Energizing innovation in green manufacturing

(As published in Business Standard, New Dehi, India on 24th September 2017)

Demand driven innovation has been a key success factor for many industries in US and Japan, especially in defense R&D programme, in which well-articulated demand was key to developing and diffusing technologies. Also, companies are willing to invest, innovate and scale-up when demand is secure and well directed.

In USA, the domestic market for green electronics products took huge strides after the Federal Government’s Executive Order on the purchase of greener products in early 1990s. Similarly in Europe, public procurement acted as a catalyst in developing market for organic food and drink, fuel-efficient vehicles, and sustainable buildings and timber products.

Typically, a government spends about 12-30% of national GDP on procuring products, services and works, thereby creating significant financial clout for itself in the market. It is not only the biggest institutional consumer, but also regulates and influences allocation of resources by demanding sustainable products and services. Governments, especially in the developed economies, have leveraged this combination of purchasing and regulatory power to shift investments towards the manufacture of innovative low-carbon products. There is no reason why India can’t travel the same path.

In today’s interconnected world, consumers are savvy and sensitive to environment and health hazard of products. Several studies have concluded that despite high unemployment rates and low wages post 2008, millennials in European countries are willing to spend more for environment-friendly products. The European Commission estimated the rapidly growing global market for low carbon environmental goods and services at €4.2 trillion in 2012. Indian businesses can either seize the opportunity and capitalize on this trend by internalizing sustainability in their value chain, or face the danger of becoming obsolete in the modern consumer-driven market.

The objective of “Make In India” initiative to transform India into a global manufacturing hub would not succeed unless our businesses adopt the new competitive mantra of reducing carbon emissions as well as materials and energy usage over the whole life-cycle of products. Businesses, by adopting this ‘low carbon manufacturing’ philosophy, have transformed their manufacturing and been reaping the benefits of consumers’ willingness to pay premium for sustainable products. This leads us to the question – how can we transform Make in India initiative to “low-carbon manufacturing” initiative?

In May 2017, Government of India (GoI) took a small step in this direction by releasing the Manual for Procurement of Goods 2017, which has made key changes to facilitate procurement of sustainable products by public sector.

The Manual has broadened the “Value for Money” concept and brought out contemporary concepts of “Total Cost of Ownership” and “Life Cycle Cost” to take into account, not only the initial acquisition price, but also cost of operation, maintenance and disposal during lifetime of products and services. Further, it has allowed incorporation of environmental characteristics besides quality, price, technical merit, aesthetic and functional characteristics in procurement cycle – from specification, to bid evaluation and contract monitoring. Embracing these changes, public procurers would create steady demand for greener products, thereby decoupling both resource requirement and environmental impacts from GDP growth.

The implications of this step are mind-boggling when one considers the scale of government procurement in India, which is about 30 percent of GDP. Considering Indian GDP is about $2.3 trillion, the government has, in a bid to incentivize the market for innovation in design, development and manufacturing of sustainable products, created a market of about $700 billion for such products, works and services. In addition to challenging traditional manufacturers to improve their efficiency, it will also force them to innovate continuously to retain market competitiveness.

This tweaking of purchase policy will attune our businesses to the new success paradigm and make them aspire to capture a small piece of the big €4.2 trillion cake. It would also help us achieve multiple SDGs, mitigate climate change, foster sustainable development, besides creating whole new market for voluntary sustainability standards and labeling. 

However, the Manual will remain unnoticed unless its provisions are embedded into procurement practices. To start with, the government can set up a Task Force to analyze their spend, identify hot-spots in procurement, bring out  comprehensive sustainable products procurement guidelines and action plan for prioritized products, and set up a monitoring and review mechanism. This would send a clear signal to the market that it means business.

The capacity building of stakeholders and preparing businesses (especially SMEs) for such transformation can progress simultaneously. Industry in China realized long ago that efficiency in energy usage, waste generation, and water consumption, along with using recycled materials, was vital for reducing costs and becoming competitive in the long run. Our policymakers must move aggressively if we are to unlock public procurement’s "power of the purse" to trigger innovation in low-carbon manufacturing.