On Effective Use of Public Procurement – Public procurement for Make in India

Source: The post on Effective Use of Public Procurement has been created based on the article “Public procurement for Make in India” published in “Business Standard” on 6th December 2023.

UPSC Syllabus Topic: GS paper 3- Economy- Effects of liberalisation on the economy, changes in industrial policy and their effects on industrial growth.

News: The article discusses how India can use government buying power to boost local manufacturing in high-tech and labor-intensive industries. This involves selecting key products, creating new capacities, and offering incentives like lower financing costs and duty-free imports, to compete globally and achieve self-reliance.

What are the issues with India’s public procurement policy?

Limited Utilization of Procurement Power: Initially, India excluded government procurement from WTO agreements to maintain policy freedom. However, this tool remains underutilized in recent policies.

Shift to Competitive Procurement: Post-1990s reforms favored global competitive procurement, overlooking the potential of government procurement for national development.

Overreliance on PLI Scheme: The overemphasis on the Production-Linked Incentive (PLI) scheme, while successful in areas like smartphone manufacturing, limits broader application due to fiscal constraints.

For more information on PLI Scheme read here

What government initiatives are in place to encourage domestic manufacturing through procurement policy?

Public Procurement and National Law: India’s public procurement is not governed by the World Trade Organisation (WTO) as India hasn’t signed the Agreement on Government Procurement (GPA).

MSEs Procurement Policy, 2018: Central Ministries, Departments, and PSUs are required to procure 25% annually from the MSE sector. Within this, there’s a 4% sub-target for procurement from MSEs owned by SC/ST entrepreneurs.

Government e-Marketplace (GeM) Policy: Sellers must specify the “country of origin” on products listed on the GeM. This platform also features a provision for indicating the percentage of local content in products, supporting the ‘Make in India’ initiative.

How can public procurement be effectively used to boost domestic manufacturing?

Identify Import-Dependent Products: Select important products that India imports, which could potentially be manufactured domestically. If market forces alone are insufficient for initiating their production in India, then the implementation of policies such as the Production-Linked Incentive (PLI) scheme should be considered.

Use Procurement to Support New Capacities: To reduce investment risks in new manufacturing capacities, the government should invite bids for future supply contracts. These contracts should guarantee purchases for at least five years to ensure financial viability. Additionally, allowing second and third lowest bidders to match the lowest bid can foster competitive pricing and industry growth.

Lower Financing Costs and Offer Incentives: Ensure lower financing costs for projects which can have advanced technology and efficient production. This can be done by providing incentives like duty-free imports and reasonable infrastructure costs. Initially higher prices are acceptable but expected to decrease with competitive bidding. This strategy can spur industries like solar panel, green hydrogen, and shipbuilding in India, reducing dependence on financial aids like the PLI scheme.

Question for practice:

Discuss the challenges and strategies in using India’s public procurement to enhance domestic manufacturing.