Any large organisation whether it is public or private needs a lot of supply on the input side to keep its show running. This also applies to both state governments and centre government who provides a whole lot of services to the citizens and are required to enter into a lot of contracts with vendors, suppliers and contractors. In each organisation, the principles of procurement are largely founded on the objectives they intend to achieve. While the principles of procurement in private organisations are founded purely on economic basis, the principles of procurement in the government also strive to provide equality of opportunity to different market players irrespective of their size and strength.
The payment schedule plays an important role in deciding whether the objective to provide equality of opportunity to small and micro enterprises will be met or not. By virtue of being government organisations, an enterprise entering into a contract with government is sure of the payment but is not very sure of the timing of the payment. The timing of payment can play a crucial role in altering the market forces and can lead to challenging times for finances of both the suppliers and the government.
The first impact of delayed payments to the suppliers is that it will give rise to litigation which will put more financial burden on both the parties. Secondly, the delay in payment can lead the small vendors and suppliers to default on their loan repayments. The loan repayments to financial institutions are very structured and require timely payment by suppliers or contractors. In case government fails to pay the vendors timely , it may lead to contractors liabilities getting listed as Non-Performing Asset(NPA). Once, he becomes NPA, he may have difficult time to recover and may also have to shut down his business due to liquidity crunch. The major repercussion of such a scenario is that big contractors or suppliers who have enough financial appetite will remain in the market while others will be wiped out.
The collapse of small vendors does not augur well for the government in the long term. The big contractors will bid for the works pricing in the delay in payments and discounting the financing cost which will increase the costs for the organisation. Thus, a work which is around 1 crore will cost government around 20 percent more due to elimination of competition and pricing in of financing costs of the delayed payments. It will deteriorate the financial health of the government organisations which can become very challenging to manage in future. From social angle, the collapse of small vendors, contractors and suppliers means a damp employment scenario will prevail in the country as new jobs will be hard to come by.
Thus, it is very important for governments to ring-fence their contractual liabilities and try to have scientific basis for entering into contractual obligations duly taking into account their future liabilities.The governments still remain one of the largest procurer of supply of services and goods and their ability to maintain a timely payment schedule has a wider and deeper repercussions for Indian economy. Hence, a prudent approach is required to ensure that contractual payments are discharged on time.