Rewiring public procurement for innovation faces single-vendor hurdle

The recently launched ₹1 trillion Research, Development and Innovation (RDI) Scheme signals a historic shift in India’s innovation policy. For the first time, private sector innovation is at the centre, with funds channelled through a special-purpose fund and deployed by professional managers via concessional loans, equity, and a fund-of-funds structure. 

Until now, R&D spending largely flowed to public institutions, which laid the nation’s scientific foundations. The new approach taps the innovative energy of over a billion people — far beyond a few thousand government scientists—ushering in a 3S revolution: Scale, Speed, and Spend. 

Scale comes from opening R&D to startups, industry, academia, and individuals, bringing unmatched breadth. Speed flows from the private sector’s push for market-ready, time-bound solutions. Spend is unlocked by private co-investment and fund-of-funds participation, addressing chronic capital shortages. This transition is set to broaden participation, accelerate breakthroughs, and power transformative technological growth. 

For RDI to deliver fully, it must be backed by reforms in public procurement to actively support locally developed products. A dedicated policy tool is vital because innovations rarely fit traditional norms like multiple bidders or prior procurement history.  With government purchases making up nearly 20 per cent of India’s gross domestic product, the state wields enormous power to shape markets and drive innovation. As an early adopter, it can validate new technologies, build consumer confidence, provide steady revenues, and reduce the risks innovators face in bringing novel products to market. 

The biggest dilemma is the single-vendor situation, which is inherent in innovation. The general financial rules (GFR) do not prohibit single-source procurement. Rule 166 allows it if the user department establishes that a particular firm is the sole manufacturer of the required goods, supported by a proprietary article certificate issued by the concerned ministry.  The provision makes no distinction between goods simply manufactured in India and those designed and innovated domestically. However, its presumption of suspicion discourages single-vendor procurement, often turning the PAC requirement, meant to safeguard the organisation, into a showstopper. 

The L1 tendering norm often sidelines innovations that may be costlier upfront but become economical once scaled. To address this, the Public Procurement (Preference to Make in India) Order, 2017, mandates 20 per cent local content for procurement preference. Yet, it makes no distinction between simple manufacturing and genuine IP (intellectual property) creation. In contrast, the US Buy America Act requires 55–75 per cent local content — levels only achievable through indigenous technology. Since 20–30 per cent value addition can be achieved through assembly alone, India’s framework — by not privileging domestic design — leaves a critical gap that needs urgent correction.

 

In India, the defence sector has tried to solve this problem by introducing the Indigenously Designed, Developed and Manufactured (IDDM) category in the defence acquisition procedure. Here, if an IDDM vendor exists, the request for proposal should only go to that vendor, even if others manufacture the same product in India using imported technology. However, risk aversion often leads to both IDDM and other manufacturers being invited, weakening the preference.

 

Ambiguity also persists around what qualifies as “designed in India”. The Ministry of Defence created a Collegiate to pre-define which technologies must be Indian for a product to qualify as IDDM. Yet, benchmarks were usually set around median industry capability rather than the frontier of innovation, limiting impact. 

 

South Korea offers a structured solution to single-vendor procurement. An independent authority certifies domestic products as innovative, after which public agencies are permitted — and sometimes required — to procure them even from a sole supplier. This shifts the burden of identifying innovation away from procuring authorities, reducing risk-aversion and the reluctance to sole-source purchases. Certification is temporary and can be withdrawn as competition emerges, ensuring innovation is promoted without entrenching monopolies. The Innovative Solutions Canada Testing Stream offers a solution. This programme buys and tests pre-commercial products on behalf of government departments, covering initial costs so that line ministries don’t bear financial or reputational risk. 

 

Even when governments agree to procure an innovative domestic product from a single vendor, the key challenge is establishing a fair price without competition. International practice offers two models: The US Federal Acquisition Regulation allows pricing through cost analysis (based on production costs with capped profit) or price analysis (using past procurements, catalogues, or comparable products). The EU’s 2014 Directive (Article 32) instead permits negotiated pricing with the vendor, provided the justification is recorded and transparent — ensuring defensible decisions while keeping price-points confidential to prevent undercutting or litigation.

 

Public procurement systems are usually built around fixed specifications and established standards, which innovative products often disrupt. To address this, several countries have built flexibility into their frameworks. The EU encourages functional or performance-based requirements instead of rigid technical ones. South Korea exempts certified innovations from certain specification requirements, compelling public agencies to adopt them even if they don’t fit existing standards. Canada allows early-stage technologies to be tested in government use, enabling standards to evolve after real-world validation.

 

In the defence sector, earmarking a fixed share of the procurement budget exclusively for domestic manufacturers has proven effective. A similar approach could be applied to innovation by creating a dedicated budget sub-head, mandating a set percentage be reserved for innovative products.

 

In India, where process often outweighs outcomes, procuring early-stage innovations remains a major challenge. The GFR must, therefore, provide a clear framework to institutionalise such procurement. Global models offer guidance, but their true value lies in adapting them to India’s context. With the right framework, India can turn innovation into its most decisive competitive advantage.

  The author is chairman, Union Public Service Commission, and  former defence secretary. The views are personal