Public procurement can lift manufacturing

Ajay Shankar | Updated on June 15, 2020 Published on June 14, 2020

Creating jobs , attracting investment and increasing value addition have to become the goals of public procurement   -  istock

It can be implemented in tandem with setting up SEZs in sectors such as shipping. Solar power, too, is an area of promise

A self-reliant India needs success in manufacturing with increasing value addition. The key to this is finding the policy instruments which would deliver results in today’s context. India is now so integrated into global consumption and production supply chains that it cannot try and go back in time to become the closed economy of the 1980s.

Indian industry cannot be shielded behind the walls of protectionism of those days. Manufacturing has also undergone relative decline in the last few decades. Imports from China have been gradually taking over the domestic market for consumer goods. The government’s fiscal resources have been collapsing due to the lockdown and its first priority has to be to stimulate demand for domestic goods and services.

Macro conditions

There are some macro conditions which are prerequisites for success in manufacturing. The first is the necessity of preventing the appreciation of the real exchange rate. The 19 per cent real exchange rate appreciation that took place between 2008 to 2017 was equivalent to an across the board lowering of import duties by 19 per cent. This meant that we had negative rates of import duties in many cases. No wonder industrial growth rates collapsed. An explicit enunciation by the RBI of the policy goal of not letting the real exchange appreciate is overdue.

The other is investing to create/upgrade infrastructure to international standards in industrial areas chosen for rapid growth in competitive manufacturing. Then costs of production, land, electricity and logistics, have to be brought down and made comparable to those of our competitors. The government usually tries to promote a particular industry by capital/interest subsidy, or exemption of taxes on profits. The government recently announced production linked incentive schemes of 25 per cent on capital investment for electronic goods and 5 per cent on incremental sales of medical devices. But it may not be possible for the government to find the resources for such subsidies for rapid broad-based industrialisation.

The case for exemption of taxes on profits has been nebulous. Firms make investment decisions if they are confident of making good profits. Exemption of taxes on profits is unlikely to be the determining factor for a firm on whether to make an investment decision or not. The way to move ahead is on how to make manufacturing so profitable that there is a surge of new investments by domestic as well as foreign firms. If subsidies are not an option then what options does the government have. One instrument which was earlier neglected is public procurement.

A beginning was made a few years back with the introduction of purchase preference for domestic bidders who were allowed to match the price of the lowest bidder in global tenders and get the contract. The instructions just issued for inviting only domestic bids from suppliers who do at least 50 per cent value addition in India, if sufficient capacity exists in the country, takes this to the next level. This helps in the growth of existing industrial investments.

Ship building

To get investments in new areas, a radically different approach would work better. Let us take the case of ship building, a classic labour intensive industry where with rising wages in China it could shift to India. This is unlikely at present. To make this happen, the government would need to promote a large Special Economic Zone for ship building and its supply chain. This would provide a competitive regime for production costs.

It should then get the Shipping Corporation of India to invite bids for the supply over five years of a large number of ships for cargo movement as well as oil tankers starting from the year of production. Value addition in India should be required to rise by the fifth year to over 70 per cent.

To create a competitive industry structure, it should allow the second and third lowest bidders to match the price of the successful bidder and get two-thirds of the volume of the order of the lowest bidder. Land and environment clearance should be on offer for the successful bidders in the bid process so that they can start setting up their plants immediately.

The Exim Bank should offer in advance dollar denominated credit at prevailing international rates. This would give potential Indian bidders a level-playing field for financing. With assured orders, competitive costs and reduced risks, investor interest would be high and competitive bids would be received. The key would be getting the first round of orders to be so large that bids from a number of investors are received.

If the discovered price is the prevailing international price then there would be no additional cost for anyone. Even if it is a bit higher, the impact on freight charged would be negligible. The government can mandate that cargo for its agencies would have to move on ships made in India.

The Special Economic Zone development should be self-financing. India would then have created a globally competitive ship-building industry within five years. By the end of the decade it could target a substantial share of the global market in ship building.

A similar approach could be adopted by the Solar Energy Corporation of India (SECI) which should invite bids for solar power capacity with the condition of full domestic value addition. Orders should be placed for 2GW per year on the lowest bidder with the next two getting orders for 1.5 GW per year if they matched the lowest price. The same could be done for large grid storage batteries. Offer of land in industrial parks should be part of the bid process.

This would need a major change in the procurement guidelines of the government, the Central Vigilance Commission and the approach of audit and other investigating agencies. Creating jobs, getting investment in manufacturing and increasing value addition in India have to become explicit goals of public procurement. Such procurement can and should be done with full transparency. The reduced risks would result in lower prices.

The writer is Distinguished Fellow, TERI, and former Secretary, DIPP. Views are personal

Published on June 14, 2020
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