Policy Brief: Reforming Public Procurement Legislation in India

Public Procurement Legislation Essential for Improving Public Financial Management in India
Mukul G. Asher, Tarun Sharma and Shahana Sheikh

In response to input sought by the Ministry of Finance on the 2012 Public Procurement Bill.

Read the full Policy Brief [179 KB]

Executive Summary

The new Indian government elected in May 2014 has commendably decided to seek suggestions to refine the Public Procurement Bill of 2012, which was introduced by the previous government. This signals the intention to secure the passage of the revised Bill during the remaining months of 2015. This Policy Brief focuses on three aspects relating to the Bill: its potential benefits, selected design features and implementation challenges.

The brief argues that potential benefits from well designed and implemented public procurement legislation include fiscal savings arising from annual procurement expenditure, generating much needed fiscal space, and fiscal flexibility to channel government expenditure into growth enhancing areas. One such area is increasing public investment with potential to crowd-in private investment. The procurement legislation could also assist in a shift towards rule-based institutional procurement process.

Estimation of potential fiscal savings from better procurement process is hampered with poor quality of data on total amount of procurement and its major components. This gap needs to be urgently addressed. A conservative but crude estimate of potential savings generated by the revised Bill ranges between 0.6 percent and 1.2 percent of GDP, depending on the extent of efficiency achieved. This compares well with the revenue deficit of 2.9 percent of GDP projected for 2014-15 by the Union budget.

The fiscal savings for India would be larger as if states, whose expenditure about equals that of the Union government; and who will get increasingly larger share of Union resources in an unconstrained manner, but will need to shoulder greater responsibilities for their public finances and policy outcomes, also initiate similar procurement reforms. The brief suggests considering entrusting this task to the NITI Aayog.

The brief makes several suggestions to improve the design features of the 2012 Bill:

First, the Brief suggests making the objective function of the bill less complex to ensure greater focus on procurement process efficiency and integrity, and to enhance accountability.

Second, it suggests, the bill’s scope be extended to include post contract procedures.

Third, given judicial delays, and lack of economic literacy often displayed by the judiciary, procurement redressal committees should preferably be non-judicial, but need to be better specified to prevent undue discretion by procurement agencies.

Fourth, whether the proposed Central Purchasing Office (CPO) will act as a nodal agency needs clarification. The nodal agency framework will need to be reconciled with decentralised procurement process suggested by the two recent committees to the Indian Railways.

Fifth, the exclusion from procurement to be better specified. The scope for cost plus contracts needs to be reduced.

Sixth, putting aside 1 to 2 percent of the procurement budget, and entrusting it to NITI Aayog to find solutions for urgent domestic public policy issues merits consideration.

The Brief discusses the following implementation challenges. First, the Bill needs to ensure that the new procurement regime is accompanied by streamlined data and information systems. Second, there are too many rules associated with the 2012 Bill, but the general principles on which the rules will be based remain unclear. This needs addressing. Third, procurement should be regarded as a task requiring professional skills and capacity building should be undertaken urgently to ensure appropriate skill sets and understanding business practices and logic.

Appropriately designed and implemented procurement legislation is a long overdue step towards better public financial management.

Read the full policy brief [179 KB]

This policy brief can be cited as: Mukul G Asher, Tarun Sharma and Shahana Sheikh, “Public Procurement Legislation Essential for Improving Public Financial Management in India”, Takshashila Policy Brief 2015-01. (2015) www.takshashila.org.in/1534524506254.