Unlocking Innovation with India’s Procurement Reforms

Brief Context

Procurement policies and frameworks in India, often designed with transparency and cost-efficiency, frequently killing innovation by prioritising procedural compliance over scientific needs.

Source Content

Syllabus: GS3/Economy

Context

• Procurement policies and frameworks in India, often designed with transparency and cost-efficiency, frequently killing innovation by prioritising procedural compliance over scientific needs.

About Public Procurement System

• Public procurement is the process by which governments purchase goods and services, for governance and economic development.
• It represents around 12% of GDP in OECD countries and up to 30% in some developing countries.
• In India, it accounts for nearly 20–22% of GDP, making it a powerful lever for policy implementation, industrial growth, and innovation.

Procurement’s Evolutionary Arc

• Procurement has evolved from mere control to a tool of creativity and strategy, from ancient Egyptian records to AI-driven supply chains.
  • Industrial Revolution: Cost-centric approach.
  • World Wars: Strategic role in securing scarce resources.
  • Post-1945: Procurement became central to innovation in semiconductors, space, and renewable energy.
  • Modern Time: ‘Cognitive procurement’ employs AI for predictive sourcing, scenario simulation, and compliance automation.

India’s Procurement Landscape

• Historically, India’s procurement system was governed by the General Financial Rules (GFR), 2017 and managed through decentralized, paper-based processes.
  • These rules introduced flexibility in procurement, allowing departments to experiment with new vendors and solutions.
• They often lacked agility, excluded small players, and were vulnerable to inefficiencies and opacity, while these frameworks emphasized cost-efficiency and compliance.

Reforming the Procurement Framework

• Reforms in General Financial Rules (GFR): These mark a shift toward enabling research and development (R&D) by granting exemptions from the Government e-Marketplace (GeM) portal and raising financial thresholds for R&D procurement.
• Government e-Marketplace (GeM): It is a dynamic, paperless, and cashless online platform that enables government departments to procure goods and services efficiently.
  • It offers real-time price comparison and reverse auctions; direct access to over 50,000 government buyers; and minimal human interface to reduce corruption;
• Public Procurement Policy for MSEs: The government mandates that 25% of annual procurement by central ministries and PSUs be sourced from MSEs, while these frameworks emphasize cost-efficiency and compliance. It includes:
  • A 4% sub-target for SC/ST entrepreneurs;
  • Special provisions for women-owned enterprises;
  • Exemptions from earnest money and tender fees;
• Startup India Procurement Reforms:
  • Exempted DPIIT-recognized startups from prior experience and turnover requirements;
  • Created the GeM Startup Runway, allowing startups to showcase unique products and services;
  • Enabled registration on the Central Public Procurement Portal (CPPP) with relaxed norms;
• Vocal for Local: Creation of 210 ODOP product categories for listing unique products from each district in India.

Recent Steps Taken By Government

• Bypassing GeM for specialised equipment, reducing delays in scientific procurement.
• Raising direct purchase limits from ₹1 lakh to ₹2 lakh, acknowledging bespoke research needs.
• Delegating tender approvals up to ₹200 crore to institutional heads, eliminating bureaucratic lag.
• These measures align with the concept of ‘catalytic procurement’, where flexibility enables public institutions to act as early adopters of advanced technologies.

Impacts of Reforms in India’s Public Procurement System

• Transparency and Accountability: Platforms like GeM and e-Procurement portals have digitized the entire process, reducing human discretion and corruption.
  • A well-designed procurement law can yield significant fiscal and governance benefits, potentially saving up to 1.2% of GDP.
• Catalyzing Innovation Through Strategic Procurement: Ministries are now encouraged to issue challenge-based tenders, inviting innovative solutions to complex issues like water purification, waste management, and digital governance.
• Sectoral Impact: In sectors like Agriculture and Infrastructure, procurement reforms are making systems more farmer-centric and tech-driven.
  • Initiatives such as farm-gate procurement, digitized monitoring, and timely payments are improving outcomes for producers while modernizing supply chains.
  • The National Infrastructure Pipeline and asset monetization strategies are being supported by streamlined procurement processes that attract private investment and global expertise.
• Selfhelp Groups (SHGs): GeM is collaborating with the Self-employed Women’s Association (SEWA) to train, assist and enable 21 lakh+ women-led micro and small enterprises, women entrepreneurs and selfhelp groups (SHGs).

Limitations of India’s Public Procurement System Reforms

• Overemphasis on Lowest Cost: The traditional focus on L1 (lowest bidder) continues to dominate procurement decisions.
  • It often sidelines quality, innovation, and lifecycle value — especially problematic when sourcing advanced technologies or services that require long-term performance.
• Low Direct Purchase limit: The ₹2 lakh direct purchase limit may still be inadequate for high-cost fields like biotechnology and quantum computing.
• Overemphasis On Global Tenders: It may sideline domestic suppliers unless local R&D ecosystems are strengthened.
• Limited Support for Innovation: Many innovative firms still struggle with procedural hurdles, lack of awareness, and limited capacity to navigate complex tender documentation.
  • It remains risk-averse, favoring established vendors over disruptive solutions.
• Fragmented Implementation Across States: Procurement reforms are unevenly adopted across states and local bodies.
  • Smaller municipalities and rural departments often lack the digital infrastructure, training, or incentives to fully embrace e-procurement platforms, leading to inconsistent outcomes.

Global Models of Innovation-Oriented Procurement

• Germany’s High-Tech Strategy: Embeds innovation into procurement through dedicated advisory bodies like KOINNO.
• US Small Business Innovation Research (SBIR): Reserves a share of R&D funds for startups, using phased procurement to de-risk early-stage technologies.
  • The US model of performance-based private management illustrates how hybrid systems can balance public oversight with corporate agility.
• South Korea’s Pre-Commercial Procurement: Pays premium prices for prototypes aligned with ambitious national goals.

Way Forward: Toward Transformative Procurement in India

• For India to unlock procurement’s full potential, four systemic shifts are essential:
  • Outcome-Weighted Tenders – evaluating bids on qualitative factors like R&D investment, not just cost.
  • Sandbox Exemptions – allowing premier institutes partial freedom from GFR, tied to innovation targets.
  • AI-Augmented Sourcing – deploying cognitive procurement assistants for faster, smarter decision-making.
  • Co-Procurement Alliances – pooling demand across labs for high-cost equipment.
• India’s Council of Scientific and Industrial Research (CSIR) could adopt a similar framework for strategic labs, provided strong accountability structures are in place.

Source: TH