MSMEs: The unsung heroes of Atmanirbhar Bharat in defence
Economics Times, September 23, 2023

By Ojasvinee Sharma and Pradeep S. Mehta,

Synopsis- There must be a strong implementation of the “ease of doing business” for MSMEs. The categorisation clauses in DAP 2020 should provide some leverage to MSMEs. There should be an open gate for these enterprises in the acquisition process, through which they can directly penetrate the strong wall of restrictions.

“Atmanirbhara Bharat” is one of the ambitious projects of the Government of India. The project emphasises on maximum indigenisation and promotes Indian products in the market. Under this project, the Government of India launched the “Make in India” scheme, which promotes the establishment of manufacturing units and plants in India, eventually decreasing dependency on imports. While discussing Atmanirbhara Bharat and indigenisation, we cannot neglect the unmatched growth of the Indian defence sector and particularly the MSME sector’s role.

Micro, Small and Medium Enterprises (MSMEs) are the most significant actors in any country’s economic growth. In comparison with marge and medium enterprises, MSMEs contribute more to the nation’s economy, generate employment, enhance indigenous production of goods, exports and much more. Although we perform dexterously in self-reliance, we must still increase our momentum and strength to become completely self-reliant. MSMEs are such players that can accelerate our pace to achieve a high amount of indigenisation in the defence sector. Considering our dependency on Russia, especially for spares (60%-70%), MSMEs can be better and good self reliant alternatives for Indian defence production.

India’s Approach towards Defence MSMEs
Over the years, it has been seen that engagement of MSMEs has increased in various sectors. Different governments have launched various schemes and policies to support and promote MSMEs. Yet, they lack the limelight that they deserve. They are facing numerous challenges in establishing themselves in the market.

To strengthen the backbone of MSMEs, the Government of India launched the Public Procurement Policy in 2012, which was again amended in 2018. The policy was established under the Micro Small Medium Enterprises Development (MSMED) Act 2006. According to the amended policy, 20% of the annual government procurement should be done from MSMEs. The policy applies to PSUs of all ministries except the Ministry of Defence. The exclusion of the Ministry of Defence from this policy is one of the biggest obstacles in the development of defence MSMEs. This policy mandates PSUs to purchase 358 items from MSMEs, with no significant defence items in the list.

The only government document which talks about the procurement from MSMEs is the Defence Acquisition Procedure (DAP) 2020. In the preamble of DAP 2020, paragraph three states, "The Government of India's Make in India initiative aims to increase the involvement of Indian Vendors, notably MSMEs. As a result, the "Make" system has been further improved in DAP 2020 to make it more objective and deadline-driven, emphasising the Indian industry, particularly MSMEs.”

The clause of the ‘Strategic Partnership Model’ in DAP 2020 also pays particular emphasis on the involvement of MSMEs. In Chapter I, ‘Acquisition Categories, Acquisition Planning and Indigenous Content,’ paragraph 17 declares that: “Acquisitions made under the Strategic Partnership model involve engagement by private Indian companies and foreign OEMs in "Make in India" for the defence industry. These companies take on the function of a system integrator by creating a vast ecosystem made up of growth partners, specialised vendors, and suppliers, particularly those in the MSME sector.”

Under the processing of Acceptance of Necessity (AoN) of ‘Delegated power cases,’ there is a clause of criteria for the MSME(s) for eligibility in this category. It says that: “MSMEs will be given preference in cases with an AoN cost of Rs.100 crores if there are a minimum of two or more MSMEs qualified to compete in the category.”

Although an emphasis is placed on MSMEs in DAP 2020, these are very vague. There are no mandatory procurement clauses for MSMEs in the DAP 2020. The procurement process under DAP 2020 is very complex and difficult to understand. Entering the government’s procurement radar is one of the most challenging tasks in itself. The categorisation of BUY mentioned in Chapter I and II of the DAP 2020 is arduous for MSMEs. These categories are well designed for procurement from big enterprises, but for small enterprises, they are very demanding. It will be very difficult for MSMEs to understand the norms and mandated requirements of the DAP 2020 and to work accordingly. Conclusion.

Defence manufacturing or defence services are among the most challenging businesses, particularly in the Indian context. Our armed forces operate in geographically diverse terrains, from cold freeze mountains to deep and dark seas. With the change in terrain and climate, equipment and their operational capabilities must be adaptable. The same weapon with the same features cannot operate with the same efficiency in different terrains. The requirements of the armed forces are very different from those of regular buyers. The acquisition process of any equipment/spare parts is also very complex. It has to go through various stages, including different types of trials. Even the basic requirements of defence forces demand deep technical know-how and premier quality production. All these parameters can be achievable by any big enterprise/company, but MSMEs might face some challenges.

To make MSMEs a base pillar for defence indigenisation, there is a strong need for training, hand holding of these enterprises. The Ministry of Defence has announced the fourth and last positive indigenisation list. The four indigenisation lists mention items that will not be imported by the Indian Armed Forces. These items will be completely indigenised and made by Indian manufacturers. Under this list, items can be categorised under different types of companies based on their size and production costs. The categorisation must be specific and the procurement must be done under the respective categorised companies and enterprises. For instance, items like Sarvatra Kavach, Individual Underwater Breathing Apparatus, LED-based taxi, landing and Navigation Lights, etc. can be placed under the category of MSMEs. These items will not be purchased from any medium or large enterprises. With this simple step, the engagement of MSMEs with the Ministry will be enhanced.

There must be a strong implementation of the “ease of doing business” for MSMEs. The categorisation clauses in DAP 2020 should provide some leverage to MSMEs. There should be an open gate for these enterprises in the acquisition process, through which they can directly penetrate the strong wall of restrictions. MSMEs should be provided with simplified knowledge of the procurement process and requirements. Along with it, the government should also start the capacity-building programme for MSMEs through which they bestow the technical knowledge of manufacturing the defence equipment along with assistance in choosing the best equipment for them to manufacture.

(The authors work for CUTS International, a global public policy research and advocacy group .)

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