1. To push manufacturing growth, domestic procurement is a legitimate tool; India has been defensive for far too long’

To push manufacturing growth, domestic procurement is a legitimate tool; India has been defensive for far too long’

Domestic procurement is a legitimate tool to push manufacturing growth.

By: | Published: May 22, 2017 5:11 AM
MSME sector is one where government departments are mandated to source at least 20% from MSMEs registered in India. (Reuters)

At last, India intends to adopt a national policy to give preference to domestic goods in public procurement. Last week, it was reported that there have been meetings in this regard at the PMO level. There are several estimates for the market size of government procurement, but an important aspect is that it is significant enough to drive manufacturing and create additional jobs in the country. FICCI has been advocating for a long time for adoption of this policy to provide the requisite push to industrial growth. Particularly, in 2013, FICCI’s Manufacturing Agenda had explicitly asked for policies for various sectors where government procurement could be leveraged.

Such a policy has been under discussion for several years. The offset policy for the non-defence sectors was much talked about. The concept note developed by the government was discussed at inter-ministerial meetings, but couldn’t take off. This single measure of the central government has the potential to revive growth in manufacturing, which has been sluggish on account of global slowdown. Several countries whether they are members of WTO’s Government Procurement Agreement or not have used this tool to encourage domestic industrial growth. In fact, it is not only limited to goods and has been extended to the service sector too, of which the recent Trump order in April 2017 is a good example. Under the Buy American Act of 1933 (BAA), the purchase of supplies and construction materials by government agencies is limited to those defined as “domestic end-products.” The BAA did not apply to services. But by its order dated April 18, 2017, the federal agencies have been asked to hire American. Similarly, in Malaysia, procurement from local sources, including bumiputera suppliers is encouraged, with a view to supporting economic development.

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For long, India has been defensive about using this legitimate tool under the WTO. Preference for domestic goods is currently applicable in few sectors, but the results have been mixed. MSME sector is one where government departments are mandated to source at least 20% from MSMEs registered in India. We also have preferential market access policy for electronics goods where domestic sourcing of 30% is mandated subject to certain value addition norms. Defence offsets have been existent for a long time. Recently, for metro development, the government decided to source the coaches locally to certain extent and the ministry of petroleum and natural gas notified a purchase preference policy in all PSUs. Steel ministry is also mulling over a similar policy for its sector. Steel finds a special mention even in the Trump order of buy American and hire American. The latest GFR notified by India in March 2017 have provided an enabling provision for preference policy for domestic suppliers. FICCI is also submitting a roadmap for Public Procurement of Smart Internal Security in India.

But there have been doubts over the legitimacy of such measures ever since our loss in WTO on domestic content requirements imposed in the initial phases of National Solar Mission. These requirements, which were imposed on solar power developers selling electricity to the government, concerned solar cells and/or modules used to generate solar power, and were found inconsistent with GATT 1994 and Article 2.1 of the TRIMs Agreement. However, the government procurement norms as been proposed now, would be entirely limited to sourcing for the government and public sector, and hence cannot be challenged.

Also, there have been apprehensions about non-availability or of suitability of domestic products in certain cases. Exceptions will always be there and are there under the US law too, where exceptions to the BAA can be granted if it is determined that the domestic preference is inconsistent with the public interest. As long as these exemptions are provided only as exceptions and in a transparent manner there should not be any concern.

It is important that the capacities that have been created over the years are not wasted and more such capacities come up for the economic good of the country, especially when we are aspiring to be a strong nation and a major global economy.

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