What Indian Defence Industry needs Post-Covid-19

The Indian government, since 2014, has actively promoted setting up of a Defence Industrial base in the country. A number of policy directives have been issued to encourage Make in India and actively promote the establishment of two Defence Industry corridors in Uttar Pradesh and in Tamil Nadu and yet, that programme is yet to realise its full potential. 

As is well-known, the Defence and Aerospace industry is mainly dependant on Government for orders. In addition, the business is characterised by long development and procurement cycles and heavy investments. The sector is also characterised by tierised structure where MSMEs form the backbone of Tier 1 and Tier 2 structure and at times, rarely, prime contractors.

As a result of a number of initiatives taken in the past few years, the Indian industry had just started to evolve when COVID-19 gave it a body blow. A large number of Industry players may not survive the crisis unless some urgent steps are undertaken to boost Make In India.

Implications of ‘Lockdown’ for Private Defence Industry are multi-fold and the private industry is likely to incur higher losses and financial burden due to:

• Responsibility to bear wages of all employees, though there is no production (for both domestic as well as exports), during the lockdown and beyond.

• Discontinuity in the business cycle due to disruption in tendering and contracting activities. There may not be any business during the early stages post lifting of lockdown.

• Enhanced cost of capital, interest on capital for extended duration of projects, and LDs.

• Working capital challenges are severe for MSMEs (no huge surplus cash piles to pay salaries and wages, and carrying the financial burden of carrying inventories).

Lockdown Exit Strategy for Defence and Aerospace Sector

Defence and Aerospace industry needs to be distinguished from the rest of the industry sectors due to the peculiarities already explained. It is an accepted fact that many capacities created for defence products cannot be employed elsewhere. Secondly, it is also a known fact that the defence industry needs to be treated as a strategic national asset and nurtured. Therefore, the government must do the following:

• Total moratorium on further imports of Defence Systems from foreign OEMs.
• New Orders to Indian Industry under Make In India (MII).
  • • Operationalising B(I-IDDM), B&M(I) and Make(I&II) categories expeditiously to give relief to the D&A industry in terms of new orders in the COVID-19 impacted bleak industry outlook.
    • Convert Programs/product that have been developed under aegis of the DRDO which have reached certain level of maturity and have completed User Assisted Trials into MII orders on Indian Industry on priority within the next 60-90 days, such as Pinaka, Akash, ATAGS, etc. This will provide the much needed lifeline to Tier-II & III MSME partners who are struggling to remain afloat under the impact of COVID-19. 
• Re-appropriation of funds/budget planned for foreign acquisition to Indian industry.
• Release all outstanding payments of companies, especially MSMEs.
• Fast track the orders in the pipeline meant for Indian MSMEs, especially where the IP belongs to Indian company and the IC is more than 75 per cent. This will ensure that value capture is happening in India. 
• All Government disbursements like IT refunds, GST refunds, State level incentives, etc., need to be disbursed urgently as disruption in production and supply chains have adversely impacted the cash flow of industries which have greatly hampered the operations.
• Give 100% advances against Bank Guarantee to Indian MSMEs
• Mitigate working capital stress on defence industries by way of reduced BGs and making capital available at affordable interest rates. The actions may include deferment of all loans for six months, extension of ad hoc 25 per cent additional credit on existing working capital limits and waiver of interest on working capital for six months.
• Outsourcing from Naval Dockyards, Base Repair Organisations and Base Workshops: The MSMEs/SMEs capabilities should be leveraged by the Maintenance organisations of the three services besides the DPSUs/OFs for the repair/ refit and upgrade of their in-service systems and platforms. This will shorten their time to operationalise and become a win-win for the industry and users.

The defence budget, already under pressure, is likely to get squeezed further, sending the fragile defence industrial base into terminal decline. The government must not allow that to happen.

Nitin A. Gokhale