Prime Minister Narendra Modi’s call for Start-Up India was the loudest bang on the weekend. A few days ago, the wider contours of the new Defence Procure-ment Procedure were unveiled by defence minister Manohar Parrikar. It unequivocally gave a message to the armed forces that their modernisation plan has to be to “Make in India”.
Mr Parrikar is carrying a purse with an upwards of $2 billion modernisation budget to be spent on the armed forces in the next decade or so. If there is one sector that can give both “Start-Up India” and “Make in India” meaning, it’s the defence sector. Though there are apprehensions as the ministry of defence has opted for domestic private firms for stra-tegic partnership.
The micro, small and medium enterprises in the defence sector are a worried lot as they think that only big firms will benefit from this. Will the nominated strategic partners grab most of the budget without the MSMEs and new entrepreneurs getting an opportunity to grow simultaneously?
A task force under former DRDO chief V.K. Aatre has made recommendations to the government on strategic partners. The concept of strategic partners in defence production is not novel. The trend has been that of large conglomerates gradually evolving in major areas of defence production and governments supporting them in their research and development of new generations of military hardware and software.
It would be prudent to look at the models used in a few countries with sophisticated defence industry. The British defence industry has in its logistics chain over 9,000 small and medium enterprises. The UK also has a Manufacturing Advisory Board Service. Its nine centres provide support to SMEs in areas of technology, consulting, networking and training.
Large manufacturers complement the government programme by mentorship initiatives for Tier-1 manufacturers (Tier-1 companies are direct suppliers to original equipment manufacturer, or OEM). In the US, major manufacturers spend up to 60 per cent of the product cost on purchased inputs, thus spreading out the profits to a large family of SMEs and entrepreneurs.
The Hollings Manufacturing Extension Partnership of the US department of commerce has 60 centres and 1,200 manufacturing ex-perts to provide technical expertise to small manufacturers. The common factor that emerges from the methodologies adopted by leading industrial nations is that the interests of the SMEs and entrepreneurs are part of the government and major industrial establishments’ focus. Institutions exist to help them progress both technologically and in quality manufacturing.
New entrants are reluctant because defence products have a limited market and long gestation period. The procurement cycle is tedious and protracted. Existing MSMEs are squeezed between rising cost of raw material and labour and remaining competitive. They have idle capacities and are financially stretched.
With the decision to nominate strategic partners, there is apprehension of a further squeeze with big players calling the shots without much concern for the lesser ones. There is also the threat of the entire “Start-Up India” and “Make in India” pitches going the big business way in the defence sector. The generation of employment — an area where the MSMEs have greater contribution — will also not see the boost that “Make in India” or “Start Up India” would want to address.
Certain issues that New Delhi now needs to address include earmarking a percentage of the acquisition outlay for execution by new entrants and MSMEs.
Clear guidelines are required regarding percentage of proposed cost of project that will be outsourced to entrepreneurs and MSMEs by defence PSUs, Ordinance Factory Board and potential strategic partners. Strategic partners will need to involve entrepreneurs and MSMEs at project planning and technology development stages.
Some MSMEs and aspiring entrepreneurs with novel ideas, capable of technological innovation can be directly funded by DRDO for design and development. The new DPP and the “Start-Up India” initiative have provisions for government funding of R&D. Diffusion of technology from nominated strategic partners and original equipment manufacturers to the MSMEs and entrepreneurs in their supply chain will also need to be ensured.
These big players need to promote innovation by MSMEs and taking entrepreneurs on board by assuring returns on new technologies and upgrades they can produce. MSMEs and entrepreneurs should also be guided into availing offsets benefits, even though the new DPP has raised the bar for offset obligation to above Rs 2,000 crore projects. Focused emerging forces like the recently launched Defence Innovators and Industry Association should pursue the interests of both entrepreneurs and MSMEs vigorously.
Finally, financial issues must be revisited. Over and above government support, ensuring availability of credit facilities from bankers on priority and soft terms is necessary. It is time to nurture trust between the government, financial institutions, big corporates, MSMEs and entrepreneurs with accountability for non-performance built into the system. “Start-Up India” and “Make in India” offer wide avenues of growth for every segment desirous of participating in the military modernisation thrust.
The writer, a retired brigadier, was former deputy director-general, Public Information Department, Indian Army
