Creation of Vibrant SMEs for Defence Corridors

Context

Defence Minister Rajnath Singh called for increased and active participation of the private sector in defence manufacturing to achieve the government's target of making the Indian defence industry worth $26 billion by 2025.

Background:

What are Defence Industrial Production Corridors?

• A defence corridor refers to a route or a path along which domestic production of defence equipment by the public sector, private sector an MSMEs is lined up to enhance the operational capability of the defence forces.
• The budget for 2018-19 provided for development of two defence industrial production corridors: the locations of these corridors have been strategically decided, taking into account the natural ecosystem.
• The first corridor plans to link Chennai and Bengaluru and will pass through Coimbatore and several other industrial clusters. This southern corridor will extend from Chennai, Hosur, Coimbatore, Salem and Tiruchi.
• The second corridor will be in Bundelkhand—a region divided between Uttar Pradesh and Madhya Pradesh. This will be a Rs 20,000-crore defence industrial production corridor, which will generate 2,50,000 jobs.

It is in the strategic interest of a nation aspiring to be a regional power to develop an indigenous and internationally competitive defence industry base. India has the potential to emerge as a global platform for defence research, manufacturing, supply chain sourcing, software development, and offsets, with the right kind of policy interventions. The Small and Medium Enterprises (SMEs) sector is critical for the success of these flagship initiatives.

MSMEs in Defence sector:

The Ministry of Defence set up a Committee of Experts under the chairmanship of Dhirendra Singh in May 2015 to evolve a policy framework for ‘Make in India’ and to suggest the requisite amendments in Defence Procurement policy 2013. This committee stressed on the importance of SMEs for the Defence production.

• Present status of MSME in defence:
  • 90 percent of the industrial units in India belong to the Micro, Small and Medium Enterprises (MSME) sector.
  • There are over 11 million MSME units in India that produce more than 8,000 products. They contribute nearly 45 percent to manufacturing and about 40 percent to the Indian export sector.
  • Their contribution to the Indian Gross Domestic Product (GDP) is 8 percent.
    • Opportunities for start-ups in the defence sector include not only the manufacture of equipment but also the provision of technical support and integration services in information technology, maintenance, repair, and overhaul, communication and navigation, among other areas.
  • Although exports are a nominal part of the earnings of the defence industry, as the SMEs develop the capacity to manufacture defence equipment, they can be part of the global supply chain.
  • The SMEs are crucial for the Indian defence sector due to their flexibility, diversity, low cost inputs, etc.

Issues and Concerns:

• Reluctance to Technology sharing: Make in India for defence has not made any substantial difference because of the primary dependence on the import route for acquisition of technology. There is a general reluctance among technology leaders to share critical technologies with Indian partners and there is relative inability of the Indian counterparts to absorb and upgrade the technology.
• Stiff competition: The MSMEs face stiff competition from two sources: the bigger and more established players in the market, and imports. These make it necessary for the MSMEs to innovate and either introduce a product or a service to fill the void created by the bigger players, or reduce the costs and streamline the processes to enable them to be on a more level playing field against the bigger players.
• Infrastructural bottlenecks: The MSMEs are located in decades-old industrial estates, are functioning within urban areas or have come up in an unorganized manner in rural areas. The state of infrastructure, including power, water, roads, etc. in such areas is poor and unreliable.
• Lack of skilled manpower: Although India has a large pool of human resources, the industry continues to lack formally skilled manpower required for manufacturing, marketing, servicing, etc.

Recommendations to Create Vibrant SMEs in Defence Corridors:

• The important issues faced by the industries need to be researched and common issues like testing facility, Computer Aided Design (CAD) and Computer Aided Engineering (CAE) facility for R&D, Internet Protocol (IP) management services, co-location of the Quality Assurance Evaluator (QAE) establishments and defence PSUs, and talent upgradation specific for emerging technologies, need to be addressed.
• Considering the relative state of development of the two proposed corridors, the approach for each corridor needs to be different.
• From a generalistic SME policy to adopting specific policies for high-growth innovative SMEs, and from promoting entrepreneurship to improving the business environment for SMEs can be helpful in supporting the SMEs.
• As the MSMEs are bogged down in routine operations, reporting for regulatory compliance, an integrated IT system taking care of non-core functions will allow them to concentrate on core areas, improving employee productivity. Adoption of Information and Communication Technology (ICT) is a key enabler for migration to Industry 4.0.
• The government should play the role of a facilitator for delivery of cost-effective solutions such as Software as a Service (SaaS), Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) through cloud computing.
• A special fund to provide up to 50 percent funding support for hiring external experts to improve management and operations can make the SMEs more efficient.
• As part of the intellectual property management support programme, the necessary support can be given for developing new products, processes, ideas and business models.
• Better linkage to the venture capital and angel investors would help the SMEs to learn and grow by tapping onto the expertise of these special categories of investors.
• Knowledge and technology transfer from the universities to the SMEs and innovative start-ups can be facilitated by the government under an appropriate scheme. A symbiotic relationship between the MSME clusters and technical institutions would help solve the technical and designrelated problems of the MSMEs.

Conclusion:

The rise of India as a growing power would require not only a macroeconomic uplift but also a thorough realization of entrepreneurship and innovation by the MSMEs. Since firms, not countries, are the ones that have to compete internationally it is, therefore, essential for India to foster innovation, especially at the firm level.

Practice Question:

Analyse the role of Small and Medium Enterprises in the development of Defence Corridors in the country.