The footprint of union government procurement in India

by Anjali Sharma and Susan Thomas.

Difficulties of government contracting are one important source of low state capacity. When capabilities in government contracting are low, problems that involve purchase from the private sector prove to be daunting (e.g. Covid-19 vaccines), and the decisions of make vs. buy are distorted (e.g. arms manufacture by the Indian state). This has motivated research in the field of government contracting. Along with a few other fields, government contracting constitutes a `horizontal’ field which influences state capacity in all specialised domains such as defence, health, etc.

A foundational fact of this field is the magnitudes involved. A few researchers have worked on the problem of measuring the size of government procurement. In a recent paper, The footprint of union government procurement in India, we develop an estimation strategy based on public finance data that is available in the public domain, for the union government and for central public sector enterprises (“CPSEs”).

We analyse the fiscal documents produced by the ministries and public sector enterprises of the union government: the `Detailed Demand for Grants’ (DDG) submitted by various departments and ministries to the Ministry of Finance of the Union Government and the annual statement of accounts published by the Controller General of Accounts (CGA). Object head level data is collected from the DDGs, the heads that constitute public procurement are identified. and each expenditure is classified as procurement or non-procurement. Procurement expenses are further classified into procurement expenses of goods, services and works, and operating or revenue expenditure and capital expenditures. This results in an estimate for the total operating and capital procurement expenditure for a given ministry or department in a year.

This methodology generates estimates for :

1. Total procurement in a year
2. The magnitudes which are operating expenditures vs. capital expenditure.
3. The procurement magnitudes in goods, services and works.

In this work, some records are not amenable to the approach used and are excluded from the analysis. This could contain procurement activity, which is missed out. Therefore, the resulting estimates are biased on the downward side.

The paper uses 2016-17 as an example where these methods are applied. The main findings for 2016-17 are:

1. The total purchases of the union government are about Rs.3.9 trillion, and the CPSEs additionally purchase Rs.13.8 trillion. These add up to around 12% of GDP.
2. Of the total purchases by the union government, Rs.2.2 trillion are capital goods and the remainder are operating expenses. The CPSEs added Rs.2.2 trillion of fixed assets. The remaining Rs.13.67 trillion were operating expenses. This indicates that a little over 13% of public procurement by union government and CPSEs are capital expenses.

This research fits into the emerging literature on government contracting. Obtaining a sense of the empirical magnitudes involved is a critical building block of this field. We build on, and enhance, the measurement of public procurement which includes the preface to the draft `Public Procurement Bill, 2012′, work by the research group at Consumer Unity & Trust Society (CUTS, 2012), and research work based on the World Bank Global Public Procurement Database (Djankov et al 2016).

Alongside this (conservative) estimate of union government procurement activities at about 11% of GDP, there are purchases by state and city governments. Khan (2012) places this total at around 30% of GDP. The magnitudes involved underline the importance of this field, of measuring, diagnosing, and improving the capabilities of government in contracting.

References

CUTS (2012), International, Government Procurement in India Domestic Regulations and Trade Prospects, CUTS, October 2012.

Simeon Djankov, Asif Islam and Federica Saliola, How large is public procurement in developing countries?, Peterson Institute for International Economics blog, November 2016.

M. H. Khan, Public procurement issues with Government of India, Presentation at LBSNAA, March 2017. 

Anjali Sharma and Susan Thomas, The footprint of union government procurement in India, xKDR Working Paper 10, November 2021