New Delhi: The Union cabinet on Tuesday approved a policy under which central ministries and state-run firms will have to source a certain proportion of goods and services they buy every year from small and medium enterprises (SMEs).

Prime Minister Manmohan Singh.

Some portion of the goods and services sourced from SMEs will have to be from firms owned by people belonging to the scheduled castes and scheduled tribes (SCs and STs).

SCs constitute the main electoral base of Bahujan Samaj Party chief and Uttar Padesh chief minister Mayawati. The Congress party, which heads the United Progressive Alliance (UPA) coalition at the Centre, has been trying to regain lost ground in the state.

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The cabinet’s decision that central ministries and state-run firms source at least 20% of their annual purchases from SMEs was announced by Ambika Soni and Virbhadra Singh, cabinet ministers in charge of information and broadcasting, and micro, small and medium enterprises, respectively.

The sourcing policy will remain voluntary for three years, after which it becomes mandatory. A fifth of the goods and services thus sourced will have to be from firms run by people from SCs and STs. Currently, state-owned firms and ministries have to source up to 12% of their annual purchases of goods and services from SMEs.

“The micro and small enterprises, including khadi, village and coir industries, constitute an overwhelming majority of this sector, contributing significantly to the gross domestic product, manufacturing output and exports," a government statement said.

The sector, with 26.1 million units, employs an estimated 59.7 million people and, in terms of value, accounts for about 45% of India’s manufacturing output and around 40% of its exports, said Singh.

He added that it is the “government’s duty" to see that the sector’s problems are addressed in the interests of job creation and social justice.

According to Soni, the “pathbreaking" policy initiative is designed to cushion small enterprises that are “highly susceptible to volatile market conditions", a reference possibly to the global economic situation. “The proactive step is to help those sections of the population who are standing on their own feet and would like to contribute to national growth," she said.

According to the government statement, the policy will not cover the defence ministry and armaments, given their “unique nature".

Singh noted that even in the US, considered the “citadel of capitalism", a law mandates that firms buy a minimum of 23% of goods and services they buy from “small businesses".

Uday Kumar Verma, secretary, information and broadcasting, said total government procurement was worth RS 1.75 trillion and 20% of this would be RS 35,000 crore.

“So this means opening a huge window of opportunity for the small and medium-scale industries, “ he said.

Soni also tried to allay fears expressed by Indian corporate executives about poor governance affecting both foreign and domestic investment in the country. Reacting to Wipro Ltd chairman Azim Premji’s comments that there was a “complete absence of decision-making", she said: “His remark does not reflect the reality; it is his perception. But he is an eminent personality and we will try and rectify (the situation)."

The minister conceded that there was “anger and anguish" against the government’s approach to the proposed anti-corruption Bill. She pointed out that Prime Minister Manmohan Singh himself had articulated the government’s commitment to the legislation.

Soni added: “Our attempt in the coming three years will be to take (welfare) schemes to its logical conclusion. You could see the cabinet has cleared many projects with a time frame to its goalpost in the recent weeks."

Opposition parties saw electoral motives in the latest initiative.

“While such steps are certainly needed as part of affirmative action to address concerns of scheduled caste/scheduled tribe communities, the hurried approach just in time for assembly elections in Uttar Pradesh next year definitely raises questions," said Nirmala Sitharaman, spokesperson for the main opposition Bharatiya Janata Party.

Communist Party of India-Marxist politburo member S. Ramachandran Pillai termed the sourcing policy an “election gimmick" on the part of the government.

The Congress defended the move. “The cabinet does not take decisions considering any election to any assembly," said Rashid Alvi, party spokesperson.