1. MSMEs eye defence windfall, but here’s what they must do first

MSMEs eye defence windfall, but here’s what they must do first

It is imperative for Indian MSMEs to integrate themselves into the global supply chain of defence majors

New Delhi | Published: October 17, 2016 6:15 AM

The Defence Procurement Procedure (DPP), announced recently, finally delivers Indian MSMEs, a growth opportunity they have long been waiting for. The advantages that MSMEs will leverage are their innovative capabilities in niche manufacturing, greater flexibility, lower overhead costs and their ability to learn and absorb new technologies quickly.

MSME sector already contributes a significant 38% to the nation’s GDP and 40% and 45% to the overall exports and manufacturing output, respectively. It is engaged in the manufacturing of over 6,000 products ranging from traditional to hi-tech items. However, till now the MSMEs contribution in defence sector was limited to just 9%.

According to figures shared by the defence minister, Manohar Parrikar, last year procurement from MSMEs reached 9%, and in the current year, it will reach 15%. Volumes are also set to increase from R40,000 crore in 2014, to R52,000 crore in the current year.

There are nearly 6,000 MSMEs across the country supplying components and sub-assemblies to the DPSUs, ordnance factories, DRDO and private industries.

As per latest industry reports, India’s defence budget accounted for nearly 17.2% of the total central government expenditure, at R19.78 lakh crore (about $294.36 billion). In terms of defence spends as a percentage of the GDP, India stands fifth globally. Nearly 60% of the defence need is met through imports putting a huge dent on India’s fiscal health. Therefore, boosting ‘Make in India’ initiative via MSMEs and integrating this sector with global supply chain can be a panacea for managing current account deficit, when oil prices rise again.

As a sequel to 100% FDI in defence production sector, several foreign majors have already made their entry into India. Boeing, Lockheed Martin, Saab, Bell Helicopter, Rolls Royce, Northrop Gruman, Rolta, BAE Systems, Dassault, Honeywell, Thales and Finmeccanica are some of the big foreign players actively looking at Indian market. These companies will have to depend on MSMEs to meet their offset obligation for a host of purposes: equipment, spares, IT-related services and other techno-commercial services.

The government has initiated host of measures for simplification of procedures to policy change for boosting manufacturing in defence sector based on priority of MSMEs Sector, these include:

  •  Allowing 100% FDI in defence sector and announcement of DPP. The new DPP encourages the MSMEs associated with the industry with funding up to 90% of their project’s prototype development cost. Adding another safeguard, the MoD has also stated that it will reimburse the remaining 10% prototype development cost, if the request for proposal (RFP) is not called within a stipulated timeframe after the successful test of prototypes.
  • Outsourcing and Vendor Development Guidelines for DPSUs and OFBs have been formulated and circulated to them. The guidelines also include vendor development for import substitution.
  • The Exchange Rate Variation (ERV) protection has been allowed on foreign exchange component to all Indian companies including private companies in all categories of capital acquisitions.
  • The anomalies in excise duty/custom duty have been removed. Now, Indian industries (public and private) are subjected to the same kind of excise and custom duty levies.
  • The defence products list for the purpose of issuing Industrial Licences (ILs) under IDR Act has been revised and most of the components, parts, sub-systems, testing equipment, and production equipment have been removed from the list.
  • The initial validity of the IL granted under the IDR Act has been increased from 7 years to 15 years with a provision to further extend it by 3 years.
  • The Standard Operating Procedure (SOP) for the issue of no-objection certificate (NOC) for export of military stores has been revised wherein; end-user certificate (EUC) to be countersigned/stamped by the government authorities has been done away with for the export of parts, components, sub-systems, etc.

With these policy shifts taking place, MSMEs can complement large defence hardware manufacturing industries as ancillary units in time to come.

In the case of indigenous manufacture of defence hardware, a substantial portion of the work can be transferred to the MSMEs by the DPSUs and OEMs. They can now act as strategic partners with DPSUs, foreign defence manufacturers and the larger corporates.

The first steps have to come from MSME-based industries followed by a government push. MSMEs need to understand OEM expectations in terms of quality and supply commitments which require them to invest in technology, research and manpower training in anticipation of a contract.

The government and private players have acknowledged the fact that India needs to increase self-reliance in defence production. Today, it is imperative for Indian companies, especially MSMEs, to integrate themselves to global supply chains of national and international defence majors, to reduce dependence on foreign supplies.

Puneet Kaura

The author is MD and CEO, Samtel Avionics. Views are personal

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