• Kovllp Consulting

Government Support for Companies Planning To Set-Up Business In Defence Sector

Updated: Oct 16, 2020

India is amongst the top five military spenders of the world. The expenditure for defence sector in the FY 2020-21 stands at $65.86 billion amounting to an increase of just under 7%. The values are still however behind China and even Pakistan considering the fact of territorial and terrorist threats that we face at the borders shared with these countries. Globally India stands at 5th position in terms of Military strength ranking behind US, Russia, China and Japan. India has one of the most active manpower additional to the tanks and aircrafts owned. India also has access to nuclear weapons and possesses a fair number of submarines.

Up gradation of equipment in the defence sector for maintaining such a position is thus very crucial. Around 85% of the Defence budget is spent on meeting human resource expenses which leaves a very thin margin for up gradation in the past. Things now seems to have taken a turn for the better with numerous initiatives being put forward by the government in the defence sector.

A huge financial inflow of $130 billion on military modernization combined with technological push for private sector participation has got many eyeballs of the startup economy set into the defence sector of the country and thereby providing boost in the production of equipment and their up gradation. Banning of certain outsourced parts to increase indigenous production worth Rs 52,000 crores has also been considered for boosting up in house production along with huge inflow of FDI into the country.

The government through MAKE IN INDIA initiative aims to export equipment worth $4.87 billion by 2021.

Service / Dept. wise allocation as a % of total defence budget estimates (2020-21) are –

Considering every factor in terms of territorial tensions and anti-terrorist measures it is urgent that India achieve indigenous modernization techniques and self-reliance in defence production since we are dependent on imports of defence equipment. The defence procurement Procedure, 2016 aims to promote the domestic production by encouraging SMEs, start-ups and information technology companies.

Currently India had 6000 SMEs providing components and sub-assemblies to the ordnance factories, DPSUs, DRDO, and private industries. DPP 2016 specifies that a multiplier of 1.5 will be allowed in cases where MSMEs are the Indian offset partners, thereby increasing the appeal of such entities as offset partners. The current challenge that SMEs have pertain to costs of defence equipment and the procurement of raw materials which has been resolved by the Indian government through the announcement of third phase of Defence India Startup Challenge (DISC) under its Innovations for Defence Excellence (iDEX) — programmed to boost innovation in the defence sector.

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

  • Diversification into new defence and non-defence segments.

In conclusion, 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. Opportunities for start-ups in the defence sector do not only include the manufacture of equipment but also the provision of technical support and integration services in information technology, maintenance, repair, overhaul, communication and navigation, among other areas and create value addition and bring innovation since they are ready to bear the risk. MSMEs must collaborate with big private organization to regulate the supply of components and maintain a quality so that it can export the parts to other country thereby making a global presence in the market and increase their revenue generation.

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