Indigenous Defense Manufacturing and MSME Sector

With the launch of ‘Make in India’ initiative in 2014, we have seen some significant improvements in the defense manufacturing sector. Indigenous Defense Manufacturing is one of the key focus areas of the ‘Make in India’ initiative. At present, around 60% of our defense requirements are met by imports. During the last three years, our government has taken a number of policy-based initiatives to boost the indigenous defense production, technology upgradation, and defense export capabilities. The recent amendments to the Procurement Policy, Offset Policy and improvement in the procedures for the grant of industrial licenses are encouraging the domestic players particularly the MSMEs to leverage their capabilities.

In the defence manufacturing industry generally, the global Original Equipment Manufacturers (OEMs) prefer to work with SME/MSMEs because of their innovative capabilities, flexibility, agility and lower overhead costs. Our country’s extensive modernization plans, growing defence needs, increased focus on timely execution and improved policy etc. have opened up a plethora of opportunities for the entry of foreign players and now with the New Strategic Partnership Policy kind of initiatives, Indigenous Defence Manufacturing will definitely get a boost.

The structured efforts to promote indigenous defence manufacturing are yielding remarkable results. During FY 2015-16, INR 2,059.18 crore worth of defence platforms, equipment and spares manufactured in India were exported to more than 28 countries.

To create a level playing field in the Defence Manufacturing sector, some revisions are made to the existing policies, such as the special privilege to Ordnance Factories Board and Defence Public Sector Undertakings in excise duty/custom duty has been discontinued. Since April 2015, all Indian Industries are subjected to the same kind of excise and custom duty.

On April 2, 2016, the Defence Procurement Procedure (DPP) 2013 was amended, some major amendments are:

–Buy Indian – IDDM (Indigenously Designed, Developed and Manufactured) category introduced.

–Under ‘Buy & Make (Indian)’ category, Indian companies are allowed for tie-ups with a foreign Original Equipment Manufacturer (OEM) for Transfer of Technology.

— Under ‘Buy & Make’ Category of Capital Acquisition, the foreign vendor is required to transfer the Technology to the Indian Production agency for the indigenous production of the items. The Foreign OEM can select Indian Production agency of its choice.

–In the Defense products list for industrial licensing a number of parts/components, castings/ forgings etc. have been excluded from the purview of industrial licensing.

–The defense security manual for the private sector defence manufacturing units has been finalized.

–The MAKE procedure has been further revised to promote the indigenous design and development and to promote MSMEs. There are two subcategories of Make:

Make I (Government Funded) – Funding of projects by the government has been increased from 80 to 90 percent. If vendor develops a prototype but does not get an order within two years, then remaining 10% will also get reimbursed. There is also a provision for 20% advance against the bank guarantee. Time limit for reimbursement of development cost is 60 days. The projects with estimated cost of prototype development phase not exceeding Rs10 Crores; will be reserved for the MSMEs.

Make II (Industry Funded) – Reimbursement of 100% of development cost if the RFP is not issued within two years of the successful development of the prototype. The projects with the estimated cost of prototype development phase not exceeding INR 3 crore are reserved for the MSMEs.

The scope of the feasibility study has been elaborated. The MSME associations are being involved in carrying out feasibility studies for ‘Make’ projects. In the discharge of offset obligations, a multiplier of 1.50 has been permitted where MSMEs are Indian Offset Partners (IOPs). Besides this, the DPSU & OFB have been mandated to develop outsourcing/vendor development plans to increase outsourcing from private players, particularly MSMEs. Due to such steps, the value of outsourcing as a percentage of the value of production has increased to 37.4% in the 2015-16 as compared to 2014-15.

Defence Offset Policy

One of the main objectives of this policy, as stated in the official document, is to leverage capital acquisitions to develop the domestic defence industry. The offset policy in capital purchase contracts with foreign defence OEMs, stipulates a mandatory offset requirement of a minimum of 30% for defence contracts and the threshold for defence offset has been increased from INR 300 crore to 2,000 crore. Apart from this, a simplified mechanism to change offset partners, components, and dollar commitments have also been introduced to accelerate the stalled offset investments.

Strategy for Defence Exports

To streamline the export of indigenously developed defence equipment, the Strategy for Defence Exports (SDE) was launched. This policy has defined the clear procedures and an institutional mechanism for export promotion and regulation.

Ease of Doing Business

–The foreign vendors no need to provide all details of their Indian partner at the time of bidding. They can finalize Indian Offset Partners and offset product details one year prior to the offset release. During the last two years, 100% offset claims were registered.

–Acceptance of Necessity (AoN) validity has been reduced to 6 months, earlier it was one year.

— The list of military items for the purpose of issuing NOC for export has been notified by the Government to remove any kind of ambiguity and for transparency in the process.

— The requirement of single largest Indian ownership of 51% of equity has been removed.

— Standard Operating Procedures (SOPs) for the issue of NOC for export of military items have been simplified and specific timelines prescribed. The maximum processing time has been reduced to 25 days. During FY 2015-16 some 241 NOCs were issued.

–From July 2015, the requirement to obtain Government signed End User Certificate for the export of parts, components, and other non-sensitive military items have been eliminated.

— The provision of ‘in-principle’ approval for export incorporated in the SOP so that domestic players can explore opportunities in overseas markets.

Licensing

Now Industrial Licensing can be applied online. A large number of components, parts, subsystems, testing equipment, and production equipment excluded from the industrial licensing. The Validity of Industrial License granted has been increased to 15 years, earlier it was 7 years. There is also a provision to further extend it by 3 years on a case-to-case basis. During April 2014 to March 2016, some 119 industrial licenses have been issued to private defence equipment manufacturers. The government has also launched a separate portal – makeinindiadefence.com, which provides the details of policy and procedural issues related to defence manufacturing industry.

New strategic partnership policy

On 31st May 2017, the Strategic Partnership Policy has been included in Defence Procurement Procedure. According to this policy, the selected Indian private sector companies will partner with foreign original equipment manufacturers (OEMs) to jointly manufacture fighter jets, helicopters, submarines and armoured vehicles under the “Make in India” framework. The global vendors who want to tie-up with Indian private sector companies will receive the formal assurances from their government to get the necessary licenses. As per the framework given in this policy, the government will play the role of a facilitator in the strategic partnership between Indian Strategic Partner and Foreign Original Equipment Manufacturer. The Indian private companies will get shortlisted by the ministry on the basis of technological and financial parameters. The foreign vendors will also get selected by the Ministry on the basis of technology offered and the lowest price bid. The Strategic Partnership Policy is crucial to building an ecosystem of Indigenous Defense Manufacturing that comprises the government, foreign partners and domestic vendors and suppliers.

This policy has incorporated some of the major recommendations of Dhirendra Singh Committee. The Committee made 43 recommendations, out of which, 16 recommendations were regarding Make-in-India and 27 recommendations were regarding Defense Procurement Policy. One of the most crucial aspects of this Strategic Partnership Policy, according to the Dhirendra Singh report is the selection criteria and selection process.

Importance of MSMEs in the Economy

Local manufacturing of defence equipments is at the core of the Make in India program. SME/MSMEs are the backbone of the economy. Indian MSME sector is vibrant. MSME contributes significantly to the manufacturing output, employment, and exports, with 38% contributions to the nation’s GDP, 40% of the manufacturing output and 45% share of the overall exports of the country. After agriculture, this sector provides the maximum opportunities for self-employment and jobs.

In the Indian Union Budget 2017-18, several measures have been announced by the government for the MSME sector. The Indian government has adopted the cluster based development approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of SME/MSMEs. In India MSMEs play a crucial role in the industrialization of rural and remote areas, it is very encouraging to see that Government of India has taken a number of EODB initiatives for MSME sector such as IP Facilitation Center for MSME, Design Clinic, Lean Manufacturing Scheme, Quality Management Standards & Quality Technology Tools Scheme, Technology and Quality Upgradation Scheme, Marketing Assistance and Technology Upgradation Scheme, Zero Defect Zero Effect Awareness Scheme, Facilitation Councils, Grievance Monitoring System, Incubation, Credit Linked Capital Subsidy Scheme, Cluster Development Programme, Public Procurement Policy etc.

Our government has shown a right intention toward enhancing the capacities and capabilities of MSMEs related to defence equipment manufacturing sector through some crucial reforms at the policy level.

In India, a number of MSMEs used to serve as the suppliers to DPSUs and they are the key players behind the success of some major defense manufacturing projects. Many global companies are increasingly looking to Indian MSMEs for strategic partnerships because these MSMEs offer the innovative capabilities in manufacturing, relative advantages of advanced engineering, flexibility/agility to adopt new technologies and low-cost manufacturing benefits. For the world’s third largest army, the requirements are enormous. Indian MSMEs are quite prepared to leverage these opportunities.

Bridging the critical asset gaps for the military and building the indigenous defence industrial capability to reduce import dependence are two key objectives of the government. Indian MSMEs are playing a crucial role to strengthen the Indigenous defence ecosystem. A structured support and a dedicated platform will help to nurture these MSMEs, which is a crucial step in the process of making the country self-reliant in the defence sector.