MSME Ministry readying procurement policy

Will make it mandatory for ministries and PSUs to procure 20 per cent of their annual purchase volume from smaller units

The Ministry of Micro, Small and Medium Enterprises has compiled a draft public procurement policy (PPP). While all the contours have been put in place, the ministry is engaged in last-mile discussions with some ministries that have raised concerns about the quality and quantity of procurement.

The policy has its origin in the MSME task force constituted by the Prime Minister last year. The task force had recommended that the government must have a PPP which mandates the various ministries and PSUs to procure 20 per cent of their annual purchases from MSMEs.

Madhav Lal, additional secretary and development commissioner, Ministry of MSME, told Business Standard, “We are in last-mile consultations with the concerned ministries and agencies. The proposed policy will make it mandatory for ministries and PSUs to procure 20 per cent of their annual purchase volume from MSMEs and report the procurement made from MSMEs in their annual reports.”

After completing the consultations, the ministry will take the policy to the Cabinet for its approval prior to implementation. Defence, power and railways are likely to be key sectors in the government that will procure the most from MSMEs under this policy.

Only 4-5 per cent of the government’s total annual procurement is currently from MSMEs. Considering this, it will be a herculean task to raise this to 20 per cent.

The policy stipulates three years’ time to raise the share of procurement from MSMEs to 20 per cent. However, there could be cases where it would not be possible to meet the stipulated volume. Lal said that the MSME ministry would set up a committee headed by its secretary. The ministries and PSUs can present their case to the committee, stating the reasons which impede uptake of the stipulated volume.

Industry associations have welcomed the move. Anil Bhardwaj, secretary general, Federation of Indian Micro and Small & Medium Enterprises (Fisme), said, “MSME associations have been consistently demanding that a specific percentage should be earmarked in public procurement. It seems now there is a willingness in the Central government to move forward.”

The policy of preferential procurement from MSMEs is prevalent in the US, UK and Europe to promote the cause of MSMEs. In the US this policy is known as ‘sourcing from MBEs (minority business enterprises)’, and under it, all large companies are incentivised to buy a minimum of five per cent of their total needs (products/ services) by value from MBEs to claim tax benefits.

The Confederation of Indian Industry (CII) has recommended a similar provision. “In a financial year, in case the large industry (private and public sector) procures stipulated percentage of goods/ services from MSMEs and subject to the transaction having been completed in the form of payment to MSMEs, the large industry would be entitled to certain tax benefits. This would also facilitate the growth progression and upgradation of the vendors,” said Salil Singhal, chairman of CII’s National MSME Council.

However, at present, the MSME ministry does not have any such tax benefits in mind.

While MSME sector representatives welcomed the proposed policy, they said MSMEs supplying to government agencies faced several problems.

“Firstly, most government departments do not follow the guidelines for providing free tender sets to MSMEs. Neither do they waive the security deposit up to the monetary limit for which the unit is registered. None of them provide the agreed price preference to MSMEs also,” said Bhardwaj. There are also issues like delayed payments.