Role of MSME in Defence Sector

Ministry of Defence
Ministry of Defence

Ministry of Defence set up a Committee of Experts under the Chairmanship of Shri Dhirendra Singh, IAS (Retd.), in May 2015 to evolve a policy framework for Make in India and to suggest requisite amendments in Defence Procurement Procedure (DPP) 2013. The Committee submitted its report in July 2015 and in its report it is mentioned that almost 80% of component, aggregates and assemblies of complex weapon system and aircraft are made by MSMEs, which are part of supply chains. The Report also mentions that there are nearly 6000 MSMEs across the country supplying components and sub-assemblies to the DPSUs, Ordnance Factories, DRDO and private industries. A 2012 Report of the Confederation of Indian Industry (CII) and the Boston Consulting Group (BCG) mentions that the employee base of 1.8 lakh in Ordnance Factories and DPSUs is similar to the countries like United Kingdom and France which are amongst the largest producers of defence related items.

The lack of state of the art defence technology and poor production capabilities are some of the major reasons for lagging behind by India in the field of defence production. However, the Government has promulgated Defence Production Policy in 2011aimed at achieving substantive self-reliance in the design, development and production of equipment, weapon systems, platforms required for defence in as early a time frame as possible; creating conditions conducive for the private industry to take an active role in this endeavour; enhancing potential of SMEs in indigenisation and broadening the defence R&D base of the country. In pursuance of the Policy, the Government has taken several steps to build strong defence industrial base, which are given as below:-

• FDI policy has been revised in Nov 2015 under which Foreign Investment upto 49% is allowed through automatic route and above 49% under Government route on case-to-case basis, wherever it is likely to result in access to modern and ‘state-of-art’ technology in the country.

• The Exchange Rate Variation (ERV) protection has been allowed on foreign exchange component to all Indian companies including private companies in all categories of capital acquisitions, so as to create a level playing field between the Indian and foreign industry.

• To establish a level-playing field between Indian private sector and the public sector, the anomalies in excise duty/ custom duty have been removed. As per the revised policy, all Indian industries (public and private) are subjected to the same kind of excise and custom duty levies.

• The Defence Products List for the purpose of issuing Industrial Licences (ILs) under IDR Act has been revised and most of the components, parts, sub-systems, testing equipment, and production equipment have been removed from the List, so as to reduce the entry barriers for the industry, particularly small & medium segment.

• The initial validity of the Industrial Licence granted under the IDR Act has been increased from 7 years to 15 years with a provision to further extend it by 3 years on a case-to-case basis.

• To promote the participation of private sector, particularly SMEs for defence manufacturing, Outsourcing and Vendor Development Guidelines for DPSUs and OFB have been formulated and circulated to them. The guidelines mandate that each DPSU and OFB to have a short-term and long-term outsourcing and vendor development plan to gradually increase the outsourcing from private sector including SMEs. The guidelines also include vendor development for import substitution.

• The Standard Operating Procedure (SOP) for the issue of No Objection Certificate (NOC) for export of military stores has been revised and put on the website. Under the revised SOP, the requirement of End User Certificate (EUC) to be countersigned/ stamped by the Government authorities has been done away with for the export of parts, components, sub-systems etc.

• The list of military stores has been finalised and has been put in the public domain to make the process transparent and unambiguous. The process of receiving applications for NOC for export of military stores and for issuing NOC has been made online to reduce the delay and to remove human interface in the process.

• Preference to ‘Buy (Indian)’, ‘Buy & Make (Indian)’ & ‘Make’ categories of acquisition over ‘Buy (Global)’ category, thereby giving preference to Indian industry in procurement.

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