The US India strategic partnership on defence has progressed without a visible ?grassroots? structural element. But with President Obama likely to wrap up the negotiations on multi-billion dollar defence acquisitions, which will boost employment in the US, the sector now offers a unique opportunity for SMEs in business and collaborations.
Backstage, while China and Pakistan cooperate to counter the US-India nuclear deal with their own non-NSG compliant nuclear free trade zone, front stage, the US and India could go ahead establishing a sustainable barrier that neither China nor Pakistan could easily replicate, by unleashing their combined forces of entrepreneurial superiority by joining their SMEs for cooperation in defence technologies under a favourable policy umbrella in both US and India. This could become a job creation engine in both the countries.
China?s biggest worry will be this initiative succeeding the same way as the Indian IT and automotive industries did; as this would inextricably intertwine the strategic defence relationship to a superior level, and provide an effective, self-sustaining, long-term non-nuclear deterrent funded by India?s defence modernisation budgets.
Small and medium enterprises (SMEs or SMBs as known in the US) are the key driving forces of a modern economy. Approximately 99% of businesses around the world are ?small or medium?, contributing to nearly half of the global GDP. SMEs today are the largest contributors to economic growth and net job creation, often having high employment rates and high per-labour productivity.
The US defence sector has incorporated the use of SMEs, capitalising on their many advantages. Though most SMEs do not have the size and capability to undertake large-scale R&D like larger firms, they support defence giants with targeted research, innovation and development & production of individual systems and parts.
Tapping the SME capabilities would, however, necessitate a shift in defence sector policy. The US, the global leader in military expenditure, extracts the potential of SMEs by actively supporting them. India has yet to truly realise and incorporate SMEs as a sustainable economic entity in the defence industry, notably from the lack of a suitable policy framework.
The very incongruity in the definition of these business units denotes the varying importance given by each nation to them. The US classification of such businesses is dependent on the sector in which they produce. For example, a military and aerospace equipment/ military weapons SME could have a net worth of up to $27 million (Rs 119 crore). In India, although the government has acknowledged the need of SMEs to drive the economy, there is significantly less clarity. Unlike the US, specific qualifications for different sectors are not apparent in India.
The US military expenditure, at $661 billion, was the highest in the world in 2009, accounting for 43% of global military expenditure. With the growing unease on its climbing defence budget, the US has become more efficient in its spending. Consequently, the US department of defence has started many defence-oriented ?small business? programmes. Small business innovation research, small business technology, transfer, mentor-prot?g? and even a minority Indian (native American) incentive are just a few of the many defence-backed programmes for US entrepreneurs. Its defence economic policies continue to serve as a model for nations the world over.
India, with the third largest number of active troops and ninth in defence expenditure, spends just a twentieth of the US military budget. The Indian government finally acknowledged the private sector as an asset for defence when it opened to the private sector both procurement and production of defence equipment. The defence offset policy has provided an incentive for collaboration of local firms with foreign military manufacturers. Unfortunately, the policy favoured large local companies over SMEs.
Despite SMEs’ fervour to enter defence production, complicated procedures exist for the private sector, discouraging their entry into the sector; especially as few SMEs have the necessary capital or influence to lobby for accession. Coupled with the No Cost No Commitment (NCNC) method for selection denotes the government reluctance to encourage SMEs. Also, there is nominal financing by the government for private R&D for defence, evidence of the government?s eagerness to tightly control any advancement in the sector.
In contrast, US SMBs are encouraged to thrive, with free access to grants and aids, to establish technologically able and developed businesses to support the defence industry. Government purchases under $100,000 (Rs 45 lakh) in the defence sector must be made with a small business. This policy ensures advancement of SMBs and leverages their growing abundance. The absence of a policy preference is one of the greatest barriers for SMEs in India in entering the defence sector. Though plenty in number, SMEs have less incentive and ability to enter the defence market due to insufficient finances, unattainable qualifying guidelines and extreme unpredictability of the business.
With defence manufacturing as a key national security priority for both nations, it seems only the US is truly willing to support it. The Indian government seems unwilling or unaware of the multitude of benefits that a government-supported SME foray in the defence sector can deliver. To facilitate SMEs in defence, a SME-friendly policy framework is required. India must aid these small firms with a minimum percentage for explicit preference, similar to the policy in the US for the usage of SMBs for low level government purchases.
India?s defence procurement and offset policies need to have explicit encouragement and preference for new and established SMEs. Moreover, this structure should outline how firms in the defence industry should interact. Though public sector organisations such as Defence Research and Development Organisation (DRDO) and BEL are in the field, there is little formal provision for SMEs. To take advantage of such organisations, defence-sector SMEs should be encouraged by being recognised as the ?first level? of the Indian defence industry.
SMEs could truly become the grassroots force of the Indian defence industry. In order for the Indian government to reap the benefits, SMEs must be given a voice, merited and assimilated into a security infrastructure for the most advanced technology sector in the world: defence. President Obama?s visit is an opportunity for the Indian defence industry. If the Indian government can get the US to commit to (the less threatening) technology cooperation at the SME level in defence, it could leverage that with a favourable policy framework, building the Indian defence industry from the ground up. US-India collaboration at the grassroot (SME) level would be a win-win, which will create huge demand for US defence technologies and services, naturally leading to more jobs in the US and India, all funded by the recession-proof Indian defence rupee.
The writer is having a stint at the Indo-American Chamber of Commerce
