Preference for Local Industry in Defence Production: India’s must addopt #Hindustan360

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Broad policy framework: Make in India initiative to accelerate the share of manufacturing in the country’s gross domestic product. View more at #Hindustan360.

Big plans are afoot for India’s sprawling hydrocarbons industry. Finance minister Arun Jaitley says the government aims to create an “integrated public sector oil major” to match the might of the international oil and gas giants. The big question is how that plan will unfold. Details are beginning to emerge.

In a significant development, the Ministry of Finance (MoF) has included a new enabling provision in the revised General Financial Rules (GFR) with the intention of favouring domestic industry over foreign companies in government procurement contracts. The new provision, under Rule 153 (Reserved Items and other Purchase/Price Preference Policy) of GFR-2017, arms the central government with the power to “provide for mandatory procurement of any goods and services from any category of bidders, or provide for preference to bidders on the grounds of promotion of locally manufactured goods or locally provided services.”

Policy Framework

The broad policy framework is part of the government’s ambitious Make in India initiative to accelerate the share of manufacturing in the country’s gross domestic product. While the new provision is applicable to all government procurements, one area where its implementation is likely to have a far reaching impact is defence procurement. Unlike procurement by other ministries/departments, that of the Ministry of Defence (MoD) is immune from international trade restrictions.

The operationalisation of the new provision by the MoD, however, requires, a suitable tweaking of the existing procurement procedures to bridge a vital gap that exists in India’s attempt to push forward the Make in India initiative in defence manufacturing.

International Trade Norms and Protectionism

The World Trade Organisation (WTO), to which India has been a party since 1995, generally prohibits protectionism in international trade. However, it does provide several exemptions for member states with regard to various restrictive trade practices such as offsets and other forms of counter trade, preferential treatment to local industry and domestic content requirement.

Two areas where the WTO is silent on restrictive practices are: arms trade, and government procurement outside the framework of the Agreement on Government Procurement (GPA)

A plurilateral agreement to which 19 out of 162 WTO members are presently party. GPA promotes free trade among member states in so far as government procurement contract is concerned. India is not yet a member of the GPA, but has had observer status since February 2010. Even within the framework of the GPA, there is a clear provision that allows member states to take measures to prohibit foreign participation in public procurement on national security grounds.

Many countries, including those party to the GPA, have exploited the above-mentioned exemptions provided in the WTO, and devised suitable laws and provisions to promote their domestic industrial interests. Israel, for instance, has a law that allows a price preference of up to 15 percent for the local industry in a government procurement tender open to non-GPA members.

Price Bid and Foreign Suppliers

The price preference, in essence, artificially inflates the price bid of a foreign supplier when its bid price is found to be the lowest among all the bidders. The artificially increased price is then compared with the lowest offered price of a domestic supplier so as to find whether the said domestic supplier can match the price of the foreign supplier. In case the domestic bid price is found to be lower than or equal to the artificially increased price, then the contract is awarded to the domestic bidder. This allows the government to keep the taxpayers’ money confined to the furtherance of local business and employment.

View more at #Hindustan360.