By Atul Kaushik

The Free Trade Agreement with the UK has opened up India’s large government procurement market to British suppliers.  This market was also opened up in the pact with the UAE, with certain restrictions. A sizeable share of the market, however, is reserved for MSMEs & local suppliers to ensure that domestic manufacturers continue to benefit, explains Atul Kaushik

Size of the government procurement market
Taking both central and state government purchases into account, government procurement constitutes about 30% of India’s GDP. The small-scale sector in India has preferential treatment on the Government e-Marketplace (GeM), which itself has crossed Rs 5 lakh crore in gross merchandise value (GMV) last year, though it constitutes only 10% of the total government procurement.

Who can supply to the government?

Government entities buy supplies based on the General Financial Rules (GFRs) which, as a general rule, do not discriminate between Indian and foreign goods and services and/or suppliers. Goods and services available on GeM have to be mandatorily procured from suppliers registered on its portal; the rest can be procured through a fair and equitable tendering process.

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Mandatory procurement from KVIC

GFRs allow the central government to provide for mandatory procurement of any goods or services from any category of bidders, or provide for preference to bidders on the grounds of promotion of locally manufactured goods or locally provided services. The government has, therefore, kept its policy space intact. There are three main types of reservations. A minimum of 20% of all textiles procured by government entities must be made from handlooms. Khadi and handloom textiles must be procured only from KVIC and specific suppliers such as self-help groups.

Exclusive purchases from MSMEs

The public procurement policy mandates the government and its agencies including Public Sector Undertakings (PSU) to procure 25% of goods and services from MSMEs, though this mandate can be served by large suppliers sub-contracting to MSMEs. Within this 25% reservation, 4% is reserved for SC/STs and 3% for women entrepreneurs. The government had reserved a total of 358 items for exclusive purchase from MSMEs.

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There are 5.93 crore MSMEs registered in India (of which 173350 MSMEs export), employing more than 25 crore people. In 2023-24, Rs 12.39 lakh crore worth of MSMEs related products were exported, constituting more than 45% of India’s total exports, and accounting for more than 30% of India’s Gross Value Added (GVA).

Preference for Make-in-India

The Public Procurement (Preference to Make in India) Order, 2017 restricts eligibility to bid for public procurement of goods up to Rs 50 lakh to local suppliers so long as the nodal ministry has communicated that there is sufficient local supply of such goods. In the absence of such a communication, the order can be divided, and if the L1 bidder is a foreign supplier, it will get only 50% of the order, the balance going to local suppliers with a 20% preference margin and a condition that the supplier’s product will have at least 50% local content.

There is also a Pharmaceutical Purchase Policy for compulsory procurement of more than 100 drugs from Central Public Sector Undertakings as long as they meet the Good Manufacturing Practices (GMP) standards until they are fully closed down.

What happens in case of FTAs?

Traditionally, India’s Free Trade Agreements (FTAs) have left government procurement out of the FTA disciplines, although some Comprehensive Economic Partnership Agreements (CEPAs) include provisions for understanding each other’s government procurement markets without any market opening, and an intent for future negotiations. These include agreements with South Korea, Japan, Australia and EFTA countries (Iceland, Liechtenstein, Norway and Switzerland).

However, government procurement has been opened up in the agreement with the UAE for supplies against tenders worth SDR 20 million (approximately Rs 234 crore) and above with some exceptions such as employment/financial/fiscal/debt services. On the other hand, the India-UK FTA is reported to have a clause on opening up central government procurement to UK entities with lower monetary threshold, only for non-sensitive sectors, and with a favourable local content requirement.

What does the WTO say about this?

There is a plurilateral agreement on government procurement in the World Trade Organisation (WTO). Participants in this agreement have opened up their public procurement to each other and provided treatment to their suppliers at par with domestic suppliers. As of now, it has 22 participants, counting the 27 EU member countries as a single participant. India and UAE are not participants in this plurilateral agreement, while the UK is.

The writer is additional secretary (retd.), Government of India, and GDC Fellow, RIS