Tata Consultancy Services (TCS), India's largest private sector employer, has slashed the bonus portion of its workers' paypackets by a fifth in an effort to reassert its flagging cost advantages in IT outsourcing.

TCS's 108,000 workers were told of the unprecedented blanket cut to their incentive scheme this week after India's largest software exporter missed internal third-quarter margin targets. The company said the rupee's strength – the currency has gained about 12 per cent against the dollar in the past year – had forced its hand.

The move to cap costs was also presented as part of a plan to migrate more employment – from call centre to high-end coding jobs – to the subcontinent from the West.

"We plan to take more and more work to India," Phiroz Vandrevala, head of corporate affairs for TCS, said. "That remains the biggest lever we have to ease costs."

The UK, where clients include the NHS, British Airways and Southern Water, is TCS's second-largest market after the US and a key target for further expansion. The company has made job offers that would add 22,000 to its 75,000-strong payroll in India, Mr Vandrevala added. TCS intends to boost its overall headcount by 35,000 this year.

Offshoring and the associated "labour arbitrage" remain prickly terms, however. Azim Premji, the chairman of Wipro, another Indian IT giant, was yesterday forced to defend charges of "stealing" Western jobs.

"What is of concern is how serious a shortage of technical talent is building up in the western world," he said.

So-called variable pay accounts for about 30 per cent of the average TCS worker's salary. The incentive scheme was introduced in 2000 after TCS opted to eschew Silicon Valley-style awards of stock options.

Payouts are calculated on a quarterly basis and weigh corporate and personal performance.

News of the TCS cuts jolted India's 700,000 IT employees, a group grown used to standards of life undreamt of by their parents and double-digit levels of wage price inflation.

However, recent studies have given warning that the lustre of the totem industry of India's "shining generation" is in danger of fading.

A report by Nasscom, the Indian IT lobby group, targeted a five-fold increase in industry revenues by 2012, to $50 billion, but highlighted several hurdles including rising wages, looming talent shortages and poor infrastructure, especially in India's smaller cities.

In a sector where wage hikes of up to 40 per cent for poached workers have become common, Mr Vandrevala said the TCS cuts were a first step to "introducing realistic expectations". Ma Foi Consultants, an IT recruitment specialist, said it had seen evidence of similarly "cautious approaches" among other companies.

Indian outsourcers are also battling base-line effects that mean they are failing to meet the explosive profits growth of previous years.

Average profits growth among the biggest players has roughly halved in the past year. TCS executives, surveying a sharp fall in the group's shares, are also deeply unhappy that the group is being viewed as a proxy for the health of the US economy.

"As of now, it's business as usual, though of course [a US slowdown] is a threat," Mr Vandrevala said.

Separately, TCS revealed yesterday that it has expanded its British-based insurance business after winning a new £100 million contract from Sun Life Financial.

Diligenta, a TCS subsidiary, will continue to run the Sun Life back-office operations in Basingstoke where SLF UK's head office is based. TCS said it expects no job cuts following the deal.

Diligenta was formed in 2006, when it took on the back-office IT functions of Pearl Group, the insurers, under a 12-year deal worth £486 million.

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