Overview
The MSME sector is of paramount significance for the economic growth and job creation in India. Low labour to capital ratio in the MSME sector compared to large industries and the wide and diverse geographic distribution of these enterprises make them crucial for inclusive and equitable growth across India. These enterprises are also a source of healthy competition in the economy. Through the promotion of economic dynamism and innovation, they stimulate entrepreneurial spirit and the diffusion of skills in rural as well as urban areas.

But these enterprises are bogged down by lack of access to key resources such as finance, skilled manpower, infrastructure, and market access that eventually dwarf MSMEs global competitiveness potential.

In such a scenario, robust supply relationships with Central and State Public Sector Undertakings (PSUs) as well as large enterprises present a significant opportunity for MSMEs to add value in inadequate market access and linkages. These supplier relationships results in larger and more consistent orders for MSMEs and the stringent necessities of a larger firm of a PSU in terms of quality, on-time delivery, cost reduction and customer service provide incentives for the MSMEs to improve their operations. Working with smaller, local suppliers put forward an outstanding prospect for larger companies too by reducing lead times, inventories and logistics costs. As far as the country is concerned, the replacement of imported inputs with locally produced inputs increases the national value-added, provides a push to the local communities and promotes indigenization.

In general, greater and better industrial integration has become a major source of competitive advantage for the country. However, if these relationships are not managed carefully, they can quickly deteriorate, ruining the development opportunity for the MSMEs and discouraging the larger firms from expanding their network of small, local suppliers. Buying-selling relationships typically break down or fail to attain a sustainable status due to concerns such as poor understanding of the customers’ requirements, lack of knowhow on suppliers’ part to understand and abide by the tender documentation process, low quality perception for MSMEs’ products, etc. A methodical approach is required to build, sustain and nurture strong supplier relationships between large enterprises or PSUs and MSMEs which can result in long lasting benefits for all the stakeholders involved as well as for the economy as a whole.
The Public Procurement Policy for MSEs, 2012
With the objective of promoting the growth and development of Indian MSMEs by improving their market access and linkages, the Ministry of MSMEs notified the implementation of the Public Procurement Policy for Micro and Small Enterprises from 1 April 2012. The Policy is mandatory as notified under the MSMED Act 2006. The Policy calls for achieving an overall procurement of minimum 20% of total annual purchases of products produced/services rendered by MSEs within a period of 3 years by the central ministry, government departments and PSUs. The policy has also earmarked a sub target of 4% procurement of goods and services, out of the 20% from MSEs owned by SC/ST entrepreneurs.

Challenges Encountered in Developing Stable SME Supplier Networks
MSEs are small in size and are constrained in managerial capacity facing the problems of information asymmetry, complex vendor registration process, disproportionate qualification criteria and certification requirements while accessing the public procurement market. On the other hand, CPSEs and other public procurement authorities are also faced with the challenge of identifying and engaging with suppliers in the MSE sector. The key issues and challenges affecting the policy implementation are detailed out below from the perspective of 3 main stakeholders’ category:
Regulatory Authority (Ministry of MSME)
Demand Side (Procuring Agencies)
Supply Side (MSEs)




I. Regulatory Authority
The Ministry of MSME is the lead ministry and plays the role of a regulator cum enabler for the implementation of the Public Procurement Policy for MSEs. Though Ministry has initiated various steps for effective policy roll out, it still faces challenges in effective implementation of the policy arising from following main constraints:

• Difficulty in monitoring and evaluation due to non-availability of information from CPSEs
• Weak institutional structure for policy implementation
• Limited manpower and field level presence to cater to the needs of MSEs
• Lack of adequate ICT support systems for data capturing and tracking

II. Demand Side (Procuring Agencies)
CPSEs and other public procurement authorities report a number of constraints that prevent them from meeting their procurement targets as per the Public Procurement Policy, 2012. The most significant constraints faced by PSUs and other procuring agencies are:

• Difficulty in the identification of MSE vendors due to factors such as lack of a comprehensive database
   of registered MSEs
• Difficulty in the determination of SC/ST Status
• Lack of willingness amongst MSEs to get registered
• Lack of adequate information on the quality, capability and eligibility of MSE vendors

III. Supply Side (MSEs)
In spite of the critical importance of the Public Procurement Policy for assisting the MSME sector, these enterprises face a host of challenges that limit their ability to benefit from the Policy. The most significant challenges are:

• Poor understanding of the Vendor Registration Process by various PSUs
• Independent and decentralized vendor registration processes by various PSUs
• Lack an understanding of e-procurement procedures.
• Complicated Tender Documentation / Bidding Processes
• Information asymmetries about the quality and technological standards by PSUs
• Low quality perception for the products of MSEs
• Lack of awareness about the tendering processes, subcontracting, raw materials control, marketing and
   other promotional activities, etc. in order to build the capacity of MSE vendors.
• Lack of appropriate feedback and grievance redressal mechanisms

Vendor Development Programmes
Limited information, low skill sets, cumbersome registration /bidding/contracting procedures, payment delays are the major access barriers to public procurement market by MSE. Therefore, in addition to the procurement goal, the policy also advises procuring organizations to take actions (vendor development programme, buyer-seller meets, and outreach activities) which enhance MSE’s ability to participate in public procurement. This is being undertaken by most of the organizations in different formats and with varying degree of impact.

There is a need for adoption of more systemic approach as mentioned below:
• Enhance coordination between procurement and vendor division
• Well prepared detailed content with experienced resource
• Content should include
  ▸ Procurement Potential and annual Procurement Plan
  ▸ Understanding Vendor Registration Processes
  ▸ E-procurement and Digital Signature
  ▸ Preparing Bids and Common mistakes made by MSEs
  ▸ Grievance Redressal Mechanism

 
Against this background, CII in partnership with the Ministry of MSME and NSIC will be organising a series of Vendor Development Programmes across the country.

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