Ensuring MSME Participation To increase ‘Indian Content’ In Defence Electronics

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A study conducted by ELCINA on the ‘Opportunities and Challenges in the Strategic Electronics Sector’ with focus on MSMEs, has come up with a few recommendation to facilitate domestic manufacturing

By Sudeshana Das

A study conducted by ELCINA on the ‘Opportunities and Challenges in the Strategic Electronics Sector’ with focus on MSMEs, has come up with a few recommendation to facilitate the small scale sector
Electronics is the fastest growing segment in the defence sector and this situation is expected to remain so in the coming years. However, India faces serious challenges in becoming a significant player in electronics due to various reasons. Defence/strategic electronics requires strong and sustained R&D and investment support to enable faster growth in this segment and to encourage domestic players to acquire, adopt or create new technologies.
Unless a vibrant domestic sector is created –one that includes MSMEs — procurement by the Indian government will only help create and maintain jobs in other countries. To be self-reliant and also be able to export, India will have to utilise the opportunity to ‘Make in India’ – to not only save but also earn valuable foreign exchange.

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Recommendations made in the study

Usefulness of policy interventions like offset norms and the Technology Perspective & Capability Roadmap (TPCR)
The availability of TPCR and multiplier norms has the potential to improve MSME participation in the defence procurement process, under the provision of Defence Procurement Offset Norms. Offsets have increased the participation of large integrators in defence procurement and the TPCR has also helped.
The TPCR needs to give a realistic vision or roadmap. It should be more focussed on technologies leading to business opportunities and be able to give direction to an industry’s R&D efforts.

Understanding the offset norms
More clarity is required regarding offset norms, particularly in determining what is local and what is foreign. For example, the offset norms emphasise the need to source from domestic vendors, instead of supporting domestic manufacturing.
Multipliers should not be calculated on the basis of value addition rather than the billing value of the Indian partner as import content of the Indian partner may exceed 80 to 90 per cent
The stage-wise calculation of value addition makes it very difficult to calculate how much is local value addition. This process needs further study and clarity.
It is currently not possible to meet all the component requirements of the manufacturing process through domestic sourcing. Thus, to make it more feasible for domestic companies to participate, there should be clarity on the manufacturing value chain, on the licences such as SCOMET and the procedures to issue such licences should be simplified.

Ensuring participation of MSMEs
There is an urgent need to deal with the losses that MSMEs incur when pitching for defence contracts. Clauses such as ‘No Cost-No Commitment (NCNC)’ should not be applicable to MSMEs manufacturing in India. The cost of the prototypes must be paid to MSMEs.
Similarly, the study recommends certain indirect financial support to MSMEs. These include lowering the cost of capital, offering an interest subsidy, dealing with issues relating to payment delays, the need for securities/guarantees, the blockage of funds, etc. The study recommended establishing a mechanism or policy to cover various financial bottlenecks in order to help MSMEs focus on manufacturing and R&D.
Other recommendations include setting-up a development fund for select MSMEs, establishing a smoother procurement process for MSMEs to participate in tendering and promoting greater collaboration among MSMEs on projects. Another important recommendation is the need to review the investment limits that define ‘micro, small and medium enterprises’ as given in the MSMED Act 2006 and its Amendment needed to be inflation-adjusted.

Procurement
There are a number of recommendations to simplify the procurement process. These relate to identification of the Indian Offset Partner (IOP) by foreign companies; the delay in finalising contracts resulting in technology obsolescence caused by the time lag between tendering and actual procurement; the participation of the financial advisor and other decision makers in the procurement process; the applicability of the same import duties, central excise and sales tax (local taxes) for all vendors; the demand for bank guarantee; the requirement for detailed drawings from all vendors foreign or domestic, etc. All these issues need to be addressed.

Payment terms
The Indian private sector needs to be treated at par with defence PSUs, Ordinance Factory Board (OFB) units and foreign vendors. The private sector should have the same terms for payments, and cost comparisons including applicable taxes and foreign exchange variations. Currently, preferential treatment is given to foreign companies. Domestic vendors must also be paid on the same terms applicable to foreign vendors, or through banks, where the payments are tied to performance and not delayed due to procedural issues. Delays in payment should attract the payment of interest to the vendors.

Common ground as DPSUs
Private companies are seeking a level playing field, as is provided to DPSUs. Areas of concern include deals where transfer of technology is negotiated, the taxation patterns for DPSUs vis-à-vis private companies, the treatment in open tenders and the transfer of technology from DRDO.

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