Public procurement for Make in India

Strategic use of government purchases is the need of the hour if India is to achieve manufacturing success

India had a formidable team for the international negotiations that led to the World Trade Organization (WTO) Agreement. One of their major achievements was in keeping “government procurement” out of India’s market opening commitments. This was considered worth fighting for, as it was felt that the government should have the freedom to use its market power as a large buyer of goods and services for its national policy objectives. The creation and nurturing of national capacities were development goals that could be pursued through this exclusion from the general market opening deal, which was the central part of the WTO agreement.

This instrument, however, was not used, and its existence receded from consciousness as policy orientation changed with the economic reforms of the 1990s. Competitive procurement through global tenders, mandatory for World Bank-financed projects, was increasingly preferred. Government and its agencies, as consumers, sought to benefit from trade liberalisation. However, there is now a need for fresh consideration of the use of procurement by the government and its agencies as a feasible policy instrument for achieving the objectives of Make in India and becoming atmanirbhar.

The way to think about this is to first identify a few key product segments that are currently imported and that we would like to be Made in India. Then, we need to try and understand how market forces are working. If they are not likely in the near term to result in manufacturing in India or to greater domestic value addition, then there is a case for using an industrial policy instrument. The production-linked incentive (PLI) scheme has over the last few years been introduced as such a policy instrument for some products. To offset the initial cost disadvantage of making in India, money is given to selected firms linked to achieving certain levels of production. The subvention is limited to a few years. The results for smartphones have been impressive. There is growing demand to extend it to other sectors. However, fiscal constraints impose natural limits on how far the PLI can be extended. Further, there is an in-built sunset clause in the scheme.

Public procurement is an alternative powerful instrument that can be used for achieving challenging goals. However, for it to be effective, the normal way of tendering would not work, and new manufacturing capacities would need to be created.

The investments in creating these capacities need to be de-risked. The way to do this would be to invite bids for supply from a future date, giving enough time for a new plant to be set up. The production from a minimum technically feasible size plant needs to be bought for at least five years to make the investment financially viable. So, the bid needs to be for procurement from a future date when the new plant goes into production and for five to seven years. To create a competitive industry structure, the second and third lowest bidders may be given a chance to match the price of the lowest bidder and get orders for a lower quantity. Bids may be repeated to continue competitive pressures for cost reduction.

With market risk having been eliminated, the financing costs of such projects should be low. These new plants can be expected to have state-of-the-art technology with the most efficient production processes. They may be given a special dispensation for duty-free import of capital goods and raw materials to keep costs down to international levels. Industrial land with suitable infrastructure at reasonable rates may be offered as part of the bid process. This would reduce the time needed to put up a new plant. For energy-intensive production processes, cheap electricity from NTPC could be offered. There should also be willingness to accept a price higher than the prevailing global price. With repeated bids, prices would come down. The advantage of this approach would be the creation of new manufacturing capacity without financial subvention such as in the PLI, or, through a capital subsidy. This approach could be used to have plants come up for making advanced industrial products such as solar panels with full domestic value addition, green hydrogen, and heavy-duty trucks using green hydrogen as fuel. Going further, the labour-intensive shipbuilding industry could be created if the government were to buy cargo vessels made in India from a prospective date with increasing domestic value addition and then lease them out for our imports of commodities such as crude and coal.

We have been wanting to establish a fab facility for making chips in India and have been prepared to offer substantial financial incentives. A creative way of using government procurement for achieving this objective would be as follows. The central government could finance the provision of laptops to all secondary school children in the country. There is ample justification for such a programme to improve the quality of education. These laptops may be procured by the states and distributed. The central government could stipulate that from a prospective date, these laptops must use chips made in India. The size of this market would be so large that chip manufacturers would see profitable investment in setting up a plant in India. Laptop manufacturers would need to tie up the supply of India-made chips to be eligible to bid for the tenders for laptops for schools. Similarly, a phased increase in domestic value addition could be stipulated and the supply chain of components would then be created.  We would achieve the breakthrough in the manufacturing of electronic hardware that we have been striving for.  

India is at an inflection point for success in manufacturing, and the strategic use of public procurement to create competitive manufacturing capacities in high-technology areas, as well as some labour-intensive sectors, is the need of the hour.   

The writer is former secretary, Department for Promotion of Industry and Internal Trade