Is There Any Government Help For Small Businesses – Governments around the world encourage small businesses to participate in public tenders. They do this directly through procurement mandates, indirectly through policies that encourage small businesses to participate in tenders or support measures that allow small businesses to compete in the tender process. Greater participation of small businesses in the public procurement process benefits not only small businesses, but also the government and the economy. In India, policies to promote small business participation in government procurement focus on micro and small enterprises (SMEs). At central government level, there is an SME procurement policy for central ministries, departments and public sector units. At the state level, policies that expand the government base of MSE providers vary from state to state. This white paper provides leading international examples in promoting the involvement of small enterprises in government procurement, while also listing the best practices of Indian states to expand their MSE supplier base. Finally, a list of 21 recommendations is provided for Indian states as they formulate and review their procurement policies. This white paper is the first in a series of four white papers focusing on state-level business reforms in India.
Small businesses account for 90% of all businesses and 50% of all jobs worldwide. In emerging markets, small businesses create seven out of ten formal jobs. Thus, small businesses not only contribute to the economy; They are the economy. In India, small businesses are divided into micro, small and medium enterprises (MSMEs), collectively known as the SME sector. This is different from international small business initiatives which usually (but not always) focus on the small and medium-sized enterprise (SME) sector. In this paper, SMEs refer to the broader classification of small businesses. The term MSE is used in the Indian context to refer only to micro and small enterprises. IMM is used when referring to small and medium enterprises. The three terms are distinct and refer to separate groupings of small business classifications.
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As elsewhere, SMEs are the engines of growth in the Indian economy. They employ the largest number of people after the agricultural sector and account for 95 percent of industrial establishments and 45 percent of the country’s industrial output. The SME sector also generates about one-third of India’s GDP, gross domestic product and services; SMEs also account for a share of all India’s exports.
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Given the important role of SMEs in driving the economy, governments around the world are implementing policies to support them in the hope that they will become large, successful firms. One way governments can directly support SMEs is by prioritizing procurement, creating demand for their products and (in some cases) offering them concessional terms to secure government orders.
A major motivation for governments to initiate such policies is the benefits they bring, not just to small businesses, but to the economy as a whole. Small business purchases by government:
Economic multiplier effect, strengthening the local supply chain and the local economy. For example, a 2009 study found that from 2006 to 2007, the state of California generated nearly $4.2 billion and 26,000 new jobs from disabled veteran-owned businesses and local small businesses, rather than by big corporations. Studies have consistently shown wider socio-economic benefits through greater SME participation.
A literature review of recent efforts in Brazil suggests that public procurement can provide important protections to SMEs and that its effects may extend beyond the life cycle of government contracts.
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SMEs also gain soft skills and other benefits from participating in public procurement processes, such as better information systems and increased professionalism. Winning a government contract can increase the volume and stability of demand for small businesses, providing a stable and conducive environment for investment and expansion.
However, it is important to note the negative aspects that are possible when public procurement policies are not properly implemented. Corruption in preferential procurement can lead to market capture, rent seeking and other problems. Inadequate implementation can create long-term inefficiencies and lead to higher costs by increasing SMEs’ dependence on government priorities. Evidence on whether the economic gains from SME growth offset any inefficiency losses from preferential procurement is also inconclusive, and while some studies indicate small business participation in government procurement does, competing studies suggest otherwise. Ultimately, distinguishing the most common approach to promoting SME participation depends on removing barriers that can create market distortions. It is therefore important to ensure transparency and oversight of public procurement and to adopt a targeted approach to ensure that the benefits provided help firms to grow. One thing that governments can consider is limiting the benefits of SME procurement to a fixed year, so that inefficient SMEs that fail to grow do not continue to exploit the benefits and bear government costs.
Governments around the world promote small businesses through public procurement, both directly and indirectly, and implement a range of support measures to encourage their participation in the procurement process.
Actions and indirect contributions are just as important as those put aside. It is vital that governments take a co-ordinated approach to promoting procurement for small businesses.
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The text box below captures some of the approaches countries have taken to promote the participation of SMEs, SMEs or SMEs in public procurement processes.
The procurement landscape in India is governed by central and state government policies and initiatives to promote procurement for small businesses. Procurement policies focus on SMEs, which account for over 99% of all SME enterprises in India.
The Public Procurement Policy for Micro and Small Enterprises promotes public procurement for SMEs. Central mandates and policies apply to all Central Public Sector Enterprises (CPSEs), Ministries and Central Government Departments.
At different stages, financial and non-financial constraints prevent SMEs from participating in public procurement processes. Prequalification requirements—such as turnover, previous government vendor experience, years of service, and others—can limit MSE participation. Meanwhile, the financial requirements – tender fees for application and subsequent securities – can constrain SMEs’ free cash flow, discourage them from applying and affect their ability to complete tenders.
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For central procurement, registered SMEs are exempted from tender fee. Although Earnest Money Deposit (EMD) or bid security has been done away with under the General Financial Rules for MSE, amendments 2017 and other orders, EMD may be required if deemed necessary. In many cases, SMEs continue to apply for EMDs despite the removal – something the government recognized when it suspended EMDs and performance titles again as part of the Covid-19 regulatory forbearance. Even when orders and deliveries of goods, services or works are completed, SMEs face stranded assets and limited cash flow due to late payments. Despite the 45-day payment deadline, late payment interest penalties and other government measures, late payments continue.
At the state level, state laws guide procurement policy for SMEs. States that have purchase mandates can incorporate them into their store purchase rules. Tender regulation; industrial policy; SME Policy or SME Promotion Policy; procurement policy and rules; or any other state act, rule or policy, depending on the state.
In addition, Meghalaya offers 20% procurement preference for start-ups. Uttar Pradesh has announced a 25% procurement preference policy for SMEs after cabinet approval, but has not formally notified the policy. Maharashtra advises state institutions to source 20% from SMEs whenever possible. The Andhra Pradesh SME Policy has expired in 2020, but mentions the use of the central government’s procurement mandate.
Incentives and policies to promote SME participation in government tenders vary from state to state. According to the Ministry of Micro, Small and Medium Enterprises, the primary responsibility for the development and promotion of SMEs rests with state governments. The central government, at its best, complements the efforts of the state governments through various initiatives. It is therefore very important for states to play a vital role in formulating effective procurement policies that help promote SMEs and SMEs. Many states have taken measures such as exemptions or reductions in auction streams, EMDs and performance bonds. Others offer waivers or incentives for pre-qualification requirements such as turnover, previous experience and more. Some additional best practices known from all states of India are listed below.
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Based on the above, Haryana and Rajasthan lead in having favorable procurement policies for small businesses. While Rajasthan does not have a clear procurement mandate for MSEs, Haryana prioritizes public procurement, also offering concessions on tender fees, guarantees and pre-qualification requirements.
Considering the important role played by SMEs in the economy, it is important for the state governments to come up with their own policy to promote SMEs, including procurement promotion policy for SMEs. Some of the elements and reform measures that state governments can adopt as part of their policy to promote procurement for SMEs are listed below. These recommendations are based on international best practices as well as prominent examples from Indian state governments.
1. Procurement mandate for SMEs as a proportion of total procurement by state institutions. Such a mandate should be equal to or above the central government’s mandate of 25%.
6. Eliminate EMD, auction fee, performance security and additional performance security for ALB.
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