As outsourcing projects go it is rather fantastic: the Oscar-winning special effects for The Golden Compass, the Hollywood blockbuster that took $370 million (£187.7 million) at the box office last Christmas were put together in a thatched village hut in India.

Well, almost.

The huts in question are replicas — stylised office cubicles made to look like rural Indian dwellings. Situated in Mind Space, a vast, grey commercial complex on the outskirts of Bombay, they form the Indian headquarters of Rhythm & Hues (R&H), the leading Los Angeles-based special effects studio.

The Times visits on a national holiday, but several of R&H's 250 India-based staff are hunched over their computers, working overtime on the visual pyrotechnics that will feature on the next outings of the Spider Man, Mummy and Incredible Hulk film franchises. The labour is painstaking. Each employee will struggle to produce the equivalent of five seconds of screen time in a month.

The results are usually worth the wait. Babe, the talking pig who won an Academy Award and earned more than $250 million at the box office in 1995, was an R&H creation. Alvin and the Chipmunks, the recent surprise hit for which R&H created the eponymous rodents, has now grossed nearly $360 million — not bad for a film with a $60 million production budget.

For the past six years, part of the work on such projects has been completed in these Bombay offices, the design of which Prashant Babu Buyyala, the facility's managing director, seems especially proud. "We wanted something creative yet functional," he says of the faux village look. "Importantly, we didn't want to spend a lot of money."

The same maxims, it could be said, are directing Hollywood's passage to India.

Post-production movie work — everything from complex digital effects (such as the talking armoured polar bears that appeared in The Golden Compass, one of which sported a fur coat with seven million individually rendered hairs) to basic colour grading (making sure shades stay consistent throughout a film) — is steadily migrating from traditional centres such as LA to low-cost locations on the sub-continent.

Prime Focus, another post-production house, has grown its Indian visual effects group to 165 people, from 40, in the past year. Pixion Studios, a rival, is aiming to increase its workforce in India fourfold, to 1,000 people, by 2009.

Nasscom, the Indian IT industry lobby group, estimates that the global animation market will be worth about $80 billion by 2010, and is targeting it as a prime source of future outsourcing revenues as more film work is shifted to India from the US and Europe.

With emotions already running high over the loss of US jobs amid an economic downturn, Mr Buyyala is adamant that Rhythm & Hues is not running a cost-cutting operation in India. The Bombay office handles work as complex as that done in the US, he says. Moreover, despite India's size, a lack of art schools has translated into a relative dearth of talent. "I keep on having to tell people: 'this country just isn't that cheap any more'," he adds.

But it is hard to believe cost has no bearing. Starting salaries in R&H's Bombay offices are as low as 40,000 rupees (£410) a month. Pay packets rise quickly and the highest earners in Bombay pull in similar sums to their US-based counterparts, Mr Buyyala says, but still the early discounts offered by young Indian animators are upsetting their American peers.

"My students will now have even a lesser chance of working in the industry," one animation teacher in the United States recently wrote on an industry website. "I understand why Rhythm & Hues must do what is necessary for the bottom line. It is just sad."

That comment may not be entirely correct — R&H has sharply expanded its US workforce while growing its Indian operations — but cost pressures are playing an ever greater role in Hollywood.

"Cost and speed" are paramount in the world of post production, says Simon Huhtala, of Prime Focus. "Scale and rationalization are the major driving forces."

In response, Mr Buyyala argues that there is a compelling reason to enter India beyond the opportunity to shave costs: the country's potential as a market. In particular R&H is waiting for the expected explosion in the use of special effects in Bollywood. The possibilities, of course, are massive: the world's biggest film industry is yet to fall for the charms of talking animals.

Explore Industry Sectors

• Banking & Finance

• Construction & Property

• Consumer Goods

• Engineering

• Health

• Industrials

• Leisure

• Media

• Natural Resources

• Retailing

• Support Services

• Technology

• Telecoms

• Transport

• Utilities

Times Recommends

• B&B shareholders forced into funding rescue
• John Lewis department store sales plunge 8.3%
• Families turn to credit to cover mortgage bills