Policies for Innovation Economy

      

      California, with a population that is 1/33th of the population of India, has an economy of size that is comparable to that of India. As of FY16, the GDP of India is ~USD 2.26 trillion, while the GDP of the state of California is ~ USD 2.6 trillion. California is at the forefront of innovation and technology, providing a favorable ecosystem to promote innovation, with numerous technology companies, including Facebook, Google and Apple Inc., headquartered in California. 

·        California is considered to be the home of American innovation, providing constant inspiration, a culture of innovation, and a healthy competitive energy. California has a large number of good-paying, tech-sector jobs.

o   California leads among states of the US in number of industries in which it has a higher proportion of employment than the US national average. A research study shows that California exceeds the U.S. average in 17 out of a possible 19 high-tech industries.

o   The state boasts nearly 1.2 million tech-sector employees, a robust 7.2% of the workforce, making it number one among states of the US in number of employees and fourth largest as a percentage of the workforce

o   On average, the wage in California is nearly two and half times more than the US national average wage

o   According to a report by WalletHub in 2017, California was ranked 4^th among states of the US in 18 “key indicators of innovation-friendliness”. It was ranked behind the District of Columbia, Maryland and Massachusetts.

o   California ranked No. 1 among states of the US in venture-capital spending per capita

o   California ranked No. 4 among states of the US in research-and-development spending per capita, behind District of Columbia, Massachusetts and Maryland

o   California is ranked 1^st among states of the US for number of patents issued per capita, almost 3 times the national average of USA

·        The role of governments is critical in the promotion of innovation. Government policies play a critical role in the determination of where R&D investments will be made, and consequently   where successful innovations occur and spur economic growth. Interventions promoting innovation in California include – creation of the Innovation and Entrepreneurship Unit under the Governor’s Office of Business and Economic Development, banning of non-compete agreements and hence promoting entrepreneurial growth, and recently announced proposed regulations for testing autonomous cars on public roads.

Indian Context

·        "Jugaad", the poster boy of Indian innovation, is also a poster boy of what is wrong in the Indian innovation ecosystem and policy. Jugaad is a means of transportation in north India, powered by diesel/kerosene engines originally intended to power agricultural irrigation pumps. It has numerous benefits – helps in irrigation, in transportation of farm produce and in transportation of people. It is therefore a perfect example of innovation that leads to enormous asset optimization as the same asset is used for multiple purposes and does not lie idle. However, as per Government of India's Central Motor Vehicle's Act , Jugaad is an illegal vehicle. In spite of the product providing asset optimization, limited efforts were made by the Government of India to strengthen it and popularize it in the rest of the country and therefore its usage stays limited to north India and is subject to the vagaries of the whims and fancies of the local police in allowing it to operate on the roads.

On the other hand, Uber, which faced similar regulatory challenges globally and in India, was able to tweak the regulatory bottlenecks to enable it to survive and prosper. Uber could do that as their home government supported them from a regulatory perspective and allowed Uber to prosper. 

·        Innovations in science and technology are integral to the long-term growth and dynamism of any nation. According to the Global Innovation Index (GII) 2017, announced by the World Intellectual Property Organisation, India is ranked 60 out of 130 nations, up from Rank 66 in 2016. 

·        While Indian historic contribution to scientific knowledge has been significant, currently India under-spends on R&D, even relative to its level of development.

·        According to the 2016 Global R&D Funding Forecast, global R&D spending was estimated to grow by ~3.5% in 2016. On the other hand, according to the Economic Survey 2017 – 2018, R&D spending in India has doubled in the last 10 years, growing at a CAGR of ~8% over this period. However, India’s R&D spending as a % of GDP has remained stagnant at 0.6% – 0.7% over this period.

·        According to the Economic Survey 2017 – 2018, India’s spending on R&D is ~0.6% of GDP and is well below that in major nations:

o   USA: 2.8% of GDP, 

o   China: 2.1% of GDP, and

o   Israel: 4.3% of GDP

·        The Economic Survey 2017 – 2018 observes that in India, unlike other nations, the central government is not just the primary source of R&D funding, but also the primary user of these funds. It is critical that state governments step up and increase spending on R&D, to target problems specific to their population and economies.

·        According to Forbes 2017, there are 26 Indian companies in the list of the top 2,500 global R&D spenders compared to 301 Chinese companies. Further, 19 (of these 26) firms are in just three sectors: pharmaceuticals, automobiles and software. There is a need for greater private sector investments in R&D. 

·        The Economic Survey 2017 – 2018 advises doubling of R&D spending is necessary, with a much larger role by the private sector and universities. This also involves a more conducive regulatory environment.

·        Number of publications: 

o   Between 2009-2014, annual publication growth in India was almost 14%. This increased India’s share in global publications from 3.1% in 2009 to 4.4% in 2014 as per the Scopus Database.

o   The Nature Index publishes tables based on counts of high-quality research outputs in the previous calendar year covering the natural sciences. This Index ranked India at 13 in 2017.

·        Patents: 

o   While, India is the 7th largest Patent Filing Office in the World (according to the World Intellectual Property Organisation), the number of patents filed in India is just ~7% of the number of patents filed in USA and ~4% of the number of patents filed in China. 

o   Also, India has a poor patents per capita

o   There is a severe backlog and high rate of pendency for domestic patent applications. Given the rapid rate of technological obsolescence, the inordinate delays in processing patents penalizes innovation and innovators within the country.

·        

The Government of India has adopted numerous initiatives to promote innovation and entrepreneurship, including Start Up India, Make in India, Atal Innovation Mission (AIM), Support to Training and Employment Programme for Women, Jan Dhan – Aadhaar – Mobile (JAM) Trinity, Digital India, Stand Up India, among several other initiatives. 

There are broadly 2 types of innovation models, depending on the main driver of innovation – the bottom-up approach and the top down approach.

Bottom-up approach to innovation:

·        The bottom-up approach to innovation is demand-based and driven by affected communities, with effective incentivization for all stakeholders.

·        In the bottom-up approach, the role of the government is to provide a conducive environment for research and for adoption of innovations.

·        A stable, innovation-friendly regulatory framework is critical to encourage and promote innovation. Moreover, along with simplification of the regulatory framework, it is important to spread awareness on the related regulations; this ensures a level-playing field.

·        An example of short-term innovation developed using the bottom-up approach is the Jugaad vehicle in India. An economy that achieves long-term innovations using the bottom-up approach is an innovating economy, and this is the ideal state for an economy to be in.

Top-down approach to innovation:

·        The top-down approach to innovation is driven by companies or nations. Examples of short-term innovations using this approach can include electric vehicles, while long-term innovations may include Artificial Intelligence. 

·        China has adopted the top-down approach to great success. The central and provincial governments have funded numerous projects throughout the country that aim to produce advanced technology, cultivate high-level talent and nurture an entrepreneurial environment.

·        Big data has become crucial to building China’s IT industry and China’s economic growth. According to the China Academy of Information and Communication Technology, investments promoting big data storage and use in 2015 were estimated at USD 1.89 billion. It is estimated that China's data volume will expand at an annual rate of over 50% and account for 21% of worldwide data by 2020.

·        China aims to be the global leader in artificial intelligence (AI) by 2030.

o   With more than 700 million internet users, China has an abundance of data to train AI-learning algorithms

o   The existing mobile internet ecosystem provides the opportunities for AI researchers to collect and analyze big data related to demographics and behavior, and to conduct large-scale experiments

o   The Chinese government has adopted favorable policies to inspire innovations, with several internet giants and rising start-ups adopting AI technology in their operations or investing in it.

o   Local governments in China are offering incentives to encourage AI-related innovations. 

§  Guizhou, earlier one of the poorest provinces in the country, has become known as China’s ‘big data hub’, with major internet companies setting up big data centers in the province.

§  Chongqing became one of the 1^st municipalities of China to establish a bureau to support local AI development

§  Xiong’an New Area and Guangdong-Hong Kong-Macau Greater Bay Area have incorporated AI in their development plans

Global Context:

·        Innovation requires continuous investment. Before the 2009 crisis, global research and development (R&D) expenditure grew at an annual pace of approximately 7%. GII 2016 data indicate that global R&D grew by only 4% in 2014, as a result of slower growth in emerging economies and tighter R&D budgets in high-income economies. 

·        The growth in global R&D investments is being driven by spending in Asian countries, in particular, China, Japan, and South Korea, which now account for more than 40% of all global investments. 

·        The top innovating nations are all high-income economies, with high GDP per capita, and these economies show mature innovation systems with robust institutions and high levels of market and business sophistication, allowing investment in human capital and infrastructure to translate into quality innovation outputs. The steps taken by some of these top innovating regions are:

o   United Kingdom: the framework under the Department for Innovation, Universities & Skills (DIUS) has been performing well, especially on the lifelong learning and early-stage venture capital front. The Innovation Nation White Paper outlines the future of innovation in the country, providing intellectual leadership by suggesting new policies based on new imperatives. Highlights include provisioning for ‘hidden’ innovation and demand-driven ideas and fostering collaboration between public, private and non-governmental organizations (NGOs) to transform public services.

o   United States: The US recognizes a vision and strong culture of innovation, and more importantly, successful commercialization of innovation in the country. The National Innovation Initiative (NII) outlines the next phase in this journey, focusing strongly on the three pillars - talent, investment and infrastructure.

o   European Union: The European Union (EU) stresses on innovation at both the Union level as well as the regional level. For Europe 2020, the three priorities identified include smart growth, sustainable growth and inclusive growth. The EU’s Innovation Policy places strong emphasis on social innovation, recognizing it as “an important new field which should be nurtured”.

o   China: China has shown tremendous rise over the past decade, and is currently ranked 22 in the Global Innovation Index 2017. This high ranking was on the back of strong performance in business sophistication and knowledge and technology outputs, presence of global R&D companies, research talent in business enterprise and patent applications.

Recommendations to promote innovation in India:

·        The innovation strategy for India needs to have four very clear objectives:

o   enable innovation at the bottom of the pyramid (for and by the next billion)

o   create an innovation ecosystem

o   focus on local capabilities for both near- and long-term benefits, and 

o   harvest existing innovations so that the benefits reach a larger potential user base. 

This quadri-focal strategy is outlined in the figure below:

·        To build the environment for innovation, the strategy needs to address the following factors:

o   Ensure research converts to innovation

o   Create a strong legal structure

o   Enable business partnerships and incubation

o   Encourage community participation

o   Develop policies to incentivize innovation

·        The legal and regulatory framework in India for promotion of innovation may be further strengthened to address the existing weaknesses. There are three requirements on the policy front for innovation:

o   formulation of appropriate  strategies for promoting technological development, 

o   identification of trade and fiscal measures to encourage technology development, and 

o   developing of a framework for standardization, certification and accreditation

·        According to the Global Innovation Index 2017 Report, the weaknesses in regulatory ecosystem in India include ease of starting of business, ease of resolving insolvency, ease of paying taxes and environmental performance. India is expected to show improvement in these parameters, with the Government’s steps to address these issues, including adoption of the Insolvency and Bankruptcy Code (IBC) Code. 

·        The intellectual property regime in India is weak, and there is scope for strengthening. Innovators do not generally seek protection for their intellectual property unless forced to. For most entrepreneurs, patents and other forms of protection take too long and cost too much. Patent literacy is low and there is a lack of expert help in this field.

·        Incentives in the form of capital investment, finance and favorable taxation are critical. Also, current procurement policies disincentivize innovation, there is a need for government policies to enable procurement of innovation. Technology and IPR framework, availability of a talent pool and better access to market are all necessary to foster innovation as well.

·        Innovation is critical to the creation of high-quality, high-wage, sustainable jobs and economic growth. It is important to create an ecosystem to recognize a vision and strong culture of innovation, and also promote successful commercialization of innovation.

·        As India emerges as one of the world’s largest economies, it needs to gradually move from being a net consumer of knowledge to becoming a net producer.

·        India lacks structures and mechanisms to identify areas of innovation for a top-down innovation approach. This needs to be defined and created.

·        Also, India needs to create institutional mechanisms to identify and promote innovations happening at the grassroots.

·        As highlighted by the Economic Survey 2017 – 2018, the Government of India is the main source and user of R&D funding. It is critical that state governments, private sector and universities step up and play a greater role in investments in R&D.

·        While research is integral to innovation, it is also important to convert research into meaningful innovation. This calls for a three-way understanding and collaboration between the public sector, the private sector and the academia. Collaboration between industry and labs, creating a framework for jointly-funded research, creating a functioning lab-less research capability that leverages the existing facilities in the private sector, universities and the government itself, and ensuring feedback for research are the other important factors.

National Conclave on Technological Sovereignty 2013

Budget Analysis 2018-19

Published in http://www.mydigitalfc.com/plan-and-policy/logistics-remains-critical-focus-area

The Union Budget 2018-19, comes at a time when the Twin Balance Sheet issues continues, wherein, both the banks and the corporates have stretched balance sheets, which prevent the corporates from borrowing any further for investments, while it also prevents the banks from lending any further. In such a scenario, as expected, investments and growth has stayed challenged, even though we see early signs of an upturn in growth.

 Therefore, the only entity that can borrow significantly and can spend in order to spur growth, is the government. Hence it is not surprising that the government decided to breach the fiscal deficit target of 3.3% by 20 basis points in the Union Budget that was presented on February 01.

The Union Budget therefore envisages a total spend of INR 24.42 trillion, and increase of INR 5.4 trillion (roughly 28% increase) from the previous budget’s budgeted estimate.

	2016-17	2017-18 BE
Gross Tax Revenues (Cr.)	17,03,243	19,11,579
Direct Tax (Cr.)	8,47,097	9,80,000
Indirect Tax (Cr.)	8,51,869	9,26,900
Non Tax Revenues (Cr.)	3,34,770	2,88,757
Fiscal Deficit ( % of GDP)	3.5	3.2
Revenue Deficit (% of GDP)	2.1	1.9
Primary Deficit (% of GDP)	0.3	0.1
Net Debt Receipts (Cr.)	5,34,274	5,46,532
Total expenditure ( Cr.)	20,14,407	21,46,735
Revenue expenditure (% of total expenditure)	86.11	85.57
Capital expenditure (% of total expenditure)	13.89	14.43

This obviously raises concerns of (a) abandonment of the glide path to fiscal prudence, (b) stoking inflation and (c) sending wrong signals to investors, thus impacting their sentiments. However, given the situation of the economy, breaching the fiscal deficit appears to be a necessary evil, and it is unavoidable that the associated public spend would lead to inflation, which would happen in any growing economy. This was indeed a tightrope walk call for the budget.

But the more interesting part is how the budget proposes to make the public spending. It continued its signaling of focus on infrastructure development with over INR 50 trillion being committed to for infrastructure spend, which is not entirely through budgetary provisions, but through off-balance sheet mechanisms. The economic impact of such infrastructure spends comes in with significant lag that the economy can ill-afford at this stage. Hence, it appears that by trying to put in more money in the hands of MSME’s through reducing the corporate tax to 25%, and by putting more money in the hands of farmers by providing a minimum support price that is 150% of the costs of farming, there is an attempt to resolve the issue of distress in rural areas and with MSME’s, while also injecting more disposable income which is expected to increase consumer demand, thus kick-starting a virtuous cycle of more investments and more jobs.

The only challenge in the above story appears to be the fact that the 150% of cost support is only for the kharif season, whose crops would hit the market only by around November, thus postponing the expected relief. There are also concerns that the budgetary provisions for such a procurement is not evident.

However, as per the expectation set in the 2017-18 budget to reduce corporate tax from 30% to 25% over a period of time, atleast the same has been done for MSME’s with turnover of less than Rs 250 crores, and hence it signals the government’s intent to make India a lower tax country for corporates. But a re-introduction of Long Term Capital Gains Tax (LTCG) of 10%, while not removing the Securities Transaction Tax (STT – which was introduced in lieu of LTCG being abolished earlier), turned out to be a dampener for the storyline of being a lower tax regime destination for investments.

The theme of the Union Budget was clearly a focus on rural, women, underprivileged and the marginalized as substantial announcements were made for rural industries including fisheries and animal husbandry and for SC/ST’s. The most spectacular part of the budget is the strong intent to strengthen the social safety net by providing a whopping Rs 5 lacs per household health insurance for 100 m households (which translates to covering 500 m households). This is indeed the mother of all healthcare programs, if successfully implemented. Alongwith it, the announcement of 1 medical college in every three districts, setting up of high quality Eklavya schools and providing all-weather motorable roads to every habitat, underlines the shift towards not just providing benefits, but providing high quality benefits. Even if the above is not achieved in the short-run, it sets the agenda for all future governments to strive and deliver on these audacious targets.

Overall, the budget appears to have covered most of the bases, leaving out the taxpaying salaried middle-class, who appear to have a higher tax burden through increased cess and indirect taxes. The only concern would be the developments in other parts of the world, such as the change in US tax rates and possible hardening of US fed rates, which could suddenly put brakes on the FDI, FPI and remittances inflows. Then again, a healthy forex reserves of over USD 400 billion would help buffer Indian against any such sudden brakes on fund flows. 

Policy support for MSME's for Adopting GST

Policy Support for MSME’s for GST

On-ground challenges faced by MSME

• MSME’s are befuddled with the concept of GST
• Many who want to come into the tax net, finding it very difficult to comprehend the system, especially when they were doing cash transactions earlier
• Those who were in the VAT system, are finding it difficult to understand the basic concepts of Input Tax Credit, maintaining of purchase invoices and sales invoices
• Fast changing rules is an even greater hindrance
• The multiplicity of tax rates, where for the same products, there are multiple tax rates (eg. Textiles of cost above Rs 2,000 attracts 12% and that below Rs 2,000, attracts 5%, similarly with shoes) is perplexing for the small and micro enterprises
• Those who have adopted softwares have lost trust as the softwares have not been able to seamlessly post the GSTN returns as the GSTN system was having problems
• Many cases are undefined – eg. If a textile trader buys 1000 m of cloth and it shirnks 10%, how will the shrinkage be accounted for or will the inspectors charge him with malpractices for the unaccounted 100 m cloth? How will employers deal with per diems paid to employees when they are traveling – should there be a GST on it and should that be treated as part of ITC? What happens when the employee is traveling outside of India?

Issues faced by MSME on GST

• GST regime requires MSME’s to have a minimal IT infrastructure in order to create and file invoices electronically
• This minimal IT infrastructure includes a laptop/ PC, connectivity, cloud provisioning, GST invoicing software with access to GSP in order to access GSTN
• A smartphone or tablet is not a realistic solution to create large number of invoices in a day
• The cost of the above minimal infrastructure is Rs 45,000, which is a large amount for MSME’s
• For every minimal IT infrastructure setup by an MSME, government receives approximately Rs 8,000 as taxes (18% of Rs 45,000). So for even two million MSME’s adopting IT solutions for filing GSTN, government receives Rs 1,600 crores as taxes on the IT infrastructure.
• MSME’s believe that they have to pay for the above infrastructure in order to pay to the government and view this as an unfair arrangement

Implications of MSME’s not becoming GST complaint

• It obviously has an impact on the success of GST regime
• More importantly, it impacts the large companies to whom the MSME’s are vendors, who will not be able to set off their Input Tax Credits against their Output Tax

Suggested Government Policy for alleviating the MSME issue

• (a)    Make GSP charges free so that private sector can bring in completely free software
• (b)    Government procures in bulk on monthly lease, laptop, GST software, GST support, dongle, and connectivity as one bundled solution, just like EESL procuring LED bulbs in bulk, thus reducing the cost of the equipment, and provides the same to registered GST taxpayers. Government also makes this procurement tax-free, thus reducing the cost by 18% which will further reduce the lease cost as the cost of money will also come down. It is expected that the total cost will come to less than Rs 1,400 per month
• (c)     The monthly lease amount for this infrastructure should be allowed to be set-off by the taxpayer, against the monthly GST payments. In fact, the entire amount should be added to the Input Tax Credit for easy processing.

Alternatively, the following mechanism may also be adopted:

• (d)    For those registered with GSTN, should be allowed to have a one-time set-off of the cost of procuring the minimal IT infrastructure against their indirect tax liabilities, similar to allowing expenditure on IT assets to be set-off against direct tax liabilities
• (e)    This set-off can be capped for a maximum of Rs 50,000, on a one-time basis
• (f)     It can be further made easier for MSME’s by allowing them to procure equipment on an EMI basis, and setting off the monthly EMI against the GST payment due
• (g)    To facilitate private players to provide credit to the millions of MSME’s who have poor credit history, the government can collect the complete GST due and use that to pay off the EMI that an MSME was supposed to pay, with a cap of say Rs 4,000 pm for one year
• (h)    The above can be made available to only those who are paying GST of above Rs 4,000 pm

Impact

• It would provide significant relief to MSME and reduce their resentment towards the GST regime
• It would also introduce them to Information Technology and put them on a path of automation
• It would create more jobs

Proceedings of National Conclave on Technological Sovereignty 2013

The National Conclave on Technological Sovereignty will be held in September 2014

http://www.business-standard.com/budget/article/kickstart-indian-railways-to-boost-economy-114070700340_1.html

http://www.business-standard.com/article/news-ians/growth-oriented-budget-for-railways-expected-curtain-raiser-114070700719_1.html

http://www.smartinvestor.in/market/read-251415-readdet-Kickstart_Indian_Railways_to_boost_economy.htm#.U7thGZSSySo

http://www.goodreturns.in/news/2014/07/07/growth-oriented-budget-for-railways-expected-curtain-raiser-277346.html

Non-Ticketing Revenue Generation for Indian Railways

Indian Railways is in a desperate position to generate revenues. Besides the need to cover its operational costs and pension costs, the revenues are required for a large number of initiatives that are urgently required for the upgradation and modernization of Indian railways. These include safety measures, building of tracks and bridges, upgradation and modernization of signalling, investments into rolling stock, building stations and terminals, building dedicated freight corridors, high speed passenger train corridors, training and upgrading skills of human resources in railways and creating indigenous capacity for development.

Railways have always played a significant role in the development of any economy and have been particularly significant for the Indian economy. A recent study by KPMG on economic impact of the second phase of high speed railways in UK concludes that the project could potentially generate GBP 15 billion per year for the economy. The analysis was a critical input into policy making for rolling out High speed railways in UK. And thus, a strong railway network plays a significant role in strengthening and growth of the economy. As a corollary, a dilapidated railways is detrimental to any economy.

Hence it is imperative that Indian railways continues to invest into its upgradation and modernization in order for the Indian economy to grow.

However, a slow growth in revenues for the Indian railways while having a galloping increase in costs has left Indian railways constrained in making the necessary investments required to transform itself into a modern, reliable and safe railway system.

Railways has been focussing on ticketing as a primary source of revenue generation. However, if railways has a significant multiplier effect on the economy, it should be possible to generate revenue by monetizing the economic value that Indian Railways can generate. In fact, many railway systems globally, have a significant percentage of their revenues generated from non-ticketing sources.

Economic value is trapped in assets such as spaces, impact zones, monopolistic data and ability to create wealth by marrying tangible and non-tangible assets of the railways with capital, in a manner that no other organization is in a position to do.

One of the obvious mechanisms for monetizing the economic value unlocked by a railway system is to monetize the impact zones. Impact zones are areas which become accessible and hence open to commercial exploitation. It can include opening up areas that are non-arable for industries or even tourism.

However, significant revenues can be generated by the Indian railways by adopting a set of new trends in business models, operational models, financial models and technological models for achieving enhancing revenue generation.

Such models include increasing sales of other services and commodities to its captive passengers. Such offerings can stretch from in-coach sales of products to sale of insurances and even solicitation for sale of real estate etc.

Revenue can also be generated by exploiting non-tangible assets such as the data it generates, analytics of the data, diversifying into other data driven businesses that leverages Indian railways’ existing data and customer base and helping cargo customers optimize its logistics using the data under the possession of Indian railways.

Many of these revenue generating initiatives can potentially be taken up through a PPP mechanism, thus saving the Indian railways from even making the initial investments.

Needless to say, Indian railways also has a significant potential to cut costs and a any cost savings is also essentially revenue generated. It can also significantly optimize its passenger train operations and cargo train operations by using modern techniques including analytics and reduce energy costs by adopting energy saving practices.

In order for the Indian economy to continue to grow, it is an urgent calling for the Indian railways to generate revenues from non-ticketing sources in order to implement the initiatives necessary for its upgradation and modernization. Indian railways should consider roping in private investments into such initiatives through PPP mechanisms. These initiatives become even more important in the context that the Indian traveller is extremely price sensitive and is reluctant to pay a higher fare while any increase in cargo fare has an inflationary impact.

C-DEP Position on Public Procurement Issues

1.    Table of Contents

1.      Table of Contents. 3

2.      Executive Summary. 4

3.      Background. 5

4.      Payment terms. 6

5.      Discontinuity of suspense account. 7

6.      Signature registration with CCA.. 8

7.      Product Upgradation. 9

8.      Acceptance of Ink signed/Digital signed documents. 10

9.      Broad base Product Registration. 11

10.    Integration of software, hardware and peripherals RCs. 12

11.    Validity of Rate Contracts. 13

12.    One OEM One Vendor Norm.. 14

2.    Executive Summary

The Centre for Digital Economy Policy Research (C-DEP) supports the Indian government’s decision to create a single guideline for public procurement as outlined in the Public Procurement Bill 2012. With a view to synchronize the Government’s procurement policies as currently followed by the DGS&D with the PPB 2012, C-DEP’s observations are given in the following document.

C-DEP recommends that

a)      Payment terms, should be revised to a 98:2 ratio from the current 50:50 ratio,

b)      The Ministry of Finance reinstates the Suspense Account, and creates a reliable screening mechanism till such time that the Suspense Account is reinstated,

c)       The Chief Controller of Accounts (CCA) strengthens the payment process by tracking and updating the registration of authorized signatories who can ask payments to be released to vendors,

d)      DGS&D rate contracts allow for a structured process for product upgradation during the time period of a rate contract,

e)      The DGS&D moves towards accepting digitally signed documents that do not require ink signed backup copies,

f)       OEM test reports in case of ERTL certification requirements be accepted by DGS&D, and

g)      The DGS&D creates a mechanism for seamless validity of rate contracts.

3.    Background

There is currently no single guideline for public procurement in India. In order to strengthen the public procurement process, the Government of India has taken a stand to streamline all public procurement. As a first step, the government, through the Ministry of Finance, has formulated a draft Public Procurement Bill 2012 which will govern the procurement process for all central government and PSUs in the country.

However, while the decision to create a single guideline for procurement comes at the right time, the exercise can be further strengthened by streamlining it with existing procurement rules. This position paper by C-DEP is based on a holistic, view of what is required to ensure transparency and effectiveness in public procurement since the guidelines need to be viewed and would work in conjunction with each other rather than each in isolation.

4.    Payment terms

As a part of the initiatives undertaken by the Government of India to implement anti-corruption measures and strengthen the public procurement process, the Ministry of Commerce has initiated several steps including discontinuation of the suspense account, revision of payment terms for all public procurement through the Directorate General of Supplies and Disposals (DGS&D), and steps to take the entire public procurement process online.

                                                 

These steps have come at a time when the Indian economy is in need of stringent anti-corruption measures. Such measures will increase the transparency of the Indian public procurement process and in turn will boost the nation’s credibility, as well as discourage unscrupulous vendors. However, there is an anomaly.

One of the measures states that the Chief Controller of Accounts (CCA) will make a payment of 50% of the total value of the bill at the time of submission of Proof of Dispatch (POD) to CCA, and balance 50% would be released after the end customer confirms in writing to the CCA that they are in receipt of the goods. While this minimizes the government’s exposure to 50%, it does not serve as a means to check intentional fraud. For all practical purposes, all it does is maintain a control on vendors so that the after sales service needs of the end customer is met satisfactorily for a limited period of time.

More significantly, such a measure is liable to severely restrict market growth for sectors for whom government business accounts for a significant portion of their revenue. This also goes against the government’s effort to woo investments into the country in areas where domestic manufacturing has not yet become competitive on a global level.

Keeping in mind that the IT Hardware sector has been identified by the National Manufacturing Competitiveness Council as a thrust area that will serve as a high growth segment to pull the overall economy to a 9% growth path, we would request that DGS&D favourably considers that the IT sector be allowed to claim 100% payment on delivery from CCA until such time that the IT industry has gained critical mass in terms of domestic manufacturing.

As an additional control point to prevent fraud, we would suggest that the CCA write to each end customer seeking their approval in writing within a specified timeframe, mentioning that unless CCA hears from them in writing otherwise, the payments would be released by the CCA.

5.    Discontinuity of suspense account

DGS&D has issued a notification that with effect from July 2012, unless the end customer has sufficient credit balance, CCA will not make any payments to the vendor even if an order has been executed. Vendors do not have any visibility to the credit limits of end customers, and are not in a position to discern. Additionally, if a customer has placed orders on multiple vendors at the same time, there is a risk of only the first supplier getting paid, as there is no internal system of checks and balances in DGS&D to stop a customer from placing multiple orders simultaneously.

HP would request that the suspense account be reinstated as per earlier norm. Alternately, DGS&D may set up a screening system so that end users without sufficient credit balance may not place orders at all to vendors.

6.    Signature registration with CCA

CCA is supposed to have with them a list of signatories with authenticated signatures for Indentor & Consignee, before releasing payment . We can compare this to a bank allowing cheque credit /encashment, post signature verification. Currently CCA does not maintain the list of authorized signatories, and the system is defunct. However, CCA plans to restart this from September 2012. Authorized signatories change regularly, and payment cycles should not suffer due to this.

7.    Product Upgradation

Issue: Under the news terms, DGS&D product upgradation are not allowed during the term of a Rate Contract.

Impact: As we are all aware, the Information Technology industry is highly dynamic and products are constantly upgraded every three to twelve months. In addition, the ecosystem is inter-dependent which means that technology decisions are multi-lateral. Product upgradation not being allowed during the term of a RC will lead to IT vendors stopping supply of that particular product. In addition, customers will be deprived of choice and new technology since upgradation is not allowed. DGS&D shares the industry’s vision of providing customers products with the latest technology, and the above policy would run against this stated objective.

 Recommendation: We, therefore, suggest that DGS&D instill a process of reviewing technical upgrades for IT products on a quarterly basis and allow all IT vendors to submit their requests for upgraded or new model amendments, if any. Technology upgradations which are met at the same price points as agreed in the ongoing RC should be accepted by DGS&D.  At the beginning of every quarter a week’s window could be allocated for technical upgradation requests from IT vendors. This process will help DGS&D and customers make provisions for new technology.

8.    Acceptance of Ink signed/Digital signed documents

Issue: In the new terms, DGS&D has reverted to an older policy where online processes are required to be authenticated by physically signing (ink signed) and stamping copies all documents. This older process has been introduced as online I-calls are still not streamlined and there have been instances where online I-Calls do not show details such as complete name, date of visit, address and so on.

Impact: This process inordinately delays inspection, execution and all other related processes. As a process it works against streamlining business processes and reducing product delivery time to customers.

Recommendation: Ministry of Commerce should advise DGS&D to accept either ink signed or digitally signed documents till the necessary checks and balances in the software system are streamlined, as in the long term, we understand that DGS&D has agreed in principal to move towards acceptance of digitally signed documents.

9.    Broad base Product Registration

Issue: Currently, products are registered individually by model. For example, in the present tender for laptops there are 15 variants of AMD based note books and 12 variants for Intel based notebooks apart from 6 variants of other form factors. This means that every laptop vendor has to provide documentation and registration for 33 notebooks. This increases documentation considerably and does not add value to the registration or buying process.

Impact: The ERTL Test Report requirement is a time-consuming and expensive process. Products from reputed suppliers adhere to strict international guidelines and are tested for quality and functioning under all conditions. 

Recommendation: We recommend a product or model is registered based on its highest specification which would suffice for all the lower specifications of the same platform. In the case of ERTL reports, OEM test reports should be accepted as against duplicating the process.

10.                      Integration of software, hardware and peripherals RCs

Issue: According to the new policy, DGS&D has split RCs for different product groups such as Laptop/Desktop, Server, Storage, Software, Printers and peripherals.

Impact: By doing so, customers will now need to issue separate orders for a single solution requirement. This becomes cumbersome for vendors as most of them have partnerships and collaborations at the back-end that are instituted to ensure that a customer gets a complete solution.

Recommendation: The need for separate RC for Software and Hardware should be dispensed with and RCs should be led by the hardware which includes provisions for software, networking, peripherals and so on as may be the case.

11.                      Validity of Rate Contracts

Issue: Firstly, in the case of Office Automation products and Multi-function Devices Rate Contracts are valid only for a period of six to seven months. Secondly, there is an unusually long time lag between new RCs and old RCs that affect customers and vendors alike.

Impact: Due to the time lag between RCs, time and resources are wasted which do not add any value to the overall process. Without a valid RC no purchases can be made, affecting both customers and vendors.

Recommendation: As a standard validity of all Rate Contracts for IT products should be made for a minimum period of one year.  Also, the validity of a Rate Contract should automatically be extended till such time the new Rate Contract is in place.

12.                      One OEM One Vendor Norm

Issue: DGS&D new policy states that a vendor can quote products from only a single OEM and not multiple OEMs as was the case earlier.

Impact: The One OEM – One Vendor policy has the tendency to create a monopolistic situation and reduces competition between vendors and OEMs. In a multiple bid environment, customers have more than one option to select the brand or technology that is opted for. For example, if a customer wants to buy a particular brand due to its technology offering, however, the vendor has not been empanelled for application software or for Operating Systems or does not have sufficient support infrastructure, then the customer may not be able to procure the technology best suited for his organization.