Global tenders up to Rs 200 crores have been disallowed for government procurement. IPC talks to Ajay Sahai, Director General and CEO at FIEO (Federation of Indian Export Organisations) to understand this move better.
The central government says its decision to disallow global tenders up to Rs 200 crores is to ensure that MSMEs (Micro, Small and Medium Enterprises) are incentivised to invest and grow without the anxiety of global competition. But the move raises many questions - such as those raised by this editorial - about protectionism, possible implementation issues, and whether and how much it will benefit MSMEs.
We speak to Dr. Ajay Sahai to try to understand the disallowing of global tenders in the context of such questions.
1) How does one define a “global tender” in this case? What about Multinational Corporations (MNCs) manufacturing in India? Or where the component parts are from abroad but the product is manufactured in India? Does the definition get tricky because of complex global supply chains?
A ‘global tender’ refers to those tenders where we invite expressions of interest from foreign companies. It’s in order to encourage procurement from MSMEs that global tenders up to the value of Rs 200 crores are being restricted. This will enable domestic MSMEs for fulfilling government procurement up to Rs 200 crores. Hitherto, it has not been clarified whether by domestic sources the government means manufacturers or whether it can just be a supplier or even just a trader. The bottomline seems to be that the product (of up to Rs 200 crores that is being procured by the government) should be manufactured by MSMEs. Whether this has to be entirely supplied by the MSME or whether a third party can be involved, to know this we will have to see what is in the notification.
2) When is the notification likely to be out?
We are expecting it to be out soon.
3) Is this likely to fall foul of WTO rules or principles?
There is a WTO agreement on government procurement but India is not a signatory. It only has an observer status. So I don’t think we will have that problem.
4) Global tenders are allowed so that we (through our government) have access to what is best in the world, not simply the cheapest. Is this move likely to be detrimental in this regard?
I’m not sure whether the government has any intention to relax the specifications, related to quality, while floating the tender. The specifications are detailed in the tender and usually comply with the standards applicable on products. Therefore, they are more or less similar for a product. The specifications are key. The government is not likely to compromise on the quality, from what they were assuming for global tenders. If such relaxations are made to ensure that the product comes from domestic sources only, then this question is relevant and one can reexamine this policy.
5) In an ideal world, the government should focus on making Indian manufacturing more competitive. What needs to be done for that?
We need to make the manufacturing competitive because India has defied the conventional economic transition: moving from agriculture to manufacturing and then to services. We migrated directly from agriculture to services. That has created problems because agricultural productivity is going down. And yet, more than 50% of the population is dependent on agriculture. By and large this population is more suited to be absorbed into industry than in the services sector (with the exception of some service sectors like transport and tourism where they can be absorbed).
We need to look into all factors of production to make manufacturing more competitive. The good thing is that Indian interest rates are declining and I’m sure that in the years to come they will decline further. So the cost of credit, to some extent, will be taken care of.
Land is a big issue and now the focus of the central government has turned towards land. Many of the states have their own land bank. The Finance Minister has spoken about the huge amount of land which will be available for industrial purposes. If there is an availability of land it won’t bring down the prices but will help in the allocation of land. Otherwise procurement of land in India takes more than a year in most cases.
Thirdly, we have to relook at our taxation structure. In various products, we have an inverted duty structure, where inputs (used to manufacture products) are taxed at higher rates than the finished products themselves. This results in the buildup of taxation credits and cascading costs on the consumer. These in turn, result in buyers preferring imports as opposed to Indian products. This needs to be addressed.
And finally, the Government also has a role to play by creating a competitive infrastructure - eg. efficient ports, better roads, uninterrupted power supply etc. - so that the logistics costs of Indian manufacturing comes down. In many of the products we are as competitive as China but we are outranked because of factors that are beyond our factories.
The government has a big role to play in these areas, in which we have a long way to go.
6) Does this move signal protectionism and if so could it harm India's image in the world?
There’s been a lot of debate on what’s meant by “atma nirbhar”: whether it means self-sufficiency or self-reliance.
I feel it means self-reliance. If that’s the case then it would signify that we want to be capable, that we want to create institutions of stature. For eg., having chip manufacturing in electronics, or manufacture APIs (Active Pharmaceutical Ingredients) such as Pen-G (Penicillin G, an antibiotic used to treat a large number of bacterial infections). In this case being “atma nirbhar” won’t be an issue.
But if it means self-sufficiency then that would mean we’re looking inward and that should be a cause of concern.
A general negative fallout of COVID-19 has been an increasing localization. Every country is doing it. We can’t be aloof from this development. But I’m sure we do not need protectionism. I always believe that if you’re increasing tariff for a limited period with some specific objective in mind - like a certain investment and according scalability to it - it’s understandable. For example, you attract investment into manufacturing Pen-G. Then you increase the import tariff on Pen-G for 2 to 3 years so that the investor stabilizes its production. Then you scale it to compete effectively with imports.
But otherwise higher tariffs lead to inefficiency and can’t lead to inefficient manufacturing in the country.
7) Is there a danger of inflating orders by departments to get past this limit?
I don’t think so. There are checks and balances in the government. We have different levels of auditing. Past buys also provide benchmarks to check against the same.
8) How do you think this limit of 20 crores was decided? Does it seem arbitrary to you?
I am sure the government has the necessary details to do their calculations. MSMEs have been given some fiscal benefits. So the elbow room - the availability of finance to adjust the fiscal stimulus given to MSMEs - available with the government would have decided this limit.
Secondly, these limits have to be aligned with the limits overseas also - if you want Indian companies to achieve a certain scale and competitiveness, you can’t keep the limit very low.
Thirdly, one has to look at the relationship between investment and turnover. In some of the sectors - for example in the leather sector - if I’m bringing in machines worth Rs 20 crores and producing goods worth only Rs 100 crore. It hardly makes the economics viable because the margins will be very thin.
So the government would have taken all this into consideration and taken a call based on the data available to them. And if they have money to enhance the limit. they may look into that too.
9) What about orders for essential goods. Will getting an exception prove too cumbersome?
India hasn’t attempted sector-wise limits. Some other countries have sectoral limits for MSMEs, so there can be different limits or exceptions for sectors which are considered ‘essential’. We have not yet adopted this approach.
10) To what extent might this move prove helpful to MSMEs?
By increasing the limit of global procurement and procuring from MSMEs instead they’re incentivising MSMEs to bring in new technology. The fact of the matter is that MSMEs need to automate certain processes.
With COVID-19 in particular, and social distancing norms coming into circulation, we have to move towards automation. So increasing the investment limit will definitely help the companies on the investment side (by enabling them to invest in technology). On the turnover side, also, the companies will benefit.
However, the MSME sector is very vast and the scale of operation varies a lot between micro, small and medium units. Micro units (micro enterprises are where the investment in plant and machinery doesn’t exceed Rs 25 lakh) have different demands and different aspirations and require a different kind of support. So while MSMEs are often given ‘a package’, there should be different treatment for micro units. So within a period of time we can look into whether, within the MSME segment, we can have different facilities for micro companies. For instance, giving them 25% capital subsidy and interest free loans for capital goods or machineries.
11) Is this move primarily targeted against Chinese imports?
I don’t think that’s the intention nor should it be. I think, if we look into it, we will see other countries like South Korea and Japan being impacted. The intention is simply to provide opportunities to Indian businesses.
12) Any other repercussions/impact of this move you would like to highlight?
I think the policy is welcome because MSMEs - especially those that are production based - which were earlier competing for tenders of upto Rs 50 crores can now compete with the best in India for tenders upto Rs 200 crores. So this will promote an economy of scale which plays a pivotal role in growth.
13) But given that this is likely to be a short term measure, will MSME's be able to sustain this economy of scale? Would they not be worried about making an investment based on a short-term boost?
I am not sure whether it is only in response to demand challenges faced by MSMEs during COVID-19 or if it will be a permanent feature. In both scenarios, it will provide relief and business to MSMEs. Over a period of time, hopefully, they will develop capabilities to compete with foreign suppliers.
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