Made in India, for India: Empowering MSMEs to Bolster Defence Manufacturing: Empowering MSMEs and Enhancing Indigenous Production

Rajesh Uppal September 21, 2024 Doctrine & Strategy, Industry, Military Comments Off on Made in India, for India: Empowering MSMEs to Bolster Defence Manufacturing: Empowering MSMEs and Enhancing Indigenous Production 939 Views

Introduction

India’s pursuit of self-reliance in defence production has gained significant momentum in recent years. Led by initiatives from the Ministry of Defence and the Department of Defence Production (DIP), the nation has embarked on a journey to enhance indigenous manufacturing capabilities and reduce dependence on imports.

India is navigating a complex strategic landscape, facing challenges from neighboring countries with significant military capabilities. With historical tensions persisting with China and Pakistan, maintaining operational readiness is imperative to address active border threats and respond to regional dynamics. Despite being a major importer of defence equipment, India has made strides in indigenisation, with around 35% of defence items now manufactured domestically. However, there remains a pressing need to enhance this capability further, given the country’s high defence expenditure and reliance on imports, particularly to gain technological advantages and strategic parity with neighboring rivals.

To address these challenges, India has embarked on the path of indigenisation, recognizing it as the key to cost-effectiveness, a robust defence industrial base, and technological innovation. The Make in India initiative, launched in 2014, aims to promote domestic manufacturing and attract foreign investment, thereby creating job opportunities and raising standards across various sectors, including defence. Recent policy reforms, such as the gradual banning of select weapon imports, corporatisation of ordnance factories, and enhanced FDI in defence, underscore the government’s commitment to fostering self-reliance in defence production.

Furthermore, initiatives like raising the FDI cap to 74%, promoting the Buy (Global — Manufacture in India) category, and setting ambitious turnover and export targets for the defence manufacturing sector demonstrate a concerted effort to bolster domestic capabilities and reduce reliance on foreign imports. While these measures signal a significant shift towards self-sufficiency, challenges such as ensuring quality standards, addressing national security concerns, and navigating complex procurement processes remain. Nonetheless, with a clear focus on indigenisation and a conducive policy environment, India is poised to strengthen its defence manufacturing ecosystem and emerge as a global player in the sector.

Import Embargo of 1010 items

In August 2020, Defence Minister Rajnath Singh unveiled a significant move towards self-reliance in defence with the announcement of an import embargo on 101 items. This embargo, aligned with Prime Minister Narendra Modi’s ‘Atmanirbhar Bharat Abhiyan’ (Self-Reliant India Movement), covers a wide spectrum of defence equipment, including artillery guns, combat aircraft, missiles, radars, and ammunition, among others. With indicative embargo dates ranging from 2020 to 2025, the government aims to incentivize domestic production and reduce dependency on imports. Singh emphasized the importance of meeting production timelines for the listed items, highlighting the creation of a separate budget allocation of nearly Rs 52,000 crore for domestic capital procurement in the current fiscal year.

The embargo list will undergo annual reviews, with additional items possibly added after consultations with the Department of Military Affairs (DMA). This strategic move compels India to develop indigenous technology for the listed defence systems, fostering innovation and self-sufficiency in the sector. Singh underscored the collaborative effort behind the list’s preparation, involving consultations with various stakeholders, including the military and industry experts. The DMA, under the leadership of Chief of Defence Staff General Bipin Rawat, is tasked with promoting the adoption of indigenous military equipment, signaling a concerted push towards bolstering domestic defence capabilities. With contracts worth approximately Rs 4 lakh crore expected to be awarded to the domestic industry in the coming years, the embargo represents a pivotal step towards realizing India’s vision of a self-reliant defence sector.

DRDO identifies 108 military systems for production by domestic industry

In August 2020, the Defence Research and Development Organisation (DRDO) of India unveiled a significant move towards bolstering indigenous defence production by identifying 108 military systems and subsystems for domestic industry involvement. This comprehensive list includes a diverse range of items such as navigation radars, tank transporters, missile canisters, and mini UAVs, among others. Handing over the list to Defence Minister Rajnath Singh, a high-level DRDO delegation emphasized the initiative’s alignment with the government’s overarching goal of achieving self-reliance in the defence sector.

Under this initiative, the DRDO aims to collaborate closely with domestic industries, providing support for the design, development, and testing of these identified systems as per requirements. The target set by DRDO for developing these systems and subsystems is next year, reflecting a swift and determined approach towards enhancing indigenous defence capabilities. By leveraging the capabilities of Indian industries, DRDO intends to streamline its focus on critical and advanced technology development, ensuring that the defence establishment’s requirements are met efficiently.

This initiative by DRDO comes in response to the Prime Minister’s call for ‘Atmanirbhar Bharat’ (self-reliant India), aligning with broader efforts to strengthen the indigenous defence ecosystem. With a robust industry base comprising 1800 MSMEs, defence public sector undertakings, and large-scale industries, DRDO aims to foster greater collaboration through policies such as development cum production partnerships (DcPP) and technology sharing. By enabling the industry to contribute significantly towards ‘Atmanirbhar Bharat,’ this initiative is poised to accelerate the growth of the Indian defence industrial ecosystem, positioning the country as a key player in self-reliant defence production.

Gradual improvement in Defence Procurement Procedure

The Defence Procurement Procedure (DPP) serves as a cornerstone for ensuring the timely acquisition of military equipment, systems, and platforms required by the Armed Forces, all while adhering to performance capabilities, quality standards, and budgetary constraints. It is designed to uphold principles of probity, transparency, fair competition, and self-reliance in defence production and acquisition. The overarching goal is to achieve substantive self-reliance in designing, developing, and producing defence equipment, platforms, and weapon systems within a conducive environment for private industry participation, particularly focusing on Small and Medium Enterprises (SMEs) and enhancing the defence R&D base.

Since its inception in 2002, the Defence Procurement Procedure has undergone several revisions to adapt to evolving defence acquisition needs and policy objectives. The latest iteration, DPP 2016, introduced significant reforms to promote indigenous design and development of defence equipment, including the prioritization of the “Buy-Indian” and “Buy-IDDM” categories. This revision also aimed to provide greater impetus to Micro, Small, and Medium Enterprises (MSMEs), with specific categories of projects reserved exclusively for them. Moreover, the increase in foreign direct investment (FDI) limits and the emphasis on modern technology infusion have made the policy more attractive to global defence primes, potentially catalyzing collaborations and investments in the Indian defence sector.

As the global defence market increasingly emphasizes affordability and cost efficiencies, India stands poised to capitalize on its growing stature as a viable manufacturing hub. The liberalized FDI norms and policy reforms have positioned India favorably to attract investments and technology transfers, thereby fostering greater self-reliance and indigenous capabilities in defence production. With a strategic focus on promoting indigenous innovation, enhancing SME participation, and leveraging global partnerships, India is steadily advancing towards its goal of becoming a self-reliant powerhouse in the defence sector.

Giving Preference to Make in India

The Defence Procurement Procedure-2016 underscores a pivotal shift towards bolstering indigenous defence production through its emphasis on the ‘Make in India’ initiative. Introducing the ‘Buy {Indian-IDDM (Indigenously designed, developed and manufactured)}’ category as the topmost priority for capital equipment procurement signifies a strategic pivot towards fostering self-reliance in defence manufacturing. Moreover, preference is now accorded to ‘Buy (Indian)’ and ‘Buy and Make (Indian)’ categories over their global counterparts, reflecting a concerted effort to promote domestic capabilities and reduce reliance on foreign imports.

The ‘Make’ category of acquisition has undergone significant simplification and restructuring to incentivize local production and empower Indian industry players. Divided into three subcategories – Make I, Make II, and Make III – each segment aims to facilitate a specific aspect of arms manufacturing while encouraging indigenous innovation. Under ‘Make I,’ government-funded projects receive substantial backing, with 90% of the development costs shouldered by the government. Additionally, reimbursements are offered if projects fail to secure Request for Proposals (RFPs) within a stipulated timeframe, incentivizing timely development and deployment. Meanwhile, ‘Make II’ shifts the onus of development costs to industry players, yet ensures full reimbursement if RFPs are not issued promptly post-prototype development. ‘Make III,’ specifically reserved for Micro, Small and Medium Enterprises (MSMEs), underscores the government’s commitment to fostering a vibrant ecosystem of domestic defence manufacturing, offering opportunities for smaller enterprises to thrive and contribute to India’s self-reliance journey.

Why MSMEs?

Traditionally, India’s defence sector relied heavily on large corporations and foreign imports. However, MSMEs offer distinct advantages:

Agility and Innovation: MSMEs are known for their flexibility and ability to adapt to changing technological landscapes. This fosters innovation and the development of niche defence products.
Wider Supply Chain Network: Integrating MSMEs into the defence ecosystem creates a more robust and geographically diverse supply chain, reducing dependence on single sources.
Cost-Effectiveness: MSMEs can often deliver components and sub-assemblies at competitive prices, making domestic production more economical.

Empowering the Change

The government is taking concrete steps to empower MSMEs in defence manufacturing:

Simplified Procurement Processes: Streamlining tendering procedures and easing eligibility criteria makes it easier for MSMEs to participate in defence contracts.
Financial Assistance: Initiatives like credit guarantee schemes and venture capital funding provide much-needed financial support for MSMEs to invest in technology and infrastructure.
Skill Development Programs: Training programs specifically designed for the defence sector equip MSMEs with the necessary skills and expertise.

QRS

Vendors of commercial equipment, particularly in the realm of commercial vehicles, are subject to a revised framework where the Ministry specifies two essential parameter sets, denoted as A and B. “Essential Parameters A” scrutinize the automotive performance exclusively, with further evaluation of “Essential Parameters B” reserved for selected vehicles post-installation. Notably, vendors are prompted to adjust existing product specifications solely upon receipt of confirmed orders, streamlining the customization process in response to market demand. Simultaneously, the structure of the Annual Acquisition Plan (AAP) has evolved, integrating a range of ‘Make’ projects with either in-principle approval or under consideration by higher procurement authorities for such endorsement. Furthermore, the Technology and Perspective Plan (TPCR), previously criticized for its vagueness, now assumes greater significance, mandated to delineate acquisition plans for a 15-year period to inform industry stakeholders. These strategic adjustments in planning mechanisms promise heightened visibility of ‘Make’ projects and foster greater accountability among procurement entities, marking a significant step towards efficient and transparent defence procurement practices.

Introduction of L1-T1 Methodology for Award of Contracts

The introduction of the L1-T1 methodology marks a significant departure from traditional procurement practices, shifting the focus from mere cost considerations to a more nuanced evaluation encompassing both price and technological superiority. Under this approach, the final bidder is not solely determined by the lowest price quoted but by a balanced assessment of price and superior technology offered. The Request for Proposal (RFP) incorporates provisions for ‘enhanced performance parameters,’ granting additional credits to vendors whose products demonstrate superior qualities beyond the specified requirements. This methodology ensures that vendors offering superior products, albeit at marginally higher costs, are not disadvantaged by the automatic preference for the lowest bidder. However, the price enhancement cannot exceed 10 percent of the cost, maintaining fiscal prudence while fostering innovation and quality in defence procurement.

Addressing concerns regarding a level playing field, the new methodology rectifies disparities between Indian and foreign manufacturers, as well as between public and private sectors. Measures such as Exchange Rate Variation (ERV) protection for all Indian vendors and equitable access to national assets like test ranges and validation labs promote fairness and transparency in the procurement process. Moreover, the liberalization of the industrial licensing regime and revisions in the Foreign Direct Investment (FDI) policy have lowered entry barriers for new entrants, particularly Small and Medium Enterprises (SMEs), stimulating competition and innovation in the sector. The flexibility introduced in offset guidelines further incentivizes foreign OEMs to engage with Indian partners, promoting technology transfer and indigenous capability development. Overall, these initiatives underscore a concerted effort to streamline procurement practices, enhance domestic manufacturing capabilities, and foster a robust and self-reliant defence ecosystem in India.

Efforts to enhance transparency and efficiency in the export clearance process have yielded significant achievements in defence procurement and manufacturing. Over the past few years, the Defence Acquisition Council (DAC) has approved 136 capital procurement cases, amounting to an estimated cost of Rs. 4,00,714 crore. Notably, 96 of these cases, valued at Rs. 2,46,417 crore, fall under categories prioritizing indigenous production such as ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’, ‘Buy & Make (Indian)’, and ‘Make’. This underscores a strategic shift towards bolstering domestic defence manufacturing capabilities and fostering self-reliance in line with the ‘Make in India’ initiative.

In terms of capital expenditure, approximately Rs. 1,75,420 crore has been allocated for the purchase of defence items for the Armed Forces in the past two financial years, with a substantial portion, around Rs. 1,05,030 crore, directed towards procurement from Indian vendors. This highlights a concerted effort to promote domestic industry participation and reduce dependency on imports for critical defence equipment. Furthermore, the government’s issuance of 342 Industrial Licenses (ILs) to 205 companies for the manufacture of various defence equipment signifies a significant stride towards enhancing indigenous manufacturing capabilities. Notably, 116 ILs were issued following the launch of the Make in India initiative, signaling a growing momentum in domestic defence production and aligning with broader objectives of promoting economic growth and self-sufficiency.

Defence Acquisition Procedure 2020

The Defence Acquisition Procedure (DAP) 2020, introduced on October 1, 2020, under the guidance of Defence Minister Rajnath Singh, is a pivotal step towards realizing the vision of Aatma Nirbhar Bharat (Self-Reliant India) and fostering indigenous defence manufacturing through the Make in India initiative. The document heralds significant reforms aimed at empowering the domestic industry and enhancing indigenous content across various procurement categories.

Key features of the DAP 2020 include reservations in categories for Indian vendors, with certain categories exclusively earmarked for domestic participation, promoting indigenous content across procurement categories, and rationalizing trial and testing procedures to streamline the acquisition process. Additionally, the document introduces the Make and Innovation framework, delineating funding mechanisms for government-supported projects and industry-funded initiatives to bolster indigenous design and development efforts. Furthermore, provisions for design and development by premier defence research organizations like DRDO, DPSUs, and OFB are outlined, addressing existing voids and enhancing industry-friendly commercial terms such as price variation clauses and timely payments to vendors.

Moreover, the DAP 2020 incorporates reforms articulated in the Aatma Nirbhar Bharat Abhiyan, including the notification of a ban on the import of specified weapons/platforms and initiatives to indigenize imported spares. The document also focuses on time-bound procurement processes and faster decision-making, establishing a Project Management Unit (PMU) to streamline contract management and advisory support. Additionally, the DAP emphasizes ease of doing business through procedural changes aimed at simplification and delegation, underscoring the government’s commitment to fostering a robust and self-reliant defence ecosystem in India.

The Defence Procurement Procedure (DPP) 2020, aimed at expediting defence equipment procurement and boosting indigenous manufacturing, introduces significant reforms to streamline the acquisition process and empower the domestic industry. Notable features include the single-stage accord of Acceptance of Necessity (AoN) for cases up to Rs 500 crores to reduce time, while Fast Track Procedures (FTP) cases progress post AoN accord through delegated powers, hastening procurement cycles. Moreover, the Long Term Integrated Perspective Plan (LTIPP) is re-designated as an Integrated Capability Development Plan (ICDP), spanning ten years, focusing on strategic planning.

The draft DPP 2020 underscores the government’s commitment to fostering self-reliance and transforming India into a global manufacturing hub. Defence Minister Rajnath Singh emphasized the need to empower the private industry, including MSMEs, to bolster indigenous defence production. The draft proposes several reforms, including provisions to promote the Indian software industry, reservations for domestic companies, and measures to support start-ups in defence and aerospace sectors. Notably, the introduction of “Make-3” facilitates technology transfer from foreign OEMs, while the leasing category allows hiring defence products based on need, reducing initial capital outlays. Additionally, the inclusion of a price variation clause for procurements above Rs 1000 crores ensures cost escalation management, enhancing transparency and efficiency in procurement processes.

Indigenous Production Milestones

Director Amit Satija of the DIP revealed that out of 4,666 listed defence items, an impressive 2,920 have already been indigenised. This achievement underscores India’s commitment to bolstering its defence capabilities and fostering a robust ecosystem for domestic manufacturing.

Empowering MSMEs in Defence Sector

Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in driving innovation and contributing to the growth of the defence sector. Satija emphasized the importance of empowering MSMEs and highlighted various initiatives aimed at facilitating their participation in defence production.

Industry-Friendly Provisions

Satija elaborated on the implementation of industry-friendly provisions in the Make-1 and Make-2 categories. These provisions include relaxed eligibility criteria, simplified documentation, and other measures to encourage easier participation for MSMEs and industry stakeholders.

Project Approvals and Categories

Satija revealed that 102 projects for the Army, Navy, and Air Force have received in-principle approval under the Make-2 procedure, with an additional 44 projects under the Make-1 category. The introduction of the Make-3 category underscores the government’s commitment to achieving self-reliance through import substitution.

Licensing and Procurement Processes

The Department of Defence issues 40 to 50 licences annually for defence production, reflecting a dynamic and growing sector. The distinction between Make-I, government-funded projects, and Make-II, industry-funded programmes, highlights a strategic approach to fostering collaboration between the public and private sectors.

Import Substitution and Self-Reliance

In addition to promoting indigenous manufacturing, the government’s emphasis on import substitution through the Make-3 category is poised to further bolster India’s self-reliance in defence production. This strategic shift underscores India’s evolving defence procurement landscape and its commitment to strengthening national security.

Success Stories

The impact of empowering MSMEs is already evident:

Increased Participation: Over 10,000 MSMEs are actively involved in defence production, contributing significantly to various defence projects.
Export Potential: With their agility and focus on niche products, MSMEs can cater to not only domestic needs but also explore export opportunities.
Technological Advancements: Several MSMEs are developing cutting-edge defence equipment, demonstrating their growing capabilities.

The Road Ahead

While the progress is encouraging, challenges remain:

Technology Gaps: Bridging the gap between the technological expertise of MSMEs and the demands of modern warfare is crucial.
Quality Control: Ensuring stringent quality standards throughout the supply chain is essential for maintaining the integrity of defence equipment.
Market Access: Simplifying access to critical raw materials and fostering partnerships with larger companies can provide MSMEs with a strong footing.

A Vision for the Future

By addressing these challenges and continuing to empower MSMEs, India can achieve its vision of a self-reliant and technologically advanced defence sector. Here’s what the future holds:

A Thriving Defence Ecosystem: A robust network of MSMEs working alongside larger companies will create a dynamic and competitive domestic defence industry.
Enhanced National Security: Reduced dependence on foreign imports will strengthen India’s strategic autonomy and ensure a reliable source of defence equipment.
Economic Growth: The flourishing defence sector will create jobs, boost economic activity, and position India as a global player in defence manufacturing.

Conclusion

As India continues its journey towards self-sufficiency in defence manufacturing, the empowerment of MSMEs and the indigenisation of critical defence items will remain pivotal. By empowering MSMEs and fostering a culture of innovation, India can transform its defence landscape and write a new chapter in its journey towards self-reliance. This is a story not just about building weapons, but about building a stronger, more secure nation.

Through collaborative efforts between the government, industry stakeholders, and MSMEs, India is poised to emerge as a global leader in defence production, ensuring security and prosperity for the nation and its citizens.