How Centre’s new procurement policy to boost Make in India could make India run afoul of multilateral trade framework

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June 02, 2017 5:58 AM

The ever-larger presence of the State in the Indian economy is driven home again by the recently approved public procurement policy for local goods for boosting ‘Make in India’.

new procurement policy, procurement policy, procurement policy impact, make in india, multilateral trade frameworkThe Indian state and its arms, namely government ministries, departments, public sector bodies and organisations, will now be a major market for home-made goods. (PTI)

The ever-larger presence of the State in the Indian economy is driven home again by the recently approved public procurement policy for local goods for boosting ‘Make in India’. The Indian state and its arms, namely government ministries, departments, public sector bodies and organisations, will now be a major market for home-made goods. This is expected to provide a major boost to domestic manufacturing under ‘Make in India’.

Using public procurement for driving industrial production is not a new strategy. Countries with large state sectors have often tried to do so. One of the major examples is China. China has used procurement by its state-owned enterprises (SOEs) as an effective tool for benefitting local enterprises. Given that SOEs are major players in the Chinese economy both from production and consumption perspectives, many producer SOEs have benefitted from procurement policies favouring local enterprises. China extended the policy of preferential treatment for local enterprises in procurement to similar treatment of firms that used technology developed locally. Later, however, it was forced to withdraw the policy of encouraging ‘indigenous innovation’ under pressure from foreign investors.

The latest Indian policy aims to encourage procurement from local suppliers with substantive local content set at a minimum of 50% of value addition. The policy hopes to incentivise firms to shift to greater sourcing of inputs—raw materials, intermediates and components—domestically for satisfying the local content criteria necessary to qualify for preferences in public procurement. There are obvious implications of such incentives. The most ostensible of these is the implicit policy signal urging lesser use of imported inputs. There is definitely no harm in encouraging greater use of local inputs. But one hopes the substitution from imports wouldn’t make final products more expensive and make procurement budgets of ministries and departments go through the roof.

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The substitution impact would be most for manufactured products with large ‘backward’ integrations into global value-chains. These are products using high levels of imports as inputs. In many cases, the import choices are forced, like for refined petroleum products that need to use imported crude oil due to lack of availability of indigenous crude. Whether the local content criteria for domestically refined petroleum products would suffice for being eligible in procurement depends on the formula employed for computing content. This might not be a serious issue at a time when global crude prices are headed south. But implications might be more serious for other industries. Automobile assemblers might need to refocus their sourcing strategies as many of them are importing substantial parts and components. Similarly, smartphones being assembled in India would require taking closer looks at domestic sourcing options for cracking the public procurement market.

Would the preference for local content in public procurement create complications for India’s WTO obligations? Local content is a tricky issue as it can work against the WTO’s ‘national treatment’ condition. And this is usually when the member’s policies discriminate against foreign investors. For procurement tenders above `50 crore, the policy allows greater local producers substantial concession on bid prices. Furthermore, the policy restricts non-local suppliers from bidding for tenders below `50 crore. India is not a signatory to the WTO’s government procurement agreement. But if the WTO’s recent adverse ruling on local content requirement by solar panel manufacturers in India is any indication, then the latest public procurement policy might also be dragged to dispute settlement.

The government rationale in utilising public procurement for giving a shot-in-the-arm to manufacturing in ‘Make in India’ is understandable. Industrial production and manufacturing has hardly been as robust as it was expected to even after nearly three years of the launch of ‘Make in India’. Unless manufacturing grows at high rates and expands its share in GDP, overall economic growth might remain stunted. Manufacturing also holds the key to future prospects of several small and medium enterprises (SMEs). Indeed, the procurement profiles of several government departments, including defence procurement, points to heavy sourcing of these items from SMEs. By assuring access to a public procurement market of almost US$700 billion, the government has tried to revitalise manufacturing by strengthening output and capacities of SMEs. In some respect, the qualitative similarity of the current policy with that of reserving items for exclusive manufacture by small enterprises during the 1970s and 1980’s can hardly be overlooked.

It is evident that the Indian state has picked up the baton for reviving industry at a time when concerns over jobs are looming large and the next general elections are barely a couple of years away. While the intentions are good, by doing what it is, the state might be making itself irreversibly prominent in the national economy. It is also running the risk of locking horns with the multilateral trade framework and signaling a decisive inward-looking shift in economic policies. One hopes it could have had more faith in the market for meeting its economic goals as opposed to making itself gargantuan.

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