MSMEs will be backbone of ‘Make in India’ programme

For the past decade (2008-2018), India has been ranked as the number one country for importing arms in the world. It spent over $100 billion on acquiring new weapons and systems, of which nearly 65% was imported. This heavily ‘import-dependent’ trend is likely to continue for some more time as the ‘Make in India’ initiative, a welcome measure, has not galvanised the aerospace and defence sector, as it should have. The fulcrum of the ‘Make in India’ programme is the micro, small and medium enterprises (MSMEs) segment and, as of now, the MSMEs are thought of only as an adjunct. But that is slowly changing.

Indian defence public sector undertakings and other major players have to rework their approaches with MSMEs, while policy changes are urgent. A fine example is that of Lockheed Martin, US aerospace and defence major, which not only has a huge supplier base but also systems in place to ensure their growth (dedicated portal for suppliers; a training programme for suppliers; quick payment processes etc). Not for nothing, Lockheed Martin is the world’s top arms seller with a billing of $44.9 billion in 2017, whereas four Indian companies (Ordnance Factories; HAL; BEL; and Bharat Dynamics Ltd) totalled sales of $7.5 billion, representing a 1.9 per cent share of Top 100 arms sales, according to the Stockholm International Peace Research Institute (SIPRI).

All these Indian undertakings also have a huge vendor base but a lot needs to be done if ‘Make in India’ has to truly happen. The opportunities are immense, so are the challenges and if India is looking at a defence industrial realm, it has to tweak its policies, keeping in mind the MSMEs. The Director, Planning and Coordination, Ministry of Defence, Ravin Kulshrestha has said, “We are looking to increase our vendor base as self-reliance and indigenisation are crucial.”

Order sustainability is urgent

Prakash Pushpak, the Chairman of the MSME Defence Suppliers Group of FISME (Federation of Indian Micro and Small & Medium Enterprises) and the Managing Director of Pushpak Products India Pvt Ltd, states “Unless the bureaucracy understands the issues on the ground, the MSME sector will continue to struggle, living in an uncertain business environment.”

The MSMEs live on ‘uncertainty of orders’. Prakash substantiates, “For instance, I develop a product, investing time and money, and then the Defence PSU calls for a tender where the L1 bags the order, then all my efforts of product development goes waste. There has to be a consistency of orders.” The rationale to opt for L1 needs to be questioned. Under-quoting to win an order does not really help either the vendor or the OEM and in the end, there are cost overruns, delays, sub-standard product etc. MSME, he mentions, is like a coconut tree, the fruits of which bear fruit after four-five years, hence it requires all the support from the OEMs as well as the government.

Understanding the OEM-vendor eco- system is a little complicated and it is for this reason that FISME created the MSME Defence Suppliers Group (MDSG) - to link the existing and aspiring suppliers with the high value-added defence capital acquisition market. The particular focus of FISME has been to link MSMEs with the lucrative Make I and II initiative of the defence ministry under which projects up to Rs 25 crore are reserved for MSMEs with government bearing the development costs.

Similarly, the Society of Indian Defence Manufacturers (SIDMI – a wing of the Confederation of Indian Industries) plays a role of a facilitator between foreign players and Indian industries in identifying and developing the right partnerships. With the defence Offset clause imbibed in the import orders, the opportunities for Indian companies have further opened up.

As per the revised guidelines in the Defence Procurement Procedure (DPP) 2016, any capital acquisition categorised as ‘Buy (Global) or ‘Buy or Make with ToT’ with a value of Rs 300 crore or more, is required to offset 30% of the value of foreign exchange spent through Indian Offset Partners (IOP). This offset is discharged through various means such as purchase (of goods or services) and investments (foreign direct investment – FDI or through a transfer of technology). This clause has been fine-tuned to support the MSMEs through a multiplier clause. Offsets made through MSMEs will be counted as 1.5 times the actual offsets made.

The size of defence and aerospace MSMEs was estimated at Rs 216,000 crore in 2014, expected to touch Rs 340,000 crore by 2020. With the government launching two defence production corridors, one in Tamil Nadu and the other in Uttar Pradesh, it is hoped that the eco-system will give a substantial boost to MSMEs and defence industrial production.

The MSMEs (not just those in aerospace and defence) have the potential to be the engines for growth, provided the government puts in place the right set of support and an enabling framework. The share of MSMEs in GDP was 28.77% in 2015-16 and it has been hovering around in that range for some years now. It has the potential to go up as ‘Make in India’ gathers momentum.

(The writer is a Bengaluru-based freelance journalist specialised in Aerospace issues)