Public procurement or public contracts take up a huge chunk of the GDP for any average country — this is especially the case with a developing country like India, whose GDP owes almost one-fourth of its share to public procurement. While India has an attractive market for foreign investors, it nevertheless also has a history of protectionism. A glance at India’s past trade relations shows that it was not until the economy faced a major twin deficit crisis that India agreed to open up its borders for liberalisation, privatisation, and globalisation.
This being the background, in 2007, the European Union (“the EU”) proposed a Free Trade Agreement (“FTA”) with India as a part of the ‘Global Europe’ strategy that the EU had rolled out years ago. India has been relatively more inclined towards opening up its borders to foreign investors since the 1990s. Thus, the FTA shouldn’t have been a long-drawn process. However, the impediment was an impasse as the EU proposed the FTA to be implemented with the liberalisation of public procurement — which would entail the government to buy resources from the EU market. However, India did not agree for it to be liberalised. Until very recently when it was to be put on the table yet again.
The primary tussle with liberalisation of public procurement is because, on one hand States believe in spending their money on local businesses to boost the economy; whereas the others believe that opening up markets to foreign opportunities would give a wider field for local businesses to grow. A new perspective to this debate has been added by the pandemic and the post-COVID19 expectations of the Indian Economy. Hence, it is pertinent to understand what made these two economies reach an impasse and what should be the stance now that they might have another shot at it.
India and EU: A Comparative Framework of the Public Procurement Regime
In the EU, the public purchase of goods and services has been estimated to account for 13.3% of their GDP. There is a firm belief in the free movement of goods and services, given the common market. The EU is additionally also a signatory to the Agreement on Government Procurement (“GPA”). Pursuant to this, along with its policy of free trade and commerce, the EU has comprehensively codified public procurement policies. One of the prime requirements under the GPA is the ‘impartiality principle’. This puts an obligation on the State that it should not be biased towards local products when there are better quality foreign products available (in the context of public procurement).
In India on the other hand, much attention was not given to policies on Public Procurement. It was only recently that India actually started taking steps towards a more structured public procurement regime. Earlier, there were only the general commercial laws such as the Indian Contracts Act, Sale of Goods Act, Competition Act etc., that governed the buying and selling of goods and services.
India on the central level has been very slow in bringing about public procurement reforms. Even the Public Procurement Bill, 2012 (aimed at bringing about transparency) never saw light outside the discussions in parliament. Even if it were passed, the Bill would be derived largely from the UNCITRAL Model Law on Public Procurement without much novelty and specificity to the domestic concerns.
Why was India Shying Away?
India apparently uses public procurement as a development policy to support small scale industries and enterprises. India was apprehensive of making its developing industrial sector compete with the advanced EU market because if it had to agree to the FTA it would have to agree to the non-discrimination clause. Further, it was a cause of concern for the EU because various Indian sectors predominantly relied on domestic markets for their resources. For example, the IT Sector procured 25-28% of its resources from domestic markets. Moreover, before considering opening up its public procurement markets, India had already started making efforts by passing orders under its ‘Make in India’ strategy to curtail any foreign investment in its telecommunication public procurement sector. Such steps did not fare well in the view of the EU, who saw these measures as protectionist, arguably, no country would want to offer its markets without a proportionate reciprocal offer.
The other issue that made the FTA negotiations difficult was the need for transparency. As discussed above, India does not have comprehensive Central Guidelines when it comes to public procurement. The one time it attempted to make public procurement transparent, the effort did not bear any fruit. This was a concern because India has consistently failed to fare well at transparency. This is why the EU required India to comply with the transparency guidelines, and India was not ready for the same. Conceivably due to structural costs and associated requirements that India would’ve required to actually give shape to framework. It would have taken a significant amount of resources both pecuniary and temporal, without which the EU could not see the FTA taking form.
The COVID-19 Impact
India is among the 15 most affected economies due to the COVID-19 pandemic. However, the trade impact for India is less as compared to the EU — where the latter is being counted as one of the worst hit economies (with an impact of $15.6 billion). Considering India’s position and the benefits that the FTA holds for its economy, the stance that India should take this time should be relatively less stringent. The same should be from the side of the EU. In the current crisis, this could prove to be a golden opportunity for both the economies to rejuvenate themselves. India’s failing production could benefit from procurement from the EU and this in turn could be a chance for the EU to revitalise the losses it has incurred.
India, because of the ongoing crisis, cannot be said to be self-sufficient. If an FTA is brought in place, India’s industrial sector would benefit greatly from increased transparency through comprehensive and codified policies. The endowments that are provided to enterprises are done on a political basis. Further, there are many enterprises that are facing a lack of resources, uneven distribution of resources, lack of technology and infrastructure as well (here). These are issues that can potentially be resolved by agreeing to the FTA and liberalising the public procurement sector.
However, India’s fear of making the local markets compete with significantly advanced markets is also legitimate. The authors propose that this could be resolved by selective liberalisation. One way could be by mirroring the agreement between the EU and Singapore. The EU liberalised and allowed Singapore to invest only in the utilities sector with respect to public procurement. A committee can be established to study the public sectors that India is not able to handle in a self-sufficient way, and open only those to foreign investment. Further, the private sectors that are still in a primitive stage and are not in a position to compete should not be made to do so. Hence, selected sectors being liberalised could be a viable option. This is where the EU will have to offer concession and show a degree of flexibility.
The negotiations surrounding the FTA were suspended last time due to a rigid stance of both India and the EU. Had the countries been more flexible and reached an agreement, large portions of both the EU and the Indian market would have benefited greatly. On one hand Indian markets are huge while on the other the EU’s goods and services are highly advanced. India needs to realise that shielding its public procurement sector is not a rational option anymore. If India’s rigidity may jeopardise its access to other GPA countries and their markets. Entering into an agreement with the EU will not only open up various avenues for India but it will also mean getting assistance from the EU in development and implementation of policies and guidelines for efficient regulation of its public procurement market.
The EU-India FTA is not the only instance where India was invited to open up its public procurement markets. India had also firmly rejected the Regional Comprehensive Economic Partnership Trade Agreement as it did not adequately reflect its concerns. It is only so long that a developing country like India which is inevitably an important player in world trade can keep its rigid stance. The world is increasingly moving towards a global economy. Even with respect to public procurement liberalisation, there have been a myriad of agreements between countries. With the increasing affinity between countries with respect to trade, India cannot afford to be left behind.
Finally, the impending Brexit deal will undoubtedly have an impact on the EU and its trade once implemented. The UK has been a major trade partner from the EU bloc covering almost 17% of the EU’s trade with India. Now that the UK is detached from the EU; for India, this would mean having two different entities to negotiate an FTA with. However, it would conceivably push the EU towards softening its stance on the FTA deal, because it would not only be losing a significant trading giant, but also would have a competitor once the U.K. initiates talks with India for free trade. It is then only a question of how willing the authorities are with respect to taking risks and facing challenges rather than shying away from them.
Prakarsh and Shruti Mishra are second year students at National Law Institute University, Bhopal.
Image: EU/Etienne Ansotte