Evaluation on the MSME opportunity in the Indian defense sector


When we notice at the history of our defense sector of India, it’s started by importing defense technologies, however now our civil and military segment have a solid ecosystem, that they have been surrendered to the global arena. In the most recent decade, the Indian civil aviation industry has developed at a quick pace. India which is the biggest ninth civil aviation market in the globe – is set to involve third place by 2020. There we can expect huge MSME opportunity in the Indian defense sector in upcoming days

MSMEs have a few open doors in the defense sector in the structure of offset programmes and direct supplies. Along with the defense industry, public-sector undertakings have started to offload parts of their manufacturing to tier suppliers. Due to this, the turnaround time of manufacturing is reduced and piloting or testing of products is also perfect.

Startup enterprises and entrepreneurs are also key representatives of the manufacturing trade. Internationally, India is the third biggest force for start-ups with 85,000 job opportunities. By 2020, the quantity of start-ups is estimated to be 11,500 and is predicted to generate 300,000 jobs. Investors are expected to raise multifold. Around 20 to 25% of the Indian workforce will represent start-ups.

 ‘Make in India” opportunity

With the point of developing India as a manufacturing center, Prime Minister Narendra Modi had propelled the ‘Make in India’ campaign in the year 2014 and one of its priority sector has been defense manufacturing to drive the development of India as a global manufacturing center. Indian SMEs require glancing at Make in India as an opportunity to enhance their manufacturing efficiency and improve their contribution towards making India independent in defense production.

The Make-in-India policy initiated the offset policy for capital purchase agreements with foreign defense industries, which makes it essential to offset prerequisite of a minimum of 30% for procurement of defense equipment in excess of Rs.3 billion. This is estimated to assist generate a mutual eco-system of suppliers at the domestic level. The campaign has already started showing the noteworthy impact on India economy – as per the official data, defense exports have raised from Rs 500 crore to Rs 3,000 crore, post the initiation of ‘Make in India’ campaign.

Also, reports suggest that last year defense procurement from the India MSMEs attain 9%, and in the present year, it will achieve 15%. And as per official data, the Indian sector can require business opportunities worth about USD 200 billion in the next 15 years. Thus MSMEs in India can see Make in India as a guide to penetrate the Indian defense sector.

According to industry experts, ‘Make in India’ initiative can be a clear winner by bringing MSMEs on board and by integrating them sector with the global supply chain in order to manage current account deficit, and also boost the export

Notwithstanding the Make in India campaign, the government of India had come up with a slew of developments including rising of FDI to 100%, new Defense Procurement Programme-   to appreciate its vision to make India autonomous in defense manufacturing

Support of government

  • 100% FDI: The new FDI policy change is a progressive change that will likely make India a favorable destination for investment for the foreign original equipment manufacturers (OEM). The commonly beneficial policy will assist the foreign OEMs the flexibility and freedom to administer the defense business while contributing the domestic defense industry the access to modern defense technology. With the introduction of 100% FDI in defense, a lot of the foreign defense players like Saab, Bell Helicopter, Lockheed Martin, BAE Systems, Dassault have already entered India.
  • The DPP gap for SMEs: Recently government declared the new Defense Procurement Procedure (DPP), which energizes the MSMEs related with the business with subsidizing up to 90% of their project’s prototype development cost. The new DPP will be a boon for the India MSMEs as it promotes modern capabilities in niche manufacturing, permits more adaptability and entrance to world-class defense technology. India has almost 6,000 MSMEs which are providing components and sub-assemblies to the ordnance factories, DPSUs, DRDO, and private industries. Therefore the latest DPP will be a big boost for these MSMEs to conquer their challenges and maximize their production.
  • India a potential market: Indian MSMEs can significantly contribute to India’s vision of being self-reliance in defence manufacturing considering global trends like shrinking global defence budgets. Foreign investors consider India as a potential hub for investment owing to factors like easy and cheap availability of manpower, government support, and cost competitiveness among others.
  • Exchange Rate Variation protection: The ERV protection has been allowed on foreign exchange component to all Indian companies including private companies in all categories of capital acquisitions. This will offer more opportunities for technology transfers between foreign OEM manufacturers and Indian firms, especially the MSMEs which are looking for a technology upgradation.

Opportunity of MSMEs in Defense sector

Reports propose that in the next 15 years, the Indian defence and aerospace industry would present business opportunities worth about USD 200 – which is a reminder for the domestic MSMEs. They require influencing the opportunity and also comprehending OEM expectations in terms of quality, quantity and supply commitments. This would necessitate them to have a relook at their existing process and accept a long-term approach in order to be able to entrust to the volumes of contract.

There are particular avenues of growth that Indian MSMEs can concentrate on in order to develop their contribution toward the domestic defence manufacturing:

  • Restructuring of deliberate business units
  • Investment of time and money into in-depth Research and development
  • Formation of the joint venture and collaborative projects to bridge technology gaps; and
  • Diversification into new defense and non-defense segments.

Majority of the MSMEs, especially the Tier-II and Tier-III companies in India have restricted themselves to component manufacturing and utilizing outdated processes. This requires to change and they require to concentrate on develop skill sets and efficiencies in order to be able for the foreign alliance, which can assist in technology transfer.

There are assured avenues of growth that Indian MSMEs can concentrate on in order to develop their contribution toward the domestic defence industry.

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