SMEs and Public Procurement Policy in India

The contribution of the Micro, Small and Medium Enterprises (MSMEs) sector to the Indian economy in terms of GDP, exports and employment generation is significant. According to the Central Statistics Office (CSO), Ministry of Statistics & Programme Implementation (MOSPI), the share of MSME Gross Value Added (GVA) in total GVA during 2016-17 was 31.8%. Similarly, the share of MSME related products in total export from India during 2018-19 is 48.10%, as stated by the Directorate General of Commercial Intelligence and Statistics (DGCIS). As a substantial employment generator, the estimated number of workers in unincorporated non-agriculture MSMEs in the country was 11.10 crore during the period 2015-16. The Indian government has developed a classification for enterprise size based on sector and invested capital as stated in Table 1.

Despite pertinence to the Indian economy, these enterprises are severely bogged down by constraints such as lack of access to finance, skilled manpower, infrastructure and market access due to which they fail to be globally competitive. Some of the identified barriers which are faced by SMEs in the public procurement process are enlisted in table 2.

Robust supply relationships with the Central and State PSUs present a significant opportunity to gain access to market linkages. Maintaining robust supply relationships with Central and State PSUs present a significant opportunity for MSMEs to address issues related to inadequate market access (CII, 2016).

Hence, to strengthen the regulatory framework underlying MSMEs, the Ministry of MSMEs notified the implementation of the Public Procurement Policy for micro and small enterprises from 1st April 2012. The policy is mandatory as notified under the MSMED Act 2006 and calls for achieving an overall procurement of minimum 20% of total annual purchases of products produced/services rendered by MSMEs within a period of 3 years by the Central Ministry, government departments and PSUs. Prior to the new policy, in 2009, only 5% of the Central Government and PSU’s procurement came from SMEs. The national body aka National Small Industries Corporation (NSIC) registers MSEs under the single point registration scheme in which registration is granted for a fixed period depending on the nature of the goods, and is renewed upon application. The Department of Expenditure, Ministry of Finance (MOF), Government of India (GOI) provides the basis for implementation of sustainable public procurement through General Financial Rules (GFR). The recently revised GFR of 2017 has laid down the provisions for adding environmental criteria while undertaking procurement decisions into rule 173. The purchases by government users through e-marketplace (GeM) have been authorised and made mandatory by the MOF by adding a new Rule No. 149 in the GFR 2017.

In 2018, a sustainable procurement task force was constituted with a mandate of reviewing best practices in public procurement, inventorise the current status on SPP across government organisations in India, draft a Sustainable Procurement Action Plan and recommend a set of product/service categories where SPP can be implemented. In addition to this, preferential treatment policies have been introduced to support small and medium enterprises (SMEs) and take corrective measures to counter the obstacles faced in public procurement. NSIC is also responsible for coordinating the preferential public procurement efforts. Very recently, an executive order passed by the Ministry of Micro, Small and Medium Enterprises (MSME) in 2018 and effective from 1st April 2019 has notified the procurement of 25% (from the earlier 20%) of goods and services by every central government ministry, department and public sector unit (PSU) from micro and small enterprises (MSE) through the GeM portal. The objective of the policy is promotion and development of MSEs by supporting them in marketing of products produced and services rendered by them.

While the policies are progressive and are intended for the right purpose, a major criticism of the regulatory framework on sustainable procurement from MSMEs emerges from the fact that the existing policies have not been able to generate the desired impact. As a matter of fact, piece-meal efforts to accelerate public procurement from MSME is not adequate to address the bottlenecks. Several PSUs have been unable to either meet their procurement target from MSEs or are failing to adequately measure and report their MSE procurement details to the office of DC MSME (CII, 2016). Apart from implementational challenges, absence of any overarching law governing MSME procurement hinders progress. Moreover, the notifications under existing policies do not enforce mandatory procurement measures. Overall, the lack of effective coordination between the regulatory authority ie Ministry of MSME, CPSUs and MSMEs leads to inappropriate implementation of the existing policies. ■

References:
1. DCED (2017), Technical Report: Policies that Promote SME Participation in Public Procurement.
2. CII (2016), Public Procurement Policy for MSMEs.
 

Ria Sinha
 rsinha@devalt.org