Can this lift India's industrial growth?

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Small and medium enterprises (SMEs), particularly in developing countries, are the backbone of the nation's economy. They constitute the bulk of the industrial base and also contribute significantly to their exports as well as to their Gross Domestic Product (GDP). India has nearly 3 m SMEs which account for nearly 45% of the gross value of output in the manufacturing sector and over 40% of the total exports from the country. The sector's contribution to employment is second highest next to agriculture.

The SME manufacturing sector in India has grown rapidly over the years. The growth rates during the various plan periods have been very impressive. However, as a result of globalisation and liberalisation, coupled with World Trade Organisation (WTO) regime, SMEs have been passing through a transitional period. With enhanced competition from China and a few low cost centers of production from abroad many units have of late been facing a tough time. Since SMEs are highly susceptible to volatile market conditions, the government has approved a new Public Procurement Policy for goods produced and services rendered by micro and small enterprises.

According to the new policy, the government has set an annual target of 20% procurement for the Central Government departments and PSUs from SMEs. However, the procurement policy would be voluntary in nature for three years. It would be made mandatory after three years. Within this limit, 4% of the orders should be placed to the SC/ST entrepreneurs and 16% for others. Government departments and state-run companies make purchases worth Rs 1750 bn annually. About Rs 350 bn worth of goods will now be procured from micro and small enterprises. No preference would be given to micro and small enterprises and they would have to compete with others in pricing and quality. The 20% reservation for SMEs will, however, not be applicable in defense equipment procurement like weapon systems, missiles, etc.

We believe this policy will help to promote SMEs by improving their market access and competitiveness through increased participation by SMEs in government purchases. Further it will encourage linkages between SMEs and large enterprises. However better SME participation in public procurement can be best achieved by helping the SMEs to compete effectively for contracts. For this the opportunities should be transparent, and the bidding process as simple as possible. A strategic approach to procurement will encourage innovation and give the SMEs a fair deal.