In an attempt “to transform India into a global design and manufacturing export hub” the Prime Minister of India launched the Make in India (MII) initiative in 2014 with a view to encourage both Indian as well as global players to increase development, production, and manufacturing of products made in India. While the primary focus of the MII policy is to remodel the country into a leading global manufacturing and investment destination, the greater objective of the policy is to create a conducive environment to promote investments in the manufacturing sector in India and for indigenous and foreign investors to harness the immense employment potential in the country.1
In the backdrop of the MII policy and the larger ideology of transforming India into a global manufacturing hub, facilitating investment and building a robust manufacturing infrastructure, the Department for Promotion of Industry and Internal Trade (DPIIT) of the Ministry of Commerce and Industry, issued the Public Procurement (Preference to Make in India) Order 2017, along with several amendments thereto, including the revised order dated 16 September 20202 (DPIIT Order).
In order to further the MII objective, the DPIIT Order introduced a purchase preference for goods and services having higher value of local content in government procurement through tenders issued by various ministries and departments. ‘Local content’, as under the DPIIT Order, means the proportion of value added in India, i.e., the total value of the item procured after excluding the value of imported content in the item. 3
Recognizing the diversity in requirements and specifications of goods and services across various sectors and sub-sectors, the DPIIT Order also enables nodal ministries to explore methods for determining local content as well as the extent of minimum local content requirement (LCR) through sector-specific procurement/ purchase preference orders.
APPLICABILITY OF THE DPIIT ORDER
The DPIIT Order has been issued under Rule 153(iii) of the General Financial Rules 2017 (as amended from time to time) (GFR), that allows the Central Government to notify mandatory procurement of goods or services from any category of bidders or preference provisions for bidders offering locally manufactured goods or services. Following suit, several ministries introduced their own preference to make in India procurement policies, including inter alia, Ministry of New and Renewable Energy4 (MNRE) for domestic manufacturing of solar PV modules and cells, Ministry of Housing and Urban Affairs5 (MoHUA) for revised LCR for various metro rail components, Ministry of Power6 (MoP) for the power sector, Ministry of Electronics and Information Technology (MeitY) for electronic, telecom and cyber security products, and Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers7 for goods and services related to medical devices.
The DPIIT Order is applicable to all procurement by the Government of India, including any public-private partnership projects.8 Some key features of the DPIIT Order are set out below:
(i) Classification of local suppliers
The local suppliers have been categorized into various classes, viz. (a) class-I local suppliers, that includes suppliers or service providers whose goods, services or works offered for procurement have local content equal to or more than 50%; (b) class-II local suppliers, that includes those suppliers/ service providers whose local content is more than 20% but less than 50%; and (c) non-local suppliers, whose goods, services or works offered for procurement, have local content less than or equal to 20%. Further, a preference is given to class I and class II local suppliers in different kinds of public procurements based on the nature and specifications of goods and/ or services required for a particular project.
(ii) Eligibility of Bidders
In the procurement of all goods, services or works where the relevant nodal ministry or department has communicated sufficiency of local capacity and competition, only class-I local suppliers are eligible to bid irrespective of the purchase value. However, in other tenders, both class-I and class-II local suppliers are eligible to participate in the tender process where the estimated value of purchases is less than INR 200 crores.
Further, non-local suppliers are eligible to bid along with class-I and class-II local suppliers in bids where, the procurement value is above INR 200 crores or global tender enquiries under Rule 161(iv) of the General Financial Rules 2017 (GFR) (as amended from time to time) 9 have been issued in relation to bid with procurement value less than INR 200 crores.
(iii) Purchase Preference
Procuring agencies have been permitted to give preference to bids obtained from class-I and class-II local suppliers basis divisibility in procurement of the goods, works and/or services.
(iv) Verification of Local Content
All class-I and class-II local suppliers must submit a verification of the local content percentage met by their goods, works and/or services by way of a self-certification (in case of procurement for a value up to INR 10 crores) or certification from a statutory auditor or cost auditor (in case of procurement for value in excess of INR 10 crores) based on the value of procurement.
The DPIIT further issued a clarification dated 4 March 202110 to the DPIIT Order stating that bidders offering imported products will be regarded as ‘non-local suppliers’ under the DPIIT Order and cannot meet the LCR on the basis of services such as ‘transportation, insurance, installation, commissioning, training and after sales service support’.
LCR UNDER PUBLIC TENDERS ACROSS SECTORS
The requirements set out under the DPIIT Order regarding the eligibility of the class-I local supplier/class-II local supplier/ non-local supplier and the purchase preference have been categorically incorporated in the tenders issued by the procuring entities11, with minor variations depending on the nature of the tenders issued.
Under majority of these tenders, the eligibility criteria for bidding in the tender has been restricted to class-I and class-II local suppliers, requiring the bidder to submit a selfcertification or a certificate from the statutory auditor or cost auditor of the company specifying the percentage of local content, as specified above. Submission ofsuch certification for local content is a pre-qualification requirement in several tenders and any bidder which fails to provide such certification is deemed a ‘non-local supplier’ and is disqualified from such bid process.
As observed in most tenders, meeting LCR is primarily a pre-qualification criterion only to the extent of providing a certification or undertaking that the LCR will be met at the stage of performance of the contract, along with the percentage of the LCR. However, some tenders issued by tendering authorities require bidders to submit details such as tentative description of goods, works and services along with names of vendors, locations and percentage of local content in addition to the certification/ undertaking regarding the LCR.
Another finding from review of tenders across various sectors is the distinction created between the applicability of the LCR to supply and service tenders. While the DPIIT Order does not differentiate between the LCR required in case of supply of goods and provision of services, it is typically observed that various tenders with a combination of procurement for ‘supply’ and ‘services’ impose the LCR only for the ‘supply’ aspect of the tender. For instance, certain tenders have a specific exclusion setting out that the local content is permitted to be claimed “on the supply part only” and “shall not be claimed on the services”, while others are silent on the ‘services’ aspect of the tender and only stipulate that the procurement of equipment is to be undertaken “through class-I local suppliers only”. Moreover, several pure service-related tenders across various sectors do not explicitly lay down any compliance requirements with the LCR under the DPIIT Order.
Tenders with LCR, including submission of an undertaking or self-certification regarding compliance with such LCR, also set out the consequences of any false declaration, whereby the bidder is liable to be debarred from participating in the tenders of the concerned sector for a period ranging from two to three years, along with other actions as may be permissible under the applicable Indian procurement laws or as per the discretion of the nodal authority.
CONCLUSION
As detailed above, the general norm in procurements across sectors is to prescribe the LCR as set out under the DPIIT Order as a pre-qualification criteria/ eligibility for the bid. While submission of a self-certification or the certificate from the cost auditor of the company, as applicable, specifying the percentage of local content is a necessary pre-requisite, most tenders do not prescribe provision of any details of vendors at the bid stage.
LCR in public tenders is a particularly effective model for protecting and elevating the local suppliers and service providers, furthering India’s goal of tapping the indigenous manufacturing potential. This also mitigates any competitive threat to such local suppliers and services providers from international competition.
While the objective of the MII regime has been to forge a path for local manufacturers and producers to grow, the ultimate goal has been to usher foreign investments into Indian manufacturing sector and create a robust framework to support such foreign capital in newly opened sectors. Foreign bidders are encouraged to participate in public tenders in India while also procuring locally manufactured goods and/ or services for the end performance of the contract, in compliance with the DPIIT Order.
Given the government’s goal of making India a manufacturing hub, the LCR prescribed by the DPIIT (and various other government ministries and departments) has proved immensely beneficial in increasing participation of the local players by mandating such LCR for both national and foreign bidders in the public sector and providing the much-needed impetus to India’s MII mission.
