• Kovllp Consulting

Opportunities for SMEs in the Indian Defence Supply Chain

Updated: Oct 16, 2020

Considering military might, financials, logistical capability and geography, India ranks 5th in Military Strength Ranking after United States, Russia, China and Japan respectively. India is constructing its third aircraft carrier and presently has the second-most carriers in the world. 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. The total budget sanctioned for the Indian military for the financial year 2019 was $60.9 billion, whereas for the FY 2020-21, it stands at $65.86 billion amounting to an increase of just under 7%. The amount seems tremendous but in reality we are behind China (2.1% of GDP p.a) and even Pakistan which spends 2.36% of GDP p.a on military and defence enhancement.

The capital and revenue expenditure allocations account for 34% and 66% of the total defence budget, respectively. India spends around 85% of the allocated budget on human resources rendering up gradation expenditure to a mere 15% of the total budget which is very less compared to other nations like US or Russia. Keeping these factors in mind along with the notion of reducing export of defence related units or parts from other nations, Indian government has turned to its indigenous force to meet out the demands of the defence sector.

This will enable India to come out of the dependency on imports and actually play as an exporter of many defence products instead.

The major items identified for domestic production are – wheeled armored fighting vehicles for the army, conventional submarines for the navy, and fighter jets for the air force. The defence sector has huge potential for export and job creation, thus Indian companies are focusing on defence manufacturing to see bigger orders to come through. Defence products exports will contribute to strengthening diplomatic and economic partnerships and simultaneously lead to enhanced military cooperation. Through iDEX (Innovations for Defence Excellence) India aims to achieve exactly the same by enhancing the in –house production and thereby supporting the Indian Start up economy.

The expansion in MSMEs share with all due respect in the defence sector picks up importance in the midst of the administration's emphasis on utilizing independent ventures and new companies in the defence sector hence opining on the fact that the existing pool of SMEs is being pushed to expand in numbers to keep up with the ever rising demand from the defence sector.Under the “make” category, Defence Procurement Procedure 2016, has granted MSMEs the first right to undertake projects, where the estimated cost of prototype development is not in excess of INR 10 crores in government-funded projects and INR 3 crores in industry-funded projects. Further, the eligibility criteria for MSMEs has also been simplified to enable them participate more easily in “make” projects.

Avenues for the SMEs to concentrate on growing their contribution towards 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, Indian MSMEs sector has the potential and aim to grow. MSMEs create value addition and bring innovation as they are ready to take risk. They can be the best people to work with and in low cost. Outsourcing from MSMEs will not only help to save cost and time but also in timely delivery of products. 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. 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. The SMEs those have restricted themselves to the manufacturing and utilizing the outdated process require change and through iDEX this exactly is being focused upon along with efficient and cost effective procurement procedures.

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