the company thinks the overall IT budget in the U.S. and Europe will not grow, and may even shrink a little next year. However, according to Lu, Infosys CEO Kris Gopalakrishnan says he thinks that his business -- which Lu says is representative of the top-tier businesses in India -- will see growth in the double digits. When corporations around the world are trying to cut costs, Gopalakrishnan says, he thinks offshoring remains their best option.

According to Lu, Gopalakrishnan says he thinks this crisis has actually increased the incentive for companies to outsource operations, making the outsourcing trend even stronger.

Outsourcing evolves
Outsourcing has been a hit because it lowers companies' labor costs. But will its popularity decline as wages rise? Not if outsourcing offers more than just pure cost arbitrage for a company like Infosys.

Lu notes that the wage increases in India are not a new problem. Labor has been tight in India since 2002 to 2003. "I think that [outsourcing companies] would still continue to see growth despite the global economy and wage increases ... these companies continue to manage because their margins are still stable despite that," Lu says. "Every year, they take on more value-added types of projects, where they're able to effectively charge a higher rate."

At some point, pure wage arbitrage will no longer make sense. Although Lu says she thinks we're still three to five years away from that, the smart companies are already positioning themselves for the future. Outsourcing firms are evolving their business models, moving from simple price discounting to more customized solutions. "While you could call it outsourcing, they're providing their clients with overall solutions rather than just purely body shopping," Kumar-Sinha says. These strategic actions are helping them insulate their businesses.

Reverse outsourcing
It's interesting to note that U.S. corporations that are competing with Indian IT companies are also now setting up offices in India; this is called reverse outsourcing. "We're starting to see the likes of IBM (NYSE:IBM) and Accenture (NYSE:ACN) beginning to build a presence in India, as companies realize they need operations in India to meet demands for Indian client space but also have the base of providing to other parts of Asia and the Middle East," JPMorgan's Patel says.

Many investors -- European and American alike -- view India as a base. Patel says it's important to understand that India is strategically placed to meet the demands of the Middle East as well as Asia. Bombay and Delhi, for instance, are only two hours from Dubai. He notes that English is commonly spoken in India, which -- along with the country's fundamental rule of law -- makes it an attractive place for foreign investors to set up shop.

Additionally, Patel says he is seeing more multinationals like Wal-Mart (NYSE:WMT) setting up shop in India because of the Indian consumer. "I think the potential of the Indian consumer is one of the biggest attractions," he says.