Government purchases don’t need atmanirbharta; foreign firms are required

Opening government procurement to foreign competition is a bold and pragmatic move by the Modi government to enhance the efficiency of public expenditure.

One major criticism of the recently concluded India-UK FTA is that it opens up government procurement market to foreign companies. Critics argue that it severely undermines the policy space available to support domestic manufacturing by giving preference to local firms.

They fear it sets a precedent, and will prompt India’s other trade partners, such as the EU and the US—currently negotiating free trade agreements with India—to demand similar if not better access to India’s government procurement market, valued at approximately $600 billion, or 15% of GDP, further limiting the country’s ability to favour local firms.

While these concerns are valid, opening government procurement to foreign competition is a bold and pragmatic move by the Modi government to enhance the efficiency of public expenditure. Rather than retreating, India should embrace global competition in its procurement market by joining the WTO’s Agreement on Government Procurement (GPA).

Promoting local industries through policies such as Public Procurement (Preference to Make in India) Order, 2017 (revised in 2020) has been a cornerstone of India’s industrial strategy. By reserving supply contracts for local firms, including MSMEs, the policy aims to boost domestic manufacturing.

Unintended consequences of reserving market for local firms

However, viewing government procurement as an industrial policy tool to promote domestic firms by restricting foreign participation has an unintended consequence that cannot be ignored: Higher procurement costs for central and state governments and state-owned enterprises, the burden of which ultimately falls on the country’s tax payers.

In low-value contracts (below Rs 5 lakh) reserved for local suppliers on the Government e-Marketplace (GeM), limited competition often results in higher procurement costs for basic items like office supplies.

Even for large infrastructure projects, such as metro rail systems or highways, which require global bidding, local companies are favoured due to stringent local content requirements (with additional local preference under state procurement laws, e.g. Tamil Nadu Transparency in Tenders Act, 1998), or in cases where a Class-I local supplier (one with ≥50% local content) can get the contract if its bid is within 20% of the lowest bid (L1), provided it matches the L1 price. These measures discourage foreign participation, thereby reducing competition in the bidding process.

Again, issues such as delayed payments, bureaucratic corruption, and slow dispute resolution processes prompt bidders—especially foreign bidders—to inflate their quotes to cover these associated risks. As a result, foreign bidders often lose contracts when L1 remains the governing norm to award government contracts. That again discourages them from participating.

Smaller pool of bidders can lead to cartelisation

A reduced number of bidders makes it easier for the remaining participants to rig the bidding process through collusion or cartelization, leading to price manipulation and inflated procurement costs for buyers (the government and PSUs). In other words, reduced competition—caused by attempts (even if well-intentioned) to block foreign participation in India’s government procurement operations—leads to cost inefficiencies.

Opening government procurement market to global competition addresses many of these challenges. By allowing foreign firms to bid without any restrictions or discriminations, India can get better technology, higher quality, and lower prices. For instance, in a global tender for railway equipment, a foreign firm like Japan’s Hitachi could offer advanced technology at competitive rates, pushing Indian firms to innovate and reduce costs.

FTAs point to efficiency being prioritized

The Indian government under the India-UAE CEPA, India-Australia FTA, and now the India-UK FTA have taken steps in this direction by granting companies from UAE, Australia and the UK access to India’s public procurement market. These agreements demonstrate a pragmatic approach taken by the Modi government to prioritise efficiency over protectionism, despite a strong opposition to opening up India’s government procurement market to foreign competition.

Joining the WTO Agreement on Government Procurement (GPA) would amplify these benefits. The GPA, a plurilateral agreement, ensures a non-discriminatory access to public procurement markets among member countries. Thus, by signing it, India would not only invite global competition in its government procurement market, but also secure reciprocal access for Indian companies in GPA member countries’ procurement markets.

While the reciprocity clause under the Make in India Order already restricts firms from countries that bar Indian companies, joining the GPA would formalise and expand this mutual access, further levelling the playing field.  To fully realise these benefits, Indian negotiators should focus on securing genuinely improved market access in partner countries' government procurement markets by ensuring that key entry barriers—such as complex qualification criteria, and discriminatory practices are addressed.

Critics overlook all-round benefits

Critics argue that opening procurement risks undermining local industries, particularly MSMEs, which rely on reserved contracts for survival. However, this concern overlooks the long-term benefits of competition: Huge cost savings to the government and eventually to the tax payers. Allowing foreign companies to bid for Indian government contracts will significantly increase competition. Even a modest improvement in cost efficiency—say, by just 10%—could result in savings of $60 billion. That’s a benefit too substantial to ignore.

Critics often overlook the core principle that should govern government procurement operations: maximising efficiency in public spending. The government, as the custodian of taxpayer money, has a responsibility to ensure every rupee is spent wisely and delivers maximum value. Restricting foreign firms from bidding reduces competition, which in turn limits choices and drives up costs. This can lead to the government and public sector undertakings (PSUs) overpaying for goods and services, or settling for lower quality at inflated prices.

By opening up government contracts to global competition, India can ensure better quality, lower costs, and greater value for its citizens. In addition, increased competition from foreign companies and suppliers will push Indian firms to innovate, improve quality, and become globally competitive, enabling them to participate in government procurement operations of FTA or GPA member countries.