Integration of SMEs into supply chains of Defence majors a must for indigenisation | ADU Integration of SMEs into supply chains of Defence majors a must for indigenisation | ADU

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Integration of SMEs into supply chains of Defence majors a must for indigenisation

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Bangalore. 12 December, 2015. Today, while SMEs employ 40% of the country’s overall workforce, they contribute only 17% to the nation’s GDP, as a vast majority of SMEs remain unregistered, leading to issues such as shortage of skilled workers and restricted access to working capital. And this is more so valid for SMEs in the Indian defence and aerospace industry which absolutely need to integrate themselves into the supply chains of national and international Defence majors to reduce dependence on foreign supplies and gain a foothold in the international market.

Union MSME Minister Kalraj Mishra said ,”India, till the recent past, relied heavily on foreign manufacturers for procurement of Defence-related equipment. However, there was always, a need for self-reliance. As we all know, small and medium enterprises (SMEs) play an important role in creating a self-reliant base for any industrial sector and that stands true for the Defence sector as well.” .

He added, “Our focus now is on enabling SME sector for the supply of equipment, machineries and general consumables in the Aerospace and Defence industries  which are of strategic importance to any nation and India needs to increase self-reliance.” Mishra was speaking after inaugurating the fourth edition of ‘MSME DEFEXPO 2015’, organised by National Small Industries Corporation here. Around 200 MSME exhibitors, including 10 international Original Equipment Manufacturers (OEMs) like Boeing, Airbus, Honeywell, Zen Air Defence Canada CEMILAC  participated in this exhibition.

A separate fund to provide necessary resources to SMEs to support innovation and R&D activities is also in place now, he pointed out.

Recently NITI Aayog member and ex DRDO DG V K Saraswat said,  defence SMEs, MSMEs and industries have to improve their skill sets and efficiencies as the Indian defence and aerospace industry would offer business opportunities worth about USD 200 billion in the next 15 years.

It may be recalled that the MSME ministry had demanded a fund allocation of INR 647,900 million from the Planning Commission of India for the Twelfth Five Year Plan (2012-2017). The commission allocated INR 241,240 million, signifying an increase of 133.5 percent over the funds allocated in the Eleventh Five Year Plan. The outlay is primarily spent on providing financial assistance to MSME units, providing training and skill development and on supplying assistance for technological upgradation of production processes in MSME units.

It has been estimated that the Indian defence sector currently comprises over 6,000 SMEs, which supply around 20-25 percent of components and sub assemblies to the Defence Public Sector Undertakings (DPSUs), ordnance factories, Defence Research and Development Organisation (DRDO) and the armed forces. In 2001, private ownership was allowed in defence manufacturing. Defence-procurement policies announced in 2005 offset the clause, which mandates a 30 percent offset obligation for procurement proposals where indicative cost is INR 3 billion or more. The increase in spend on defence procurements as well as the requirement for offsets will open up significant business opportunities for Indian SMEs, by integrating themselves into the supply chains of national and international defence majors.

Some suggestions which came up were FISME- as a representative body of MSMEs, should be allowed to participate during the MoD discussions in ’Make’ or ‘Buy and Make’ projects to ensure Tier-II/ Tier-III involvement. Develop of Strategic Defence Clusters development approach is also another point which was discussed. This can yield quick and large dividends in terms of scaling up the contributions of MSMEs to Indian defence production. To create fully functional eco-system for defence manufacturing in MSMEs, 10 locations could be identified to develop Defence Clusters. Then clusters could be fortified with common facilities such as specialized facilities like testing facilities, Warehousing facilities, R&D and Technology upgradation and training institutions, ‘Plug and Play’ high tech infrastructure facilities specially meant for systems, electronics and other niche areas of manufacturing to support the production ecosystem. A few such clusters with supporting infrastructure for aero structures, landing gear, engine components, avionics etc. to attract global investments. The Central government needs to work in tandem with States and global OEMs for developing such clusters.

Skill development was another agenda on the plate. India’s distinct competitive advantage lies in its human capital and this is also true for the defence sector. The skill gap in defence production is found to be acute. Therefore there is a need to integrate National Skill Mission goals with priorities in the defence manufacturing sector as well as a need for curriculum development in engineering colleges and other vocational centres. The ITIs may be allowed to be adopted and to be converted into defence focused skill development centres using offsets. Funding available with the MSME ministry and training cost could be borne out of Govt schemes (Ministry of Entrepreneurship and Skill Development). In addition templates such as the mentor-protégé programmes followed by the DOD in the US, can act as catalysts for skill development. Special ‘systems integration’ skilling programmes at the level of the various vocational institutions as well as key engineering institutions in India are needed. •

MSMEs participating in Defence business are handicapped by the peculiar financial needs of the sector. There is a need to create a new class of capital for the Defence MSME Units to fulfil the need of the both fund based and non-fund based requirement, provide collateral free guarantees, project/program financing, technology development or acquisition and Infrastructure upgrade to the SMEs operating in the defence sector at low cost. The “Defence SME fund” can be created by any of the following or a combination thereof: Allowing offset obligor to invest a part of his obligation in the fund and this deposit will be deemed to have fulfilled his offset obligation. The fund may pay interest at international rates say at 2% and the tenor is proposed to be 5-6 years. (Similar on lines of RBI’s Priority Sector Lending policy where Banks who cannot fulfil their obligations of lending to MSMEs are required to deposit the equivalent amount with SIDBI).

Or a Cess of 1% can be levied for all defence imports and revenue generated can be transferred to this fund.  An initial budgetary support of say Rs.1000-2000 Cr could be made to kick starts the activity. SIDBI already has experience of managing such Funds and has an exposure of more than 84,000 cr. A separate window for the “SME Defence Fund” may be established. The cost of acquiring and maintaining a bank guarantee is crippling for MSMEs. The requirement of the Bank Guarantee for the MSME units should be waived and in lieu thereof an indemnity bond should suffice. Only in case of advance, a Bank Guarantee may be asked to be furnished by the MSME unit.

 

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