The Policy mandates that Central Ministries, Departments and Central Public Sector Enterprises (CPSEs) procure a minimum portion of their annual goods and services requirements from MSEs, while extending key facilitative measures such as free tender documents, exemption from Earnest Money Deposit (EMD) and price-matching benefits for MSEs quoting within the L1 (lowest financial quote of bidder) + 15% band, enabling them to match L1 and supply up to 20% of the tendered value. Although the applicability of this Policy is to Central bodies, various State Governments have notified the Policy within their respective states, with certain variations in the provisions. One such example is that medium enterprises have not been included in the Central Policy; however, the State Government of Haryana has notified the Policy, providing concessions to medium enterprises as well. 

It is to be noted that the Policy applies exclusively to the procurement of goods and services and does not cover works contracts, a position affirmed by the Hon’ble High Court of Allahabad vide decision dated January 25, 2017, in Rahul Singh v. Union of India, 2017 SCC OnLine All 3579.

Since its introduction, the Policy has evolved through subsequent amendments that strengthened its scope and inclusivity, raising the procurement target to 25% from the previous 20%, introducing a 3% sub-target for women-owned MSEs and 4% for Scheduled Caste (SC)/Scheduled Tribe (ST) owned MSEs, and integrating procurement processes with the Government e-Marketplace (GeM). Its statutory force was further affirmed by the Hon’ble Supreme Court vide decision dated February 25, 2025, in Lifecare Innovations Pvt. Ltd. & Anr. v. Union of India & Ors., 2025 SCC OnLine SC 436. In this case, the Court held that the Policy is binding on all procuring entities and cannot be diluted through restrictive tender conditions.

Implementation Challenges and Compliance Gaps

Despite its statutory clarity, the procurement mandate continues to face implementation bottlenecks at both systemic and procedural levels.

• Reporting Inadequacies:

According to data from the MSME Sambandh Portal, the Central Ministries/Departments/CPSEs have collectively achieved around 43.58% MSE procurement in FY 2024-25, exceeding the minimum threshold. However, in many cases, reporting delays and incomplete disclosure undermine transparency, pointing to weak internal audit trails and the absence of standardised reporting formats.

• Restrictive Tender Conditions:

Despite the MSME Ministry’s Circular No. 1(2)(1)/2016-MA dated March 10, 2016, allowing relaxation in turnover and experience requirements for MSEs, these relaxations are rarely implemented in practice. Procuring entities often justify non-relaxation on “public safety, health, critical security equipment” as observed in the case of Lifecare Innovations Pvt. Ltd. (supra), effectively excluding smaller bidders. The non-application of these statutory relaxations thus results in the systematic exclusion of smaller MSE bidders from competing in public procurement.

• Disregard of the Reserved Items Mandate under Clause 11:

A significant implementation gap concerns the reserved items list under Clause 11 of the Policy, which mandates exclusive procurement of 358 items from MSEs. The Comptroller and Auditor General of India (CAG), in its Report No. 18 of 2018 for the year ended March 31, 2017, observed substantial non-compliance in this regard. CPSEs such as Gas Authority of India Limited (GAIL) procured large quantities of reserved items from non-MSE vendors. The CAG found that such procurements occurred largely because the reserved items were not system-identified in Enterprise Resource Planning (ERP) platforms. National Hydroelectric Development Corporation (NHDC), for example, had not mapped the Indian Trade Classification–Harmonised System (ITC-HS) codes to the reserved items, leaving compliance to the discretion of procurement personnel.

CPSEs also indicated that the reserved list’s generic and non-technical descriptions led them to classify several procured items as falling outside the reserved category, thereby not triggering the requirement to seek approval from the Review Committee for procurement exemptions.

Additionally, there is no mandatory reporting mechanism for non-MSE procurement of reserved items, resulting in deviations not being escalated or reviewed by the higher authorities.

These gaps in system identification, item classification, and oversight have weakened enforcement of the reservation mandate and highlight the need for a more precise, digitally integrated, and regularly updated reserved items framework.

• Time-Sensitivity Mismatch Between Tender Timelines and Grievance Mechanism:

A major practical challenge stems from the time-sensitive nature of government tenders, which often progress from publication to award within weeks. When an MSE believes that concessions such as relaxation of turnover, experience or EMD requirements have been unfairly denied, its only formal recourse is the Grievance Cell. However, because the cell is merely recommendatory, lacks defined timelines and typically processes representations slowly, MSEs rarely receive a response before the tender is awarded. Consequently, the mechanism offers little real-time relief, leaving MSEs without an effective remedy during the active bidding window.

• Absence of Enforcement and Penal Consequences:

A key structural weakness in the implementation framework is the absence of any enforceable penalty on procuring entities that fail to meet the mandatory procurement targets. As noted in CAG Report No. 18 of 2018, the Development Commissioner, MSME, has explicitly acknowledged that it has no statutory authority to penalise CPSEs, which fall under the administrative control of the Department of Public Enterprises (DPE). The only consequence for non-compliance is a downgrade in the CPSE’s performance rating under the Memorandum of Understanding (MOU) guidelines issued by the Ministry of Heavy Industries & Public Enterprises, DPE, Ref. No. M-03/0017/2016-DPE, dated January 17, 2025. A one-mark deduction is applied to the CPSE’s aggregate MOU score for failure to meet the procurement mandate.

This limited consequence effectively renders the Policy recommendatory rather than binding, allowing CPSEs to disregard procurement obligations without facing real repercussions. The lack of deterrence undermines the statutory intent of affirmative procurement and weakens the accountability framework envisioned under Section 11 of the MSMED Act.

Way Forward and Strategic Takeaways for CPSEs & MSEs

The public procurement policy for MSEs, 2012, as reaffirmed by the Hon’ble Supreme Court, now stands as a legally enforceable mandate rather than a policy aspiration. Its effective use, however, depends on both institutional vigilance and entrepreneurial awareness.

• Need for Awareness Among Procuring Agencies

The challenge of under-utilisation of the Policy stems not only from limited awareness among MSEs, but also from gaps in understanding within procuring ministries and PSUs, many of whom are unfamiliar with the range and technological capability of the MSE sector. Strengthening this institutional understanding is essential for meaningful implementation of the 25% mandate. Regular buyer-seller meets, sensitisation workshops, and other such relevant programmes within Ministries and PSUs can enable procurement officers to better appreciate MSE capabilities.

• Collective Representation Through Industry Bodies

Associations such as the Federation of Indian Micro and Small & Medium Enterprises (FISME), National Small Industries Corporation (NSIC), Confederation of Indian Industries (CII), and Laghu Udyog Bharati can play a vital role in coordinated advocacy and stakeholder engagement, especially as the Review Committee moves toward stakeholder consultations on turnover thresholds and tender rationalisation.

• Introducing Objective Criteria to Prevent and Regulate Invocations of Blanket “Public Safety/Critical Equipment”

While procuring entities frequently cite “public safety” or “critical equipment” as grounds to deny relaxation under Circular No. 1(2)(1)/2016-MA dated March 10, 2016, neither the circular nor the Policy describes objective parameters for invoking such exceptions. In view of the observations of the Hon’ble Supreme Court in Lifecare Innovations Pvt. Ltd. (supra), that tender conditions must not be framed in a manner that nullifies the statutory mandate under Clause 3 of the Policy, a structured safeguard may be introduced. This should be brought to the attention of both the Central and State Governments.

Ministries and CPSEs may be required to record such reasons in a template-based justification, demonstrating that:

• 1. the item or service falls within a verifiable category of essential or safety-critical procurement;
  2. the specific turnover/experience thresholds are proportionate to the identified risk;
  3. alternative, less exclusionary specifications were considered but found infeasible.

Mandating this structured evaluation, subject to periodic scrutiny by the Review Committee, would substantially curb generic, boilerplate reliance on safety-related exceptions and ensure consistency with the statutory objective of the 25% procurement mandate.

• Enhancing Procurement-System Controls

To strengthen compliance with the reserved-items mandate, the Ministry of MSME should refine and technically standardise the list of 358 reserved items, ensuring clearer product descriptions and reduced classification ambiguity. CPSEs should integrate the updated list into their ERP systems through proper ITC-HS code mapping so that reserved items are automatically identified during procurement. A central, periodically updated database of eligible MSE vendors, including those owned by SC/ST, should also be made available to all CPSEs to address vendor-availability gaps and support consistent implementation across entities.

• Leveraging Subcontracting Opportunities

MSEs that are unable to meet the financial, turnover, or experience thresholds in tenders can still participate indirectly by acting as subcontractors to larger eligible bidders. The Policy explicitly encourages such arrangements, allowing smaller enterprises to contribute their specialised products, services, or manufacturing capacity.

Conclusion

The Policy, anchored in Section 11 of the MSMED Act, represents one of the most consequential affirmative frameworks for MSE inclusion in India’s public contracting ecosystem. While the Supreme Court’s intervention has reinforced its statutory enforceability, the real test lies in consistent implementation across Ministries and PSUs. Ensuring uniform relaxation of eligibility norms, strengthening system-based controls and improving the grievance redressal process are critical to transforming the Policy from a procedural formality into a genuine tool of economic empowerment. Sustained engagement between government, industry bodies, and MSEs will be key to unlocking the full potential of the 25% mandate in driving inclusive growth.