India’s defence plans give pride of place to small and medium enterprises (SMEs)

Apr 25, 2016

Defence sector small and medium enterprises (SMEs), which had long been waiting for limelight, will now be the cornerstone of India’s defence preparedness, according to the much-awaited Defence Procurement Policy (DPP) 2016. Modi government’s first defence document sets the tone for future procurement with a clear emphasis on “Make in India” and self-reliance and provides more say to the indigenous SME sector. Although a vibrant SME sector is crucial to India’s defence plans, its voice often went unheard. This time the Ministry of Defence has finally paid heed to SMEs, startups and other middling players.

Along with the introduction of a new category of procurement, increased localization has been provided for in the existing categories. This has been done to boost locally designed, developed and manufactured products. Although these features had been present in earlier defence documents in more subtler ways, they now have the pride of the place. The emphasis on localization is obvious keeping in view India’s heavy reliance on imports for defence preparedness—a decisive factor in case of war. India is the world’s largest importer of arms; it spent $51.3 billion in 2015 with 80–90% of aircraft manufacturing materials being sourced from foreign sources. In such a context, small and medium enterprises can play a big role in making the country self-dependent.

New “Buy Indian” Procurement Category

A brand new category “Buy (Indian (Indigenously Designed, Developed and Manufactured))” has been introduced and has been prioritized over all other existing categories, imparting greater momentum to the “Make in India” program and promoting in-house design capabilities. If implemented properly, the role of domestic defence enterprises, particularly in the private sector, is set to increase manifold.

Higher and flexible local content requirement

The Government has enhanced indigenous content requirement under the existing “Buy (Indian)” category from the earlier 30 to 40%. It has also provided flexibility to authorities in determining the local content requirement on a case-to-case basis. The requirement has also been extended to the “Buy and Make (Indian)” category.

“The new procurement measures that have been introduced would go a long way in meeting a key demand of the local defence industry and enterprises. The small and medium enterprises sector has long been complaining that the IC requirement is rigid and that it has to be brought in sync with the reality on the ground. Especially with regard to critical aerospace items, India’s local industry capability stands at a bare minimum. Even achieving 20% localization is a difficult task if we look at the current state of India’s industrial development. The local industry has always been vocal about such concerns,” said a defence expert on condition of anonymity.

Local industry comes first in priority

The Ministry of Defence has divided the “Make” projects into two: (a) Make-I (government funded) and (b) Make-II (industry funded). While the Government would bear the cost for funding prototype development for the first category, the industry would shoulder the burden in the latter category. The government has also increased funding for prototype development from 80 to 90%, with 20% of the cost to be paid in advance.

“SMEs will also have the first right to develop prototype for projects worth up to Rs. 10 crore. In other words, designated projects would be offered to big industry players only when the former are not interested in taking them up. This will give local industries a decisive say,” said R K Laxman, an entrepreneur in the defence sector from Sonipat, Haryana.

Industry experts also say that such measures would lead to enhanced collaboration between Indian and foreign players, leading to greater technology transfers and making the local industry competitive vis a vis global standards. Apart from increasing self-reliance and employment, such collaborations have also been found to lead to innovative technological spin-offs in the domestic industry as in the case of Japan and Korea.

“One positive aspect about the new policy is that it also tries to involve the defence establishment in the development process. This will instill a sense of ownership among the armed forces whose involvement is critical to any successful development of defence equipment,” said the expert.

According to a survey conducted by Deskera, the SME sector, which has not been satisfied with their role in defence indigenization efforts till now, has welcomed the development. However, how successful the policy proves in boosting local industry will become apparent only after its implementation.

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