Improved government buying

Improved government buying

by Ajay Shah and Susan Thomas
Business Standard, 11 May 2025

The Indian state every year procures goods and services worth an estimated 15-20 per cent of gross domestic product (GDP) or about Rs.60 trillion a year. How procurement is conducted should be a central concern of public finance. Yet, all too often, contracting for government procurement in India is viewed through the political lens, as a tool for patronage, for pursuing industrial policy, or for protectionism.

It's time we took two large steps back. Government procurement is, at its core, about expenditure efficiency. The state, acting as an agent for the taxpayer, has a fiduciary duty to deliver the best possible value for every rupee spent. Whether it's buying steel for infrastructure projects, computers for schools, or medicines for public hospitals, only one objective should be pursued: To reliably deliver the specified quality at the lowest possible price, within the stated time. The protectionist impulse -- to give the citizenry a bad deal while the sellers gain benefits -- should be rejected. A tough, transparent, and competitive market for government contracts is the right way. We are frugal and thoughtful when we buy in our households. The principles guiding public procurement using public funds should be no different, only magnified in their impact.

The reality of government contracting in India falls far short of this ideal. As research at XKDR Forum has highlighted, our procurement processes are often riddled with inefficiencies. There is a lack of genuine competition. Tenders frequently attract only a handful of bidders, often just one. There are delays and cost overruns in delivery. The system of government contracting is generally perceived by all parties as complex, opaque, and fraught with uncertainties, including those related to payments and dispute resolution.

When competition is weak, prices are inevitably higher. If procurement reform improves prices by 10 per cent, this is tantamount to enhanced government contracts of 10 per cent, without a single rupee of additional tax. The primary strategy of public finance, therefore, should be a relentless focus on improving the mechanics of government contracting. This isn't just about bureaucratic tidiness; it's about unlocking a vast fiscal space.

One contributor to this low-competition environment is a historical reluctance to open government procurement to foreign companies. India, unlike most advanced economies, is not a signatory to the World Trade Organization's government procurement agreement (GPA). This protectionism is visibly manifested in the Public Procurement (Preference to Make in India) Order, 2017, which mandates preferences for domestic manufacturers based on local content. Even when global tenders are floated, local suppliers often receive purchase preference if their bids are within a certain margin of the lowest foreign bid, provided they match the price. This, in turn, deters foreign firms from trying to sell to the Indian state.

This approach -- of favouring Indian firms while harming the Indian citizen -- is precisely like the broader idea of protectionism. It shields domestic firms from the full force of global competition, reducing their incentives to innovate, enhance quality, and achieve price competitiveness. Ultimately, the taxpayer bears the cost of this inefficiency, either through higher prices or lower quality and delayed delivery of goods and services. Just as import tariffs on steel harm downstream industries and consumers, procurement protectionism harms the `consumer' of government services -- the public.

There are nascent signs of a welcome rebalancing. The India-United Arab Emirates Comprehensive Economic Partnership Agreement (CEPA), effective May 2022, was a pathbreaker. It included India's first FTA (free-trade agreement) chapter with explicit government procurement market access commitments. This was followed by the India-Australia Economic Cooperation and Trade Agreement (ECTA), effective December 2022. More recently, the India-European Free Trade Association's Trade and Economic Partnership Agreement (TEPA), signed in March 2024, includes a chapter on government procurement. Of great importance is the recently concluded India-United Kingdom FTA. This agreement appears to offer more extensive access to UK firms for certain central government tenders, albeit with specific conditions and thresholds.

These are commendable steps. They signal a recognition, at least in principle, that greater competition, including from foreign entities, can be beneficial. They move the Indian state closer to conditions of fairness for the people of India.

While these FTA-led openings are directionally correct and should be applauded, we must temper our expectations about their immediate impact on government procurement outcomes. The deeper problem is that India's domestic procurement ecosystem works poorly. The hard truth today is that many highly capable Indian firms have consciously adopted an internal policy of not participating in any government tenders. They see problems in the entire contract lifecycle: High transaction costs, delays in decision-making and payments, risks of arbitrary actions, predictably ineffective dispute resolution mechanism, and weak rule of law.

If India's own best firms shy away, why would foreign firms, which face even greater information asymmetries and entry barriers, rush in enthusiastically?

The path forward, therefore, requires a two-pronged strategy.

First, the initiative shown in FTAs to open up government procurement should be pursued with greater vigour and ambition. This means expanding coverage to more sectors and more procuring entities, progressively lowering participation thresholds, and extending these principles to agreements with a wider array of trading partners.

Second, and crucially, this external liberalisation should be accompanied by systemic reforms of our domestic procurement processes. A strong body of research is now in hand, which shows us the path. While IT (information technology) is a good tool for the process reform, the required reform is not an IT system, it is:

Enhance efficiencies from start-to-end of contracting: Strengthen documentation, deploy digital information management systems to enhance transparency across the entire procurement lifecycle, from bid submission to payment processing, with open contracting data standards.
Build HR for contracting: Invest in training and professionalising procurement officials, equipping them with skills in contract design, negotiation, and project management.
Establish robust and swift dispute resolution: Create independent, credible mechanisms for bidders to seek redress without fear of blacklisting.

Improving government procurement is fundamental to enhancing state capability and delivering better public services to the people. The recent FTA openings are a small, positive signal on the first track.

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