A big-ticket policy that sets aside 20% of government purchase of goods and services to micro and small enterprises (MSEs) is at an advanced stage of approval. When okayed, this will be the single-biggest policy initiative for the MSE sector in the post-liberalisation era.
Minister for micro, small and medium enterprises (MSMEs) Virbhadra Singh told FE that his ministry has circulated a cabinet note that proposes 20% reservation for MSEs in public procurement. Within the 20% quota for MSEs, the minister said, 20% would be reserved for enterprises owned by the scheduled castes and tribes. This sub-quota would amount to 4% of all procurement made by central and state ministries, departments, government agencies, public sector undertakings, state enterprises and local bodies.
India?s central and state government purchases are officially estimated at over $80 billion per annum, while independent estimates put the total public procurement bill at a quarter of its GDP. But it will be difficult to quantify the slice that MSEs would get from this, as procurement is a vast area that sweeps in various sectors, jurisdictions and activities.
The 20% sub-quota for SC/ST-owned units will be a major piece of the government?s inclusive growth action. Only 11%, or 2.28 million units, of the total MSME units belong to SC/STs while the two social classes make up 24.4% of the population (2001 census). Other Backward Castes own 40% of MSMEs. Together the socially backward classes own 51% of all MSME units in the country.
A 20% sub-quota in public procurement for 11% of units should act as a hydraulic lever for the SC/ST population to move up the social ladder through entrepreneurship. Since channelling agencies like the National Small Industries Corporation bid for big orders and distribute those among MSEs, the quota will make it easy for Dalits to start enterprises.
In all likelihood, the new public procurement policy will come into effect this financial year. Once a proposal reaches the Cabinet-note stage, it stands a fair chance of getting approved. Since public procurement of goods and services is not covered under any Parliament legislation, once the Cabinet clears the proposals, the new policy can be made effective through an executive order of the finance ministry, to be followed up by state finance departments.
Reservation, however, will not be a licence for enterprises to thrust shoddy products on the government. ?There won?t be any compromise on the quality aspect. Only products that meet certain specifications will be accepted,? the minister said. He said his ministry is ready to grant exemptions to procurers where a product doesn?t meet quality standards or is in short-supply.
Before the economic liberalisation in 1991, small industries thrived largely on reservations in manufacturing and procurement. Government orders then went to the lowest bidder. This gave little incentive to small industries to be efficient and competent. The image of that era still haunts the MSME sector, though it has since made a quantum leap in product quality and technology adoption.
Singh said preferential procurement for small businesses is a global practice and does not violate the spirit of liberalisation. All developed countries follow some form of preferential procurement for small businesses. It will also not face any WTO-related restrictions, as India is not a member of the Plurilateral Agreement on Government Procurement.