India's focus on indigenization cannot be completed unless startups are included in the supply chain. There are above 6,000 MSMEs across the country, supplying components and sub-assemblies to DPSU and OFB. To initiate MSMEs and startups to actively participate in defence manufacturing beside focusing on quality and R&D, needs the government attention. Introducing a new “Buy (IDDM)” procurement category is indubitably a right step towards it.
The focus of the Indian government has been recently on promoting indigenization and plunging imports, hence, emphasis is on participation by industry, particularly MSMEs. To facilitate participation in defence contracts, procurement policies were made to boost indigenization in defence. Moreover, new category 'Indian Designed, Developed and Manufactured' (IDDM) come up under “Buy” category, termed as Buy (IDDM).
Sadly but the fact is India imports nearly 60% of its defence equipment, spending close to $6.4 billion every year, despite of own governance nearly 70 years. The Government sector in defence design and production worked in closed compartment and DPSUs / OFB mainly relied on “Built to Print” production. They were engaged on taking all the limelight for producing even some less critical defence items and thus relied on imports for most of their parts and didn't look to break that cycle as they would have to go through the colossal process of getting it re-certified. The production agencies have been spend lot of amount to fix their own manufacturing processes and not for the product upgradation and innovation or R&D programmes.
The private industry was tacitly blocked from defence production citing security concern and under estimated by Government dominated DPSU as not capable of manufacturing defence items. There are nearly 6000 MSMEs across the country supplying components and sub-assemblies to the DPSUs, Ordnance Factories, DRDO and private industries in the range of 20-25%. Out of this outsourcing, about 25% requirement is met through small scale sector, which is extremely low.
Problem Faced by startups and MSMEs in India
The Startups and MSMEs face many problem while conducting their businesses in India. In India, SMEs working for the defence sector are generally dependent on DGOF, DPSUs and DRDO etc. Ordnance factories outsource their production in the form of components and sub-assembly requirements, mainly from SMEs. The MSME segment, with limited business support and research base, is not always competent to meet the current requirements. The startups have to live on the mercy of manufacturers or developers because they are making the components and not the whole product hence, cannot sell directly to the Armed Forces, which is the customer. Moreover, they lose the ability to build a brand when selling to a PSU.
Moreover, as production targets vary on an annual basis, sourcing of components/sub-assemblies from MSMEs is not a constant and sustained activity. They face many internal and external challenges. (Refer Fig Above)
The new category in DPP-2016, 'Buy (Indian IDDM)' is reflection of government's intents to promote indigenous design, development and manufacturing and will act as a catalyst to achieve self-reliance. In new 'Make' procedure, the process has been streamlined to make it industry friendly. Features of the new 'Make' procedures are:-
- Enhancing funding to industry up to 90% of the development cost.
- Provision for mobilization of advance
- IPRs will rest with the industry, so that they can start using the platform simultaneously for the purpose of exports as well, in addition to supplying to the Indian Armed Forces.
- There are incentives for the MSMEs, with projects upto a certain value being reserved for MSMEs. The eligibility criteria have also been relaxed for MSMEs.
- Incase RFPs are not issued within 24 months; the entire cost of development is reimbursed.
Creation of Technology Development Fund
Additionally, Department of Defence Production (DDP) has chosen 21 projects whose valued INR 18,000 Crores. These projects are going to fructify in 3-5 years. Out of the 21 projects 6 projects have got value more than INR 800 Crores, while one project of Long Range Glider Bomb is worth INR 7,600 Crores. MSMEs mostly startups have shown keen interest for competing for 'Make' projects of Army, Navy and Air Force.
Ministry of Defence (MoD) is not likely to stop with these 21 projects and the intention is to add as many projects every year, so that in 3-4 years, there would be a total critical mass of INR 60,000-80,000 Crores worth of 'Make' projects with period of fructification of 3-4 years. With this, after 3-4 years, INR 10,000 to INR 15,000 Crores worth of procurements should start under new 'Make' procedure. This will constitute 15-20% of the total acquisition budget. One of the most important features of this procedure is introduction of Sub-category 'Make-II'.
To promote Startups, all DPSUs and OFB are advice to identify products and items for which eligibility criteria related to prior experience and prior turnover for vendors can be relaxed without compromising quality and technical specifications.
The emerging ecosystem has created some of the success story in the domain and more are on way. To name a few shining stars:-
- Alpha Design Technologies
- Astra Microwave Products
- Data Patterns
- Dynamatic Technologies
- Samtel Avionics
- Solar Explosives
- TATA Power SED
- Tonbo Imaging
- VEM Technologies
- Zen Technologies
A MSME and startups cannot survive for long without the defence orders and cash inflows. Therefore, government should create a favorable ecosystem to help startups and MSMEs to come forward. The DPSUs, OFB and private players need to collaborate with them for ideas to achieve indigenisation. Moreover, PSUs should have to change the way they are working and carry forwarding the legacy because it is highly complex to work with them. On the other hand, we should not forget that the competition brings innovation. Spoon feeding may lead to laid-back attitude; hence we would have more of - late decision makers, delayers and so on.
Allowing private players to avail Transfer of Technology and being a part of prototype designing, then government should think about some incentive based programmes to encourage startups and MSMEs to invest in quality, R&D. Moreover, introducing a new “Buy (IDDM)” procurement category is indubitably a right step towards indigenization.
All the private players are actively participating with the OEMs or DPSUs in the whole process- starting from prototype designing to evaluation, hence, getting better understanding about the requirements and product.