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21/06/2016 11:17am

MSMEs look forward to compulsory procurement of defence purchases by foreign partners

image MSMEs look forward to compulsory procurement of defence purchases by foreign partners

New Delhi, 21 June (KNN) The recent announcement  of 100 percent FDI in defence via government approval route, post a high level meeting chaired by Prime Minister Narendra Modi, is expected to have a positive bearing on MSMEs.

India ranks among the top ten countries in the world in terms of military expenditure, thus, explaining the huge market India provides to the strategic partners globally. The country’s cumulative defence budget, capital plus revenue expenditure have grown over the years. However, around 70 per cent of defence procurements continue to be through imports.

Also, in case of indigenous manufacture, a substantial portion of production continues to be under government’s jurisdiction because of the critical and sensitive nature of the sector and a belief that the MSME sector has limited capability.

Considering the fact that international defence industry today is universal in nature with a complex network of global supply chains. It, therefore, is imperative for MSMEs to integrate themselves into the supply chains of national and international defence majors, in order to reduce dependence on foreign supplies and also to gain a foothold in the international defence market.

In defence, foreign investment beyond 49 per cent (and upto 100 per cent) has been permitted through the government approval route, in cases resulting in access to ‘modern technology’ in the country. The condition of access to ‘state-of-art’ technology in the country has been done away with, as many foreign investors had complained about the ambiguity regarding that term.

As per Amit Cowshish, Distinguished Fellow, Institute for Defence Study and Analysis “100% FDI comes with conditionality and replacement of state of art by modern technology though gives the leverage to the government to bring FDI beyond 49%. But, this does not make 100% FDI completely unconditional since the referred modern technology is still to be earmarked and well defined”.

“FDI is not the only game changer and a sole step to be taken in defence sector since it is not like automobile, food or any other industry and does not have an open market. The labour laws, export norms,  cumbersome procurement procedures and the whole lot of other factors have a bearing on the effect of FDI relaxation in defence sector  and not a mere 100%  FDI could prove to be revolutionary,“ said Cowshish.

On the other hand, 100% FDI in defence sector could be turned into a good call for MSMEs as stated by Debashish Bandpopadhay, Director, Policy, FISME.

He said, “Frankly, Indian MSMEs are deprived of sufficient exposure related to defence manufacturing. So, 100% FDI in defence concerns and helps MSMEs only if it is made conditional for the foreign strategic partners to procure the small parts and manufactured output from them”.

“This mandatory procurement of smaller defence components from Indian SMEs will lead to a positive ‘technological, infrastructural and knowledge spillover’. All these conditions in defence sector become necessary right in the beginning because of the fact that cutting edge technology in defence has massive ramifications and potential to make India self-reliant defence supply base,” he added.

“Thus FDI reforms in defence have a multifaceted outcome if they are complemented with such conditions requiring the foreign companies and investors to invest their sources in Indian SMEs thus, uplifting their infrastructure; technology base and making them procure atleast 30% and preferably 50% of their components from Indian companies”. 

Thus this all in all will improve the competitiveness of MSMEs and enhance their role in the Indian defence industry. (KNN/ GK)


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  1. hemen  parekh
    hemen parekh 22/06/2016 4:57 AM

    In defense of FDI in Defense Yesterday , Government announced 100 % FDI in manufacture of defense equipment Better late than never ! But some politicians / economists / industrialists are upset They thinks ,this is some kind of a " Sell Out " to the western imperialists / capitalists ! On the other hand , the government says 100 % FDI will create more jobs in India Before taking sides , let us look at the current scenario in defense equipment : # India's Military expenditure in 2015................. $ 51.3 Billion ( 2.3% of GDP ) # India was No 1 importer of major weapons ( world-wide ) in 2010-14 period # India accounts for 14 % of global arms import # India imports nearly 60 % of its defense equipment # Cost of ex-import defense products is 3 to 5 times the indigenous equipment # In next 7/8 years, India will buy defense equipment worth $ 130 Billion # With current FDI level of 49 % , only Rs 6 crore have come in during past 2 years ! Now , when we import a defense equipment for an import value of Rs 100 / - , what is its break up ? My guess is : * Material cost ( incl Bought out Components )..... .... Rs 45 * Labour cost ( salaries + wages )....................... ....Rs 15 * Finance cost ( interest on fixed + working capital )....Rs 10 * Overheads ( Sale / Mgmt / Depreciation etc )......... Rs 20 * Distribution / Commissions / Freight / local taxes ....Rs 10 --------------------------------------------------------------------------------------------------------- TOTAL...................................................................... Rs 100 --------------------------------------------------------------------------------------------------------- All of these costs are incurred by Foreign Suppliers in their OWN countries For India , All of these costs , are foreign exchange out-go , enabling those Foreign Suppliers to keep their , * OWN factories in their OWN countries , humming * OWN workers employed * OWN local suppliers of components / raw materials busy * OWN bankers earning bonuses * OWN labour leaders demanding higher wages * OWN politicians hanging on to power * OWN retail shops crowded with customers.... etc But what will happen when these ( so far ) imported equipments start getting manufactured in India ? Here is a partial list : # Foreign Companies will readily bring their latest technologies without worrying about " giving away " secrets ! # Whatever they produce locally but fail to " sell " to GOI , they will be forced to export - a big boost to export earnings . With cost arbitrage , they might even make India , their Global Export Hub # Indian Armed Forces dependence on critical imported " Spares " will go down and supply reliability will improve # Most of the " Costs " mentioned above , will get incurred locally - boosting Indian economy, not foreign ! # Government will get same products much cheaper , enabling our Defense Budget to buy more # Thousands of local Component manufacturers will spring up in MSME sector of our economy # Thousands of Indians will get jobs # Our negative trade balance will reduce # Given our current DPP ( Defense Procurement Policy ), cheaper , locally manufactured defense equipment will stand a better chance of competing with the imported equipment . This will motivate many more of the current Foreign Suppliers to set up manufacturing bases in India , in order to remain price-competitive # There will be positive fall out effects on DRDO / ISRO / Govt Research Laboratories # Last - but not the least - this will make Indian Defense equipment manufacturers " Efficient / Competitive " ! But replacement of the term , " State-of-the-art " technology with " Modern " technology , may not suffice ! No doubt Commerce Minister , Madam Nirmala Sitharaman is aware of this since she was quoted ( Business Line / 21 June ) to say : " The thought process behind this was that we are spending too much time in defining things and understanding what exactly is state-of-the-art. So, instead of keeping it verbose and making too many things binding us down, by using this one word 'Modern', we hope to bring in technology that we require " Let detractors cry hoarse There is no need to defend 100 % FDI in Defense ! -------------------------------------------------------------------------------------------------------------------------------- 22 June 2016 / blogs

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