Welcome rethink on FTAs

Recent media reports suggest that the Department of Commerce has decided to go slow on many FTA negotiations and is in the process of revising its FTA strategy. This opportunity must be utilised to take a hard look at issues of concern in FTAs, particularly government procurement.

What is the common thread running through the following two recent events: government celebrating 10 years of Make In India; and the ninth round of India-EU negotiations for a free trade agreement in the last week of September?

An important policy instrument — government procurement — links these seemingly unconnected events. Is it possible that the government developed second thoughts on its FTA strategy in view of the role of government procurement in domestic policy?

With the WTO rules having considerably restricted the elbow room of governments to bend in favour of their domestic producers and service suppliers, government procurement remains an important exception. Governments in most countries are allowed to favour their domestic producers and service suppliers in the procurement of goods and services by them for their own use and not for commercial purposes.

Govt procurement

What do FTA negotiations have to do with government procurement? In most of the recent FTAs of the developed countries, each party has agreed to treat suppliers from the other party at par with its domestic suppliers in government purchases. Effectively, this curtails the flexibility available to governments to use government procurement as a policy instrument for boosting the commercial prospects of their domestic suppliers.

How has the Centre used government procurement to boost the domestic economy? Rule 153 of the General Financial Rules allows the Central Government to provide for mandatory procurement of any goods or 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.

Further, the Public Procurement Policy for Micro and Small Enterprises (MSE) mandates 25 per cent annual procurement from MSEs by Central Ministries/Departments/Central Public Sector Enterprises (CPE).

The effectiveness of this policy can be assessed from the fact that the total procurement by Central Ministries/Departments/CPSEs from MSEs during the financial year 2023-24 was ₹82,630.38 crore.

Another initiative, the Public Procurement (Preference to Make in India) Order, 2017, (PPO 2017) aims to create an assured domestic market for manufacturers, who are genuinely ‘Make in India’, thereby encouraging utilisation of Indian material resources for the provision of goods required for public procurements.

How has government procurement figured in India’s FTAs? While some of its initial FTAs have provisions on information exchange in respect of government procurement, the Comprehensive Economic Partnership Agreement with Japan requires a party to enter into negotiations with the other party if the former provides non-discriminatory market access in government procurement to a third country.

In the FTA between India and the UAE, both parties have agreed to provide non-discriminatory treatment to goods, services and services suppliers of the other party in government procurement contracts. However, India has excluded procurements conducted under PPO 2017 from the non-discriminatory market access.

It is reasonable to assume that in their FTA negotiations with India, the UK and the EU would be seeking to expand market access for their entities in India’s government procurement beyond what India has provided to the UAE.

Time to pause

In particular, demands could be made on India not to exclude procurements under PPO 2017 from the non-discriminatory market access. If India is unable to resist this pressure, it would considerably undermine the ability of the government to use public procurement as an instrument for promoting Make In India. The recently announced pause provides scope for a rethink.

Government procurement measures have been used by other countries to bolster domestic production, protect vulnerable groups and also support environment and labour concerns.

Many developed countries have made effective use of this policy instrument. To illustrate, the American Recovery and Reinvestment Act of 2009, implemented in the wake of the global financial crisis, sought to save existing jobs and create new ones. It imposed a general requirement that any public building or public works project funded by the new stimulus package must use only iron, steel and other manufactured goods produced in the US.

Further, many studies have highlighted how the US has used the instrument of government procurement to provide an assured market to its business entities who create products based on frontier technologies. This has enabled local entrepreneurs to scale up their production and become commercially viable.

Will India not gain from having non-discriminatory access to government procurement markets in the EU and the UK? No doubt the value of government procurement in these markets that may be subject to non-discriminatory treatment are impressive — €473 billion in the EU in 2022 and £110 billion in the UK in 2021.

However, it is a harsh reality that a miniscule value of the procurement is awarded to suppliers from outside the EU. Some studies have concluded that in many years less than 0.5 per cent of the EU’s procurement was awarded to non-EU sources. India’s negotiators must not imagine that a big commercial opportunity awaits India’s exporters in the public procurement markets in the EU and the UK.

In conclusion, India needs to tread extremely cautiously while negotiating rules on government procurement in its FTAs. And, that holds true for FTA provisions in general.

The writer is an international trade expert. Views expressed are personal