Recently, minister for power, coal, new and renewable energy, Piyush Goyal commented “when foreign countries such as China, USA do not allow Indian companies to bid for power projects in their jurisdiction, why should we allow their companies to participate in setting up of similar projects in India”.
The minister was venting out his frustration over companies from those countries denting the prospects of our flagship program ‘Make In India’ by supplying plant and machinery thereby scuttling growth of indigenous industry. He was also lamenting at our own policy which gives a level playing field to global vendors while tendering for government procurement.
In India, the procedures of government procurement, as outlined in India’s General Financial Rules [GFR], provide for equal opportunity to all companies – domestic and foreign – who compete for procurement contracts in a ‘fair’ and ‘transparent’ manner to supply materials at most competitive prices as per specifications. The only requirement is that foreign companies must be centrally registered with Director General of Supplies and Disposal [DGS&D].
Recognizing the serious detrimental effect, in March 2017, the government restructured GFR to give first preference to locally manufactured goods in domestic procurement. In the follow through, it announced sector-specific initiatives.
In April, 2017, it granted purchase preference to domestic manufacturers in procurement by public sector undertakings [PSUs] in oil and gas sector. In early May, 2017, it allowed PSUs building infrastructure projects to give preference to local vendors for sourcing iron and steel. Besides, ministry of electronics & information technology [MEIT] gave thrust on local sourcing in its a phased manufacturing program to promote ‘Make In India’.
On May 24, 2017, the Cabinet approved a comprehensive policy casting the net wide to “go local” in all government procurement. For this purpose, local suppliers are those whose goods or services meet prescribed minimum thresholds [ordinarily 50%] for domestic value addition. The policy provides detailed guidelines for selection of vendors under specified slabs of contract value.
The move may have been prompted by proliferation of protectionist tendencies all over the world with Donald Trump taking the lead – under his “buy American, hire American” rhetoric. But, one wonders why India should have waken up only now when things have reached a tipping point. What prevented it from altering the rules for government procurement earlier?
This is particularly disquieting when seen in the backdrop of other major countries such as China and USA keeping supplies of goods and services for government procurement as the exclusive preserve of their local companies for ages. The irony is that those countries have managed to shield these fortresses despite being members of the WTO Government Procurement Agreement [GPA].
There are two key objectives for countries accessing WTO GPA: (i) to enhance export markets as provided by GPA member countries and (ii) to embrace reforms to internal market and administration so as to benefit from good governance aspects of the agreement.
Under WTO GPA, commitments are made in the form of ‘government entities’ apart from committing certain sectors of goods, services and concession contracts. These commitments are further qualified by thresholds [value of purchase] above which the agreement begins to apply, and ‘exclusions’ and ‘exceptions’ [albeit for social purposes or for procurement pertaining to certain utilities] are determined. The procurement by governments’ sub-central entities [say, agencies at the state/federal level] can also be excluded.
These flexibilities help countries retain orders of the government and its agencies for domestic companies and yet take full advantage of the opportunities offered by the agreement in terms of access to state procurement in other countries. Additionally, due to absence of the principle of non-discrimination under GPA, members have the freedom to grant the access to only those countries who promise to grant comparable market access to them.
Thus, a large number of contracts granted by the government are below the threshold value, which is out of the purview of the commitments under GPA. For instance, in case of Chinese Taipei, data reveals that more than 95 per cent of total procurement contracts are awarded to domestic firms while in the EU, less than 5 per cent of the size of its total government procurement market in value terms was awarded to other GPA countries.
The message is loud and clear. While, India must continue its indigenization agenda for success of ‘Make In India’ – leveraging government procurement to the maximum extent possible – it should also tap huge opportunities offered by state purchases globally by being a part of WTO GPA.
Most of the opportunities are expected to emerge from EU, Japan and USA, who are members of GPA. In USA, government expenditure accounts for about 42 per cent of GDP [gross domestic product] yielding a market of over US$ 6 trillion. In France, 56 per cent of GDP is accounted for by state spending or a market worth US$1.5 trillion. There is also a sizeable market from major economies who are currently not members but expected to be — for instance, close to US$ 2 trillion market in China and US$ 1 trillion in Brazil.
These countries present opportunities mostly in sectors such as information technology, pharmaceuticals, minerals, machinery and electrical equipment.
In 2010, India attained an ‘observer status’. But, its ascension to full member status in GPA hangs in the balance. This needs to be pursued vigorously. The agreement contains certain flexibilities for developing country members — as it allows them to phase-in entry of certain entities and social exceptions can be maintained when concomitant market access opportunities are pledged.
There is thus no contradiction between India being a partner in WTO GPA [to avail of huge opportunities for securing contracts in other member countries] on the one hand and its India’s indigenization plans on the other. The two objectives can be reconciled through careful navigation and leveraging the flexibilities [‘thresholds’, ‘exceptions’ and ‘exclusions’] available under the agreement.
Any delay in joining the WTO GPA would result in India facing harsher demands from the then existing members. For instance, the latter are resorting to [and will continue] tactics which may impel exclusion of certain countries through increased application of “Buy Local” laws; naturally, late entrants or those who remain outside the agreement [albeit permanently], could face the music.
Modi should get cracking on this without further delay.