Tata Consultancy Services, Asia's biggest employer of software developers, will shift hiring to smaller cities as it struggles to cope with lowering profit margins, amidst peaking labor costs.

The company's cheif financial officer, S. Mahalingam, stated that TCS will be building campuses and adding workers to second-tier cities including Ahmedabad, Pune, Bhubaneswar, Nagpur, Indore and Cochin. The company plans to reduce costs by upgrading infrastructure and shifting more operations to smaller cities.

TCS spent $ 2.8 billion on salaries during the last financial year. During the last quarter, salaries rose 27 percent exceeding the 17 percent increase in profits. The low profit margin missed analysts' estimates by around 3 percent, causing the company's stocks to fall by as much as 7.7 percent on Tuesday. The company's operating costs have narrowed by 1 percent in the second quarter.

Rising compensation trends have been fueled by a continued state of inflation in the economy. India's inflation peaked over 9 percent for the tenth straight month in September. Wages are expected to rise steadily throughout the Asia-Pacific region according to an Aon-Hewitt report from March. In India, salaries are expected to rise by 12.9 percent in 2011, as compared to 11.7 percent last year.

Second-tier cities like Jaipur and Ahmedabad are 20 – 30 percent cheaper to operate than technology hotspots like Bangalore, according to a study by Dallas based – Everest Group.

TCS currently employes over 20,000 workers in 17 offices in Mumbai. The company plans to increase the worforce in Ahmedabad from 2000 to 12,000 employees and start a new campus in Pune which would add upto 17,000 new workers.