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Public procurement: Is it time for govt to enhance CPSEs’ target of procuring 25% from MSEs?

Ease of Doing Business for MSMEs: Within the 25 per cent annual procurement target, 4 per cent has to be procured from MSEs led by scheduled caste/scheduled tribe entrepreneurs (SC/ST) and 3 per cent from women entrepreneurs. However, government departments have never been able to meet those targets.

Ease of Doing Business for MSMEs: Central ministries, departments, and public sector enterprises (CPSEs) have gone all out to purchase their targetted share of goods from micro and small enterprises (MSEs), at least in the past few years. That?s what it seems going by the government data. Here?s a quick backgrounder leading to that: Till 2018, the target for government units to procure from MSEs was 20 per cent of their overall annual purchase. Importantly, from FY15-FY17, the government ministries, enterprises, and departments failed 

miserably in achieving that target – 11.6 per cent in FY15, 4.5 per cent in FY16, and 10.3 per cent in FY17, official data from MSME Ministry showed.

This was until FY18 when it miraculously jumped to 23.1 per cent procurement from MSEs. The reason for this transformation couldn?t be known but what the government did in 2018 was that it increased the target from 20 per cent to 25 per cent, perhaps buoyed by the astonishing performance of government departments, ministries, and CPSEs.

From FY19 onwards, the target has been constantly overachieved – 26 per cent in FY19 with procurement worth Rs 40,399 crore from 1.28 lakh MSEs, 30.18 per cent in FY20 with purchases amounting to Rs 39,665 crore from 1.57 lakh MSEs, and 28.18 per cent with procurement worth Rs 40,723 crore from 1.75 lakh MSEs,      data      from      public      procurement      monitoring       platform MSME Sambandh showed. So far in FY22 as well, the share stood at 31.62 per cent with procurement amounting to Rs 24,037 crore from 1.15 lakh MSEs.

Now, MSME experts have opined that the government can look at further enhancing the current target of 25 per cent to a minimum 30 per cent, particularly looking at the record procurement share in FY20. This is likely to help MSEs sell 

more to government departments and CPSEs, resulting in related benefits such as more employment avenues, and more business overall. While these benefits wouldn?t translate for every MSE in the country but at least those who actively engage with the government can expect relatively better revenues, experts noted.

“If we look at the Atmanirbhar Bharat vision, it is only fair to say that the government has done its bit in purchasing from MSEs and supporting them. Government must continue procuring 30 per cent as MSMEs definitely need this. However, this is squarely on the government?s capability. If it thinks it is capable of doing more than 25 per cent and the revise the target, they should do it. This would help MSMEs grow,” Shreekant Somany, CMD, Somany Ceramics, and Chairman, National MSME Council, CII told Financial Express Online.

Increasing the procurement target to 30 per cent is also among the key budget expectations for MSMEs. MSME association Indian Industries Association (IIA) has also urged the government to allow a minimum of 30 per cent procurement by government organisations through the government e-marketplace (GeM) portal.

“We have already asked for 30 per cent as MSMEs are already the growth centre of the country. This would help businesses provide more employment to people,” Ashok Agarwal, President, IIA told Financial Express Online.

In the current financial year so far, among the 54 ministries? data available on public procurement, Ministry of Agriculture, Ministry of Consumer Affairs, Ministry of Defence, Ministry of Housing and Urban Affairs, Ministry of MSME, Ministry of Power, Ministry of Science and Technology, Ministry of Shipping, Ministry of Textiles, and Ministry of Tribal Affairs have already crossed the 25 per cent threshold based on their respective overall purchases so far and irrespective of the purchase amount.

For instance, the Ministry of Tribal Affairs? 25 per cent targetted procurement value stood at Rs 29 lakh while the actual procurement has been worth Rs 40.21 crore, as of December 27, 2021. The maximum procurement has been made by the Ministry of Petroleum and Natural Gas worth Rs 11,068 crore, however, the 25 per cent target amount stood at Rs 12,844 crore.

Comments from the MSME Ministry weren?t immediately available for this story.

“If the government increases the procurement target, it would be good for MSEs but it should be based on every purchase made by the government departments instead of 25 per cent on the gross purchases made in a year. This would mean that MSEs selling goods, which are more likely to be bought from large enterprises, would also be purchased by the government. Once this is done for every order, MSEs would benefit more,” Govind Lele, National General Secretary at MSME body Laghu Udyog Bharati told Financial Express Online.

However, more purchases from MSE units might also lead to more receivables stuck with the government department for payments. “Nothing better than a more competitive target but the only worry here is that it might add up to the cases where payments from the central government departments are pending and haven?t been cleared yet. While gradually MSMEs are getting their money but payments would have to be cleared in a more timely manner for businesses to operate flexibly,” a consultant at a financial advisory firm told Financial Express Online on anonymity.

As of November 25, 2021, PSUs and government departments had cleared Rs 50,350 crore in pending payments to MSMEs in the current calendar year, 

showed an analysis of the official data on payments cleared. Since May 2020, when Finance Minister Nirmala Sitharaman had announced Covid relief measures for MSMEs and highlighted in her press conference that MSME receivables from the government and CPSEs will be released in 45 days, total pending dues worth Rs 77,171.82 crore have been cleared as of November 25, 2021. The latest data was shared by MSME Minister Narayan Rane in Parliament during the winter session.

In September last year, the MSME Ministry had written to 500 corporates as well followed by another 2,800 of such enterprises in October to clear pending MSME dues in the respective month. The government had also urged buyers to onboard the Trade Receivables Discounting System (TReDS) platform to tide over their delayed payment issue. CII also in its expectations for the upcoming budget had urged the government to actively use TReDS for settling the delayed payments to MSMEs.

“There are MSE Facilitation Councils working on delayed payments issue and very soon PSUs will register themselves on TReDS. In our recent meeting with Commerce Minister Piyush goyal, we were told that all government departments 

will be soon on the invoice discounting platform that will ease payments,” added Agarwal.

Within the 25 per cent annual procurement target, 4 per cent has to be procured from MSEs led by scheduled caste/scheduled tribe entrepreneurs (SC/ST) and 3 per cent from women entrepreneurs. However, government departments have never been able to meet those targets. In fact, it hasn?t been more than 0.54 per cent from SC/ST entrepreneurs and 0.50 per cent from women MSEs till FY21.

“Mismatch is primarily the reason for this because CPSEs requirements don?t really match with what women or SC/ST entrepreneurs are making. Then there are quality issues as well while product range is also very limited. Hence, the percentage hasn?t really gone   up   to   3   per   cent,”   Ishita   Ganguly Tripathy, Additional Development Commissioner, Office of DC-MSME, Ministry of MSME had earlier told Financial Express Online.