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Enhancing the role of MSME sector in defence industry is crucial for Make in India in Defence

Make in India is an initiative launched by the Government of India to encourage multi-national, as well as national companies to manufacture their products in India. It was launched by Prime Minister Narendra Modi on 25 September 2014, aimed at increasing the share of manufacturing sector from little over 16% in 2014-2015 to 25% of the GDP by 2022.  This is expected to create an additional 100 million jobs and skill enhancement in 25 sectors of the economy. The initiative also aims at high quality standards and minimising the impact on the environment. The initiative hopes to attract capital and technological investment in India.

Indian Small and Medium Enterprises (SME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. SMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural areas. SMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country.

The Sector consisting of 36 million units, as of today, provides employment to over 80 million persons. The Sector through more than 6,000 products contributes about 8% to GDP besides 45% to the total manufacturing output and 40% to the exports from the country, according to SME chamber of India. The SME sector has the potential to spread industrial growth across the country and can be a major partner in the process of inclusive growth. Experts say the SME sector is an attractive option because of their innovative capabilities in niche manufacturing, higher flexibility, lower costs and the ability to learn and utilize new technologies.

However the contribution of MSME sector in defence sector is small. The India Defense Industry has grown from USD 21.9 billion in 2010-11 to USD 37.3 billion in 2016-17, at a CAGR of 9.25%.  The Centre is attempting to boost MSME sector’s contribution towards indigenous manufacturing in defence from the present 20-30 to 70 per cent in the next five years under its ambitious ‘Make in India’ programme, Lt General Ravi Thodge (Retd) said.

The Indian government recently approved a Defence Innovation Fund (DIF), which aims to create, “an ecosystem to foster innovation and technology development in Defence,” according to a statement by Minister of State for Defence Dr. Subhash Bhamre.

The idea is to engage R&D organisations, academia and industry – including startups and “individual innovators,” providing them with funding to develop ideas, products and services that have the potential for future commercialisation. Initial funding for the scheme will be provided by Hindustan Aeronautics Limited (HAL) and Bharat Electronics Limited (BEL), with grants from government agencies and other not-for-profit organisations – both public and private – in prospect as the scheme matures.

In a parallel move the government has also launched a Technology Development Fund (TDF) which aims to support the development of defence and dual-use technologies not currently in use or development in India, thereby creating a culture of innovative development for defence applications. Providing grants for design and development of key defence technologies, TDF is administered by the Defence Research & Development Organisation (DRDO).

Defence Sector

The defence equipment held by Indian defence forces is 50% obsolete, the proportion of state-of-the-art equipment also needs to double from current 15% to 30%. This justifies the huge requirement of new systems. Ongoing projects include submarine building, advance early warning aircraft, Rafale fighters, missiles, missile shields, aerostat radars, all of which already signed for and delivery schedules have begun. The future requirement includes multi-role combat fighters, basic and intermediate jet trainer, attack helicopters, drones, infantry clothing and weapons, artillery guns, gun-mounted turrets for tanks, improved electronics and sat-nav equipment for all three services and a host of equipment to modernize the forces.

Defence Systems and Technology caters to common technology / equipments across all the defence segments namely Army, Navy and Air Force. The technologies are used to build various common equipments such as Radars, Electro-optics, C4I system (Command, Control, Communications, Computers, and Intelligence), Underwater systems, Missiles and Guided Weapons, Avionics, Communication and Electronic Warfare. It’s a high value, complex and high technology segment that requires highly skilled intellectual capital for implementation and IPR from global OEMs.

The global defence market is estimated at USD 1800 Billion. India ranks among the top 10 countries in the world in terms of its military expenditure and import of defense equipment. India with a spending of USD 51 Billion in the year 2016 has moved up to 4th position from 6th position in the year 2015.

It allocates about 1.8% of its GDP to defense spending, of which 36% is assigned to capital acquisitions. However, only about 35% of defense equipment is manufactured
in India. Moreover, even when defense products are manufactured domestically, there is a large import component of raw material at both the system and sub-system levels.

Indian Defence budget is Rs. 2,62,000 Crore for FY 2017-18, an increase of 5% over the last year budget. The capital acquisitions of defence hardware in next 10 years is expected to be approx. Rs 15 Lakh Crore (Rs 1 Lakh Crore per annum)

a) Aerospace – Rs 5,20,000 Crore
b) Naval – Rs 3,50,000 Crore
c) Land systems – Rs 6,00,000 Crore
d) Security – Rs 30,000 Crore

India is the largest importer of defence products accounting for 14% of the total global imports in the year 2016. Currently, about 70% of the Indian defence procurements are imported. India will have Rs. 86,000 Cr of defence expenditure in the year 2017-18. This will offer large opportunities for Indian Private Sector Defence Companies, given renewed thrust by Government of India towards “Make in India” in the Defence sector.

Indigenization is only route forward as it is cheaper to build, operate and maintain, results in building of strong defence industrial base and growth of R&D leading to strong technology innovation ecosystem. It is also insurance against denial of critical weapons and spares by foreign countries in crisis or conflicts in pursuit of their political or strategic interests. The civil military integration resulting from indigenization shall result in military technologies to be applied in civilian fields, making high-tech equipment available to commercial markets, as well as military to benefit from civilian innovations. This will lead ultimately to industry move up in innovation ladder to become leading exporter.

The global defence industry which is primarily dominated by a few Original Equipment Manufacturers (OEMs), works similarly in close co-ordination with SMEs and their prime contractors through a well defined supply chain.

OEMs require that the SMEs they work with should have the ability to perform, maintain continuity of supplies and clearly understand how the defence procurement procedure works. Hence, to be able to integrate successfully in the value chain, SMEs must try to develop niche products and capabilities, continuously innovate and fully leverage export opportunities that are now available to them under the Defence offset policy.

SME Challenges

Despite their high enthusiasm and inherent capabilities to grow, SMEs in India are also facing many challenges like sub-optimal scale of operation, technological obsolescence, supply chain inefficiencies, increasing domestic & global competition, working capital shortages, not getting trade receivables from large and multinational companies on time, insufficient skilled manpower, change in manufacturing strategies and turbulent and uncertain market scenario.

Majority of the MSMEs, especially the Tier-II and Tier-III companies in India have limited themselves to component manufacturing and using outdated processes. This needs to change and they need to focus on improve skill sets and efficiencies in order to be able for foreign collaboration, which can help in technology transfer.

SMEs do not have exposure to national and international markets, secondary market instruments, technology and product innovations and best global practices. This impacts the profitability and growth of SMEs. SMEs are inward looking and do not have access to beneficial information and business management tools to enhance their businesses. Lack of adequate and timely finance has been a perennial cause of sickness in the SME sector.


SME opportunities

The defence  Minister stressed that Defence public sector units such as Hindustan Aeronautics Ltd., Bharat Electronics Ltd. and Bharat Dynamics Ltd., which manufacture critical products for the Forces, should be lead integrators and make way for industry as supplier of components and systems. The contribution of small and medium industries to Defence PSUs increased four per cent last year and stood at nine per cent of the total procurement. The target is 15 per cent, he added.

At present, India is importing nearly 60 per cent of its defence manufacturing components. The Government of India is committed to working with MSMEs focusing on import substitution, he said. The ‘Make in India’ programme puts great thrust on sustainability, Lt Gen Thodge said, adding that the Government is reaching out to MSMEs across India to encourage them to participate in this programme.

“The Government is also committed to introducing more clusters of defence manufacturing to help MSMEs reap the benefits of logistical efficiency, as well as to harness the benefits of innovation from all parts of the country,” he said. The Ministry of Defence is already working with the Government of Maharashtra to promote clusters in Nashik for aircraft components, forging and foundry in Kolhapur and for tank and combat vehicles in Pune,” he said.

The ministry was developing a testing center for Defence Procurement Assistance Center in Belgaum, Karnataka. This will also help MSMEs with testing facilities. On the issue of procedural delays and transparency keeping MSMEs wary of participating in the ‘Make in India’ programme, Lt Gen Thodge said since 2014, the Ministry had done away with physical tendering and today it is done through etendering. “The Government is finalising RFPs for procuring ammunition of the value of Rs 2,500 crore per year under the ‘Make in India’ programme and that these would be uploaded soon. This would be a game changer,” he said


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