Large companies may have to source 30% manufactured goods from MSMEs

NEW DELHI: A high-level government panel has recommended that large companies mandatorily source 30% of manufactured products from micro, medium and small scale enterprises (MSME), a condition similar to the one imposed on foreign multi-brand retailers setting shops in India.

The panel, set up by the cabinet secretary to boost the small scale sector, has also suggested formulating a comprehensive strategy to tackle non-tariff barriers while negotiating free trade agreements with other countries.

"The option of mandatory 30% sourcing from manufacturing MSMEs by larger enterprises should be considered by the MSME ministry," the panel headed by MSME secretary Madhav Lal said.

The panel had ruled out any fiscal incentives to large enterprises for compulsory sourcing as such a condition already exists for foreign multi-brand retailers setting up shop here. The World Trade Organisation rules also stipulate that foreign investors should be treated on par with domestic ones.

Besides, the Public Procurement Act also mandates that all central government ministries/department and CPSUs procure a minimum 20% of their annual procurement from MSMEs. The panel wants the scope of the law to be extended to private enterprises with enhanced sourcing requirement.

The committee has also suggested that MSME suppliers who import raw material add sufficient value to it to ensure it originated from within the country.

Manufacturing activity in India remains sluggish on weak investment climate and poor demand. The manufacturing sector recorded 1% growth in 2012-13 against 11.3% in 2009-10, sending the alarm bells ringing in the government. Industrial production in April grew by 2.8% with consumer non-durables recording an 8.3% contraction.


The MSME sector accounts for 45% of the manufacturing sector and the government is keen to strengthen it since it is a large employment provider. There are around 3.6 crore such enterprises, employing over 8 crore people. India's share in manufacturing has stagnated at 16% when pitted against neighbours like China (30%), Singapore (22%), Thailand (36%) and Malaysia (25%).

"The proposal of making 30% mandatory procurement from MSMEs seems untenable and unsustainable. Instead, policies should be designed to ease their pain and make MSMEs competitive," said S Gandhikumar, president, Federation of Indian Micro and Small & Medium Enterprises.

The Confederation of Indian Industry supported the proposal, but said sector-specific sensitivities need to be kept in mind before imposing such a condition.

"Mandating 30% sourcing from MSMEs will mean technology transfer and mentoring to enhance manufacturing in smaller units, which will help them grow," said Sujith Haridas, deputy director general, CII.

He further pointed out that already some large enterprises in sectors like textiles are sourcing more than 30% from MSMEs, but it would be difficult for some other sectors involving high strategic items to source from smaller enterprises. "Sector-sensitivity will be important here, and across-the-board mandatory sourcing for all large private enterprises may not work," he added.