Add ‘Buy Indian’ To Public Procurement Act

The US and China make entry of Indian companies into their territories difficult. We must have a law reciprocating their provisions for the sake of safeguarding our domestic industry.

The Indian economy has kick-started after a long lull. We are probably witnessing a major shift in economic governance, second only to the path-breaking reforms of 1991. The unveiling of smart cities project, fast trains, metro rail projects in tier 2 and tier 3 cities, modernisation of ports and innumerable other new initiatives are in place. All of this, cumulatively means that the government has unveiled something equivalent to multiple stimulus packages for the economy. We can rightfully term this phenomenon as ‘India’s Mega Stimulus Package of 2014’.

We have seen similar efforts in other countries, notably the US and China’s stimulus packages following the global financial crisis and recession of 2008. The Wall Street Journal, International Business Times and other media reports point out that perhaps another major stimulus package has been unveiled in China which, due to various reasons, is keeping it low profile by splitting up the package into several mini-stimulus packages in different sectors — from mining, healthcare, railways, investment in public facilities and agriculture to environment protection. The IBT report estimates this package to be to the tune of US $ 1.1 trillion (more than Rs.65 lakh crores).

We often see reports about various countries and foreign companies envisaging a role for themselves in India’s mega stimulus package. However, let us check if any foreign company or country can access the huge stimulus package of China. Also, let us see if the US or China allows any foreign firm to access this market segment, usually termed as “government procurement” (GP).

The GP market around the world is huge. It is not simply buying pen, paper and pencil for government offices. Government-controlled or substantially state-funded entities like PSUs, corporations, project implementation authorities, utilities, schools, universities, hospitals, public transport, public facilities, social benefit schemes, cultural bodies, news agencies, sports organisations, research institutes, laboratories etc procure a huge amount of goods and services. Since GP has been kept out of the purview of the multilateral rules of the WTO, if a country decides to adopt discriminating and protective policies in GP, others can’t take the issue to this United Nations body.

Similar to China, it is estimated that the US alone procured around $1.15 trillion in 2008 and EU $ 2.2 trillion in 2007. GP is around 15-20 per cent of GDP in various countries and could be as high as 30 per cent in case of India. The annual growth rate of GP is also very high, increasing drastically in several countries like China, the US and EU.

It has to be remembered that all these figures don’t include a major procurement by governments — defence and related areas, which are not open for foreign firms in general or open to only select countries due to strategic and other reasons. So, when we talk of GP, it is only the non-defence related procurements. Around 2002, China passed a law called Government Procurement Law (GPL). Among other things, it contained a unique clause — Article 10 of the law stipulated that “domestic goods, projects and services should be used” when the Chinese government or entities controlled by it procured goods and services.

One can imagine it’s impact. China’s procurement during 2011 was $1.02 trillion — around Rs 63.5 lakh crores. To the my best knowledge, not even one Indian company got access to this market segment in that country. Compare this with our case. In our power sector alone, Chinese equipments accounted for 34 per cent of the supplies in the power plants during the 11^th plan period and now, nearly 42,000 MW of capacity is being created with Chinese equipments.

Unlike India, where foreign firms are granted full market access, procurement by government, government-controlled entities or government-funded initiatives are closed for Indian firms in many parts of the world. Most of the times, they are at the mercy of the foreign central or provincial governments that need to certify that those procurements which fall under any of the exception clauses. For example, the US has the Buy American Act and other “buy America” provisions. They mainly pertain to procurement of goods in contrast to the Chinese provisions that encompass goods, services and projects.

The Buy American Act of 1933, which was enacted for the procurement of goods by the federal government, has been adopted by 22 of its states. At times, the US position is more complex and parochial than many other countries’; flow of jobs to Bangalore, for example, was cited as a justification for the Maryland Buy American Steel and Manufactured Goods Act, which extended the preferences under the current law with regard to American steel to virtually all American goods.

Over and above, restrictions that can be said to be conforming to the WTO exemptions for GP, countries adopt measures to discriminate foreign goods and services, some of which are not WTO compliant. Again, a good example is the US’s Zadroga Act of 2011. This act was enacted with a noble objective of treating and taking care of the victims of the 9/11 terror attack. Curiously, the Act requires an Indian company (in case it wins the bid) to pay an additional tax in contrast to an American supplier, and the taxes thus collected are used for meeting the objectives of the Act!

Indian IT firms were asked to pay more visa fee for their professionals under the law. It made Indian offers uncompetitive while vying against the American counterparts for government tenders. India protested — to no avail. Similarly, there were reports that China initially denied market access to foreign-invested manufacturing firms that were located in China and relented only in 2009. The EU’s documents state that, at times, the procuring entities in China go beyond the strict provisions of GPL and put restrictions beyond what remains in GPL.

In China, the USA or many other countries, no Indian company can easily get contracts if it is GP. In several instances, despite emerging as the lowest bidder, Indian companies have been denied entry. Worse still, realising the futility of the exercise, Indian companies don’t bid at all in GPs of such hostile economies. Only under exceptional circumstances, tenders can be awarded to foreign companies. For example, China lists out the exceptions for foreign procurement in its GPL as under:

– The required goods, projects or services  which are not available in China, or are not available under reasonable commercial conditions;
– The objects of procurement are for use outside of China; or
– It is specified otherwise in other laws or administrative regulations.

The US lists out these exceptions for its Buy American rules:

– Inconsistent with the public interest.
– Insufficient or reasonably unavailable quantities of the domestic product or its quality are unsatisfactory.
– Likely to increase the overall total cost of the project by 25 per cent.

Since WTO’s multilateral rules like Most Favoured Nation (MFN) and National Treatment (NT) are not applicable in case of GP, those countries can even discriminate in dealing with products that are available within their territories by differentiating them on the basis of their country of origin.

As a result, whenever those governments embark on major projects with stimulus packages, foreign suppliers are denied entry into the tendering process, and our products and services are refused. China complained against the US stimulus package in 2009 whereas several countries protested when China introduced a stimulus package of its own in 2008, in which foreign suppliers were denied access. This is the trend the world over.

Critics of my case say that such a move would make procurement costly, adversely affecting the end consumer. However, it may be noted that the ‘Buy American’ provisions of the 2009 stimulus package unveiled by Barack Obama gave a price preference of 25 per cent to the domestically produced products; procuring a non-domestic product was possible only if a similar domestic product was 25 per cent costlier. Probably, gains of procuring from overseas in many cases only result in 10 or 12 per cent price benefit for India. And a developed, far more advanced country like the US gives price preference up to 25 per cent; over and above this price preference, there are barriers and hidden difficulties for foreign suppliers.

There is nothing that prevents us from embarking on an exercise and fixing a limit of 10-25 per cent price preference in our case, considering the industry segment and our needs. The ultimate benefits that would accrue on the economy, jobs that would be created, technology that would get upgraded or introduced justify the loss that we might incur on this count.

Even this cost would get nullified in the long run, as foreign investment and technology would flow into the country once such a provision is inserted. As in the case of China, we should consider anything produced, serviced and conceived in India as domestic products and services so as to encourage flow of technology and investment into the country.

There is another side to this story. China implemented its GPL before initiating its journey for negotiations with the WTO on accession to GPA, thereby creating a pressure on member countries. Till date, the negotiations are dragging on. Meanwhile, Chinese government contracts were closed for all practical purposes to outside companies, giving a major boost to its domestic manufacturers and companies.

There is an agreement of the WTO, which is multilateral in nature, wherein members are allowed access to each other in their GP markets. This is called the GPA of WTO. As of now, 43 countries are its members, including the US, Japan and the EU. China is negotiating access to that with an offer that is difficult to be accepted by other countries. India became an observer in the body in 2010; it is closely watching the developments.

So far, India has not decided on joining the group. We do have a section on GP in some FTAs such as in case of South Korea and Japan. However, these GP chapters in the FTAs virtually give nothing and gain nothing from the partner countries. But sooner or later, India has to take a call on GPA or decide to go in for full-fledged bilateral agreements on GP as it cannot remain isolated from the world in this huge market segment. In case India decides to negotiate access in either GPA or at bilateral levels, having a ‘buy Indian’ clause similar to China’s would be of great advantage during the negotiations.

India is now set to unveil its own Public Procurement Act. A Bill was introduced earlier in Parliament, which got lapsed. Going by the fact that the Ministry of Finance has asked for feedback on the Bill by April, in all probability it will be re-introduced in Parliament once again in a refined and reformulated version within six months. Following in the footsteps of China, we can introduce a provision in the PPA that would cover central government, PSUs and projects funded wholly or substantially by the central government, to provide for procurement of goods, projects and services from Indian companies exclusively.

To impart flexibility, the law’s terms can be broadened and a detailed stakeholder consultation process can be undertaken to decide what can be our exceptions to this: Should we only allow ‘Made in India’ products into our GP market or grant a price preference of 5, 10 or 25 per cent? Let there be a wide ranging discussion on the subject and let us evolve a national consensus, keeping in mind our larger interests. With our major projects like smart cities, railway modernisation and augmentation, stimulation of other government entities through various reforms, this is the right time to utilise the opportunity and give a boost to our domestic firms.