A Shield That’s Not Required

Attempts to protect home markets signal a lack of confidence in the business community. A decision by the Modi administration in India “to oblige ministries to procure only locally-built electronic products not only marks a protectionist turn but also undermines the government’s avowed goal of fighting corruption and increasing transparency,” writes Nayan Chanda, editor in chief of YaleGlobal, in his Businessworld column. Government procurement is a huge market, with more than $1.5 trillion annual revenues. Opening that market has been a World Trade Organization goal. India’s shield for its electronic manufacturers will deprive its bidders from the world’s most competitive products. China, on the other hand, has signaled its confidence by joining negotiations to enter the WTO Agreement on Government Procurement with 42 member countries, including the United States, Japan and the EU. Chanda concludes that “GPA accession requirements would have pushed India towards adopting good governance methods compliant with international norms, while ensuring that the government got the best available goods and services at competitive prices.” Hesitation to join the pact calls into question Modi’s commitment to economic reform. – YaleGlobal

A Shield That’s Not Required

“Make in India” plan bars the nation’s electronic firms from competing with the world’s best and calls Modi’s commitment to economic reform into question
Nayan Chanda
Thursday, January 15, 2015

In a bid to boost domestic manufacturing through its “Make in India” program, the Narendra Modi government may have taken an inadvertent, backward step. Its decision to oblige ministries to procure only locally-built electronic products not only marks a protectionist turn but also undermines the government’s avowed goal of fighting corruption and increasing transparency.

Government procurement of goods and services worldwide accounts for nearly $1.7 trillion in revenues every year. Opening that market to international competition has been the goal of the WTO plurilateral Agreement on Government Procurement (GPA). Its 42-member countries, including the United States, the European Union, Canada and Japan, open their government procurement to bidding by fellow members. In 2010, several countries, including China and India, joined the group as observers in preparation for full accession. China since, has begun negotiation to accede to the pact, but India has restricted its ministries to domestically-made electronic goods. Supporters of the move argue that the decision will boost domestic producers of electronic goods and encourage foreign firms to invest in Indian companies that are assured of a big government procurement market. Central government procurement is estimated to be $125 billion a year. It is most likely that India’s electronic goods manufacturers will be overwhelmed by large-scale orders and import foreign components to meet the orders. This may not be a bad outcome in itself, but shielding Indian manufacturers from foreign bidders will deprive India of accessing low-cost bids by international suppliers. It cannot but have a negative impact on efficiency and quality of Indian manufacturers. Indian companies know how opening the country to foreign competition has forced them to improve their product quality and enabled them to compete abroad.  

The move to bar foreign suppliers diminishes India’s earlier expressed interest in eventually acceding to the GPA.  China’s accession would enable its companies to compete in the international market on a par with rivals in developed countries. In contrast, the Modi government’s protectionist approach will hamper efforts by Indian firms to bid for foreign contracts. A recent example is the US Buy America Act (2009) that stipulates an additional 2 per cent tax on bidders from nations that are not members of this pact. 

Another cost of this plan would be borne by Indian citizens, whose frustration with the corruption of the previous government inspired them to elect Modi. The ‘Buy India’ decision will likely perpetuate the opaque, corruption-ridden system that Modi had pledged to dismantle. Indeed, India’s biggest recent corruption scandals – including the 2G scam, the Commonwealth Games fiasco and revelations about illegal mining contracts – were products of a non-transparent system in which venal officials had a free hand. Joining the GPA and opening procurement to international bidding would have obliged India to undertake measures to enhance transparency and accountability. It would have signalled to the world that India is ready to join developed countries with what is supposed to be a clean, predictable and transparent system that rewards efficiency and quality and not mollycoddle national firms, however non-competitive they may be. The GPA accession requirements would have pushed India towards adopting good governance methods compliant with international norms, while ensuring that the government got the best available goods and services at competitive prices. 

India’s emerging protectionist stance on government procurement will raise fresh doubts among foreign investors about the Modi government’s commitment to economic reform and liberalisation. If Modi wants local firms to be the best in the global marketplace, he has to start by first allowing them to compete against the best foreign firms inside India. Like charity, competition too should begin at home.

 

Nayan Chanda is founder and editor-in-chief of YaleGlobal Online, based at Yale Univeristy’s MacMillan Center.

Copyright © 2014

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