The Defence Economics and Industry Centre at the Manohar Parrikar Institute for Defence Studies and Analyses (MP-IDSA) organised a Roundtable on ‘Enhancing MSME & Startup Engagement for Atmanirbharta’ on 13 May 2024. The event was chaired by Ambassador Sujan R. Chinoy, Director General, MP-IDSA, and was followed by an address by Shri Nalin Kohli, Member, Governing Council, Foundation for Innovation and Technology Transfer, IIT Delhi and President, Association of Small and Medium Knowledge Industries (ASMKI). Participants from Defence Accounts Departments, Defence Research and Development Organisation (DRDO), Principal Scientific Advisor (PSA), Government e Marketplace (GeM), Armed Forces, Director General of Quality Assurance (DGQA) and Industry enriched the discussion.

Executive Summary

The Round Table highlighted key opportunities for MSMEs and Startups under the framework for capital acquisition i.e. Defence Acquisition Procedure (DAP) and for revenue procurement i.e. Defence Procurement Manual (DPM). It emphasised the core areas where policy intervention is needed from apex level, and where improvisation is required for generating ‘ease of doing business’ for MSMEs and Startups within the existing procedures. It called for effective implementation of the government’s initiatives for promoting their participation in the indigenous and global defence supply chain. The Round Table also deliberated upon functioning of platforms like Srijan, funding though iDEX and Technology Development Fund (TDF), audit issues and payments, collaboration with DRDO and Academia to support R&D and innovation, need for national level standards and quality assurance mechanisms at par with international practices. It also deliberated upon broader structural reforms needed for developing the nation as a manufacturing hub with a growth engine for innovation through enhanced participation of MSMEs and Startups.

Detailed Report

After the Welcome Address by Shri Arvind Khare, IDAS, Senior Fellow, Defence Economics and Industry Centre, Ambassador Sujan R. Chinoy, Director General, MP-IDSA delivered the Opening Remarks. Amb. Chinoyhighlighted the opportunities for MSMEs under the present defence procurement and acquisition framework as well as the bottlenecks in the existing systems. He also highlighted interactive platforms like “Srijan” and initiatives such as TDF and iDEX through which MSMEs and Startups can contribute in R&D and technological innovation in the defence sector. Despite a significant contribution to the domestic production worth over one lakh crore, largely driven by DPSUs and private sector companies, MSMEs remain crucial yet reliant on larger entities for survival. He emphasised the need for a holistic vision and a structured approach from apex bodies to support the growth of MSMEs.

Amb. Chinoy stressed that for MSMEs to compete globally, they need to develop core defence and dual use technologies, secure adequate funding, and gain negotiating power within supply chains. The government should handhold their endeavours wherever required. Further, he emphasised that the MSMEs should strive to ensure their competitiveness and sustainability in both domestic and international markets. Amb. Chinoy stressed that the Roundtable should also address the barriers faced by MSMEs and Startups such as procedural complexities and the need to streamline existing processes, if any.

Shri Nalin Kohli, Member, Governing Council, Foundation for Innovation and Technology Transfer, IIT Delhi and President, Association of Small and Medium Knowledge Industries (ASMKI), began his remarks by elucidating that in the defence sector, MSMEs and Startups face unique challenges. While these smaller entities offer innovative solutions and fulfil a large demand for manufactured goods, their engagement in the defence sector remains suboptimal due to certain barriers and procedural complexities. Shri Kohli commented that as the major players in the Indian private sector involved in the defence sector came from automotive and IT industries, there is a lack of dedicated defence-focused companies.

He noted that MSMEs significantly contribute to India’s GDP and exports, and emphasised their importance in defence. Policy adjustments, including simplifying entry processes and procurement procedure, are crucial to bolster MSME participation. He further stated that addressing issues relating to Bank Guarantees, delayed payments and facilitating Transfer of Technologies (ToT) can further support MSMEs financially and technologically.

Shri Kohli stressed that defence projects often require specialised manufacturing capabilities, as they involve high-tech products. At the same time, defence sector involves low-volume production. To support MSMEs in the defence sector, it is essential to create a conducive ecosystem, which involves attracting capable and eligible MSMEs from various sectors into defence, and offering them opportunities to showcase their capabilities through paid pilot projects. Generating adequate business opportunities for multiple MSMEs by apportionment of large quantities of the products and a healthy competition by offering an equal level playing field to all prospective bidders in defence procurement is essential for financial stability and growth of MSMEs.

Shri Kohli stressed on the need to strengthen partnerships with academia which can provide crucial R&D support, foster innovation within MSMEs and enhance their role in the defence industry. Shri Kohli mentioned the need for treating MSMEs and Startups as business partners or development partners, not merely as vendors. He concluded by stating that the engagement of MSMEs and startups in the defence sector can be significantly enhanced, leading to a more innovative and resilient defence industry in India, by ensuring procedural flexibilities, financial support and technological handholding.

Director General, Amb. Chinoythanked Shri Kohli for highlighting the broader concerns of MSMEs. Amb Chinoy highlighted the difference between those MSMEs who are involved in manufacturing as per the specifications of Army/Navy/Air Force Design Bureaus or similar agencies, and MSMEs who are capable of doing their own R&D. Amb. Chinoy stressed that our system should also focus on fostering innovative MSMEs rather than just those doing basic manufacturing. He suggested that both central and state governments should support defence MSME clusters across all states, not just in the Defence Corridors in Tamil Nadu and Uttar Pradesh. These clusters could offer plug-and-play facilities and subsidies to reduce costs.

Shri Kohli also called for reduced bureaucratic stresses and more generous funding for offering adequate ‘ease of doing business’ in case of MSMEs and Startups, and also mentioned the need for simplified procedures for funding through the 25 per cent of defence budget earmarked for funding private industries and academia for defence R&D and through the proposed Rs1 lakh crore Corpus for long term funding of R&D Projects including deep defence technologies.

Amb. Chinoy highlighted the need for establishing a Technology Council for planning and strategising futuristic technological requirements and reserving certain sectors especially for MSMEs, according to a thorough capability mapping. He also stressed the need to develop a robust ecosystem for guiding and supporting MSMEs, providing them with the freedom to innovate, make mistakes, and learn, supported by academic partnerships.

Shri Arvind Khare, Senior Fellow, MP-IDSA, remarked that the system of allocation of large tendered quantity of high tech defence products to multiple vendors based on their manufacturing capabilities, as well as the system of procurement through a single source on nomination basis or on PAC (Proprietary Article Certificate) basis and also in a resultant single vendor situation in exceptional circumstances, are already effectively established in the prescribed procedure as mentioned in GFRs. He emphasised the importance of generating healthy competition without restrictive and unnecessary conditions in pre-qualification criteria (in RFPs) in the name of security, with the objective of achieving wider vendor participation, reasonable pricing and fair vendor apportionment.

Shri Khare stressed on the need to encourage MSMEs to scale up and diversify their manufacturing capabilities, for keeping themselves competitive in the market of dual use technology based items. Additionally, MSMEs require techno-commercial support from DPSUs and DRDO. He also emphasised that making timely payments to MSMEs against their dues and streamlining processes across departments are crucial for ensuring availability of adequate financial support to MSMEs. These steps can create an enabling environment for MSMEs, which is essential for leveraging their innovative potential and contributing to India’s economic growth.

Shri Anurag Awasthi, Chief Manager (Social Impact and Inclusive Seller Growth) – Government e Marketplace (GeM), highlighted several key points regarding public procurement and the role of MSMEs and startups. He mentioned the significant value of orders facilitated through the online public commerce portal in 2023, with a substantial portion attributed to the Ministry of Defence’s involvement. Shri Awasthi urged MSMEs and Startups to meet defence industry needs. He cited examples of innovative responses during the COVID-19 Pandemic, such as a startup in Kanpur swiftly pivoting to produce ventilators. He proposed allocating a percentage of subcontracting opportunities to MSMEs, providing them with a voice and opportunities they might not otherwise access.

Additionally, Shri Awasthi advocated for greater outreach to MSMEs and Startups in Tier 2 and Tier 3 cities, highlighting the challenge of information dissemination and the potential for untapped innovation in these areas. Finally, Shri Awasthi mentioned policy guidelines offering relaxation in eligibility criteria for Startups and MSMEs in public procurement.

Shri Vipin Gupta, IDAS, Joint Controller General of Defence Accounts O/o CGDA HQ,  emphasised that there is still a need for effective and pragmatic implementation of government policies and initiatives designed to support MSMEs. He highlighted that the Defence Procurement Procedure (DPP) has undergone multiple revisions and the Defence Acquisition Procedure (DAP) has evolved since it was first promulgated in 2020. The Defence Procurement Manual (DPM) 2009 however has not been revised so far despite changes in procurement procedure and processes. He noted that DPM 2009 needs to be revised to align with the General Financial Rules 2017 and Ministry of Finance Manuals for Procurement of Goods and Services. Shri Gupta also suggested that there should be a specific chapter dedicated to indigenisation and innovation in the DPM, which should be distinct from the standard procurement procedures.

Ms. Shipra Mishra, CEO, Delhi Research Implementation and Innovation (DRIIV), Flagship programme of the Office of the Principal Scientific Adviser to the GoI, highlighted their role in bridging the gap between industry, academia, and government bodies to facilitate innovation transfer from lab to market. While the cluster has primarily focused on thematic areas aligned with national sustainability goals, Ms. Mishra acknowledged the potential for addressing defence innovation challenges. She proposed leveraging their network of over 100 partners, including academic institutes, startups, and MSMEs, to create a sandbox environment for targeted innovation experiments. This approach may involve matchmaking between innovators and academia, incorporating pilot projects with the armed forces, and exploring financial instruments like bonds & insurance models and utilising CSR spending for extending financial support to MSMEs. She advocated for a structured R&D approach, suggesting that outcomes from the sandbox can inform future policy development.

Brig. Sandeep Acharya from DGQA HQrs urged the need to adhere to existing testing and certification standards to avoid issues while encouraging MSME participation in defence. He stated that the armed forces need to maintain stringent standards for testing and certification for MSMEs at par with international practices without compromising on the quality checks keeping in view the needs of national security. Brig. Acharya, however, emphasised on the need to tackle practical issues such as exorbitant delays in testing and certification, and suggested solutions like self-certification and accreditations by national and international testing agencies. Brig. Acharya also emphasised that maintaining a degree of stringency is crucial for national security and industry competitiveness. He stressed on making efforts towards streamlining and digitising the processes of integrating various labs throughout the country, and aiming to provide easy access to testing facilities for MSMEs.

Group Captain Ajay Kumar from Directorate of Procurement, Air HQrs, outlined several key points regarding the challenges and opportunities for MSMEs, particularly amidst the conflict between Russia and Ukraine and its impact on international supply chains, which has had significant implications worldwide and even for India. This has severely impacted defence procurement processes, but has provided ample opportunities for Indian industries. He called for comprehensive policy frameworks to address the specific challenges faced by Startups and MSMEs. He suggested relaxations and concessions in existing procurement procedures like DPM 2009 in order to streamline regulations and support their growth.

Gp.. Capt. Kumar also pointed out the significance of financial support to MSMEs as these enterprises often face substantial risks, especially with prototype failures. He then proposed some measures such as providing financial assistance for initial development costs and exploring reimbursement support even in NCNC (no-cost no-commitment) procurement. He also mentioned that greater collaboration between Service Headquarters and Startups/MSMEs is essential to leverage geopolitical situations and forecast procurement needs. Addressing legacy technology needs, rapidly evolving technology, and policy ambiguities through handholding and clearer policies can further support engagement of MSMEs & Startups. He emphasised on defence R&D and innovation, which are critical for future competitiveness, alongside considerations for GDP, employment generation, and training needs. He concluded that a holistic support mechanism encompassing policy reforms, financial assistance, and collaborative efforts is necessary to nurture and sustain the growth of startups and MSMEs in the defence sector amidst complex geopolitical scenarios.

Commodore Gokul Krishna Dutta, Cmdr. (Admin.), Naval HQrs, commented that the Indian Navy has significantly shifted from relying upon foreign platforms to manufacturing around 80 percent of its assets domestically, driving substantial progress in the Indian shipbuilding industry. This transition is underpinned by a strong commitment to indigenous innovation, supported by various efforts that identify items for domestic manufacturing and indigenous technology development. He stressed on the need to ensure the reliability of components given operational risks of failures at sea. MSMEs need support to meet defence quality standards, with calls for a regulatory framework to provide technological assistance. Quality assurance mechanisms, including vendor capability assessments, are proposed to maintain product standards.

Cmde. Krishnan advocated fair payment policies for domestic vendors to reduce their financial burdens and boost confidence. National-level standards and streamlined evaluation processes duly controlled and monitored by apex structures are needed to support MSMEs and ensure accountability in technology development, as well as to aid MSMEs with assured fund allocations. He stressed on the need to recognise the necessity for comprehensive structural changes to bolster indigenous manufacturing and innovation, and also proposed creating specialised commissions or organisations on those lines.

Shri Anmol Amar Singh, Senior Deputy IFA, O/o IFA (R&D), Delhi, spoke on supporting SMEs, fostering innovation, technology absorption and streamlining procedures to bolster the defence sector’s capabilities and promote economic growth. He stressed that flexibility in procedures, particularly regarding payments and technology transfer, is crucial to accommodate SME requirements. While efforts have been made to reduce entry barriers for SMEs by the Government, existing policies are not being fully utilised. Shri Singh emphasised that a structured approach, including self-certification processes and collaboration between DRDO and SMEs, is essential.

However, challenges such as funding constraints, stringent procedures, and differentiation between R&D procurement and normal procurement, persist. Despite these challenges, success stories highlight the capabilities and the potential of contribution of MSMEs to national security and innovation. Policy recommendations from Shri Singh included establishing a dedicated portal for grants, clarity in procurement rules, and a separate chapter in the GFR for R&D procurement and Grant-in-Aids for R&D purposes.

Shri Arjun Kumar, Additional Director and Scientist at DTDF, DRDO HQRs, underscored the government’s initiative for funding MSMEs for defence R&D and innovation in the form of TDF of DRDO, emphasising the government’s willingness to take risks in nurturing R&D culture in defence sector. Initially conceived in 2014, the scheme of TDF has awarded 70 projects till date, including the successful development of many innovative products of defence needs and their exports. Success stories, such as the development of a nuclear emergency drug, underscored the scheme’s role in fostering local innovation and bolstering national security. However, continued support and clear policies were deemed crucial for sustaining the scheme’s impact. Shri Kumar advocated for clearer policies and dedicated channels for R&D investment. He proposed the creation of a unified portal for government grants to enhance accessibility and emphasised the need to treat R&D grants different from procurement and to make necessary policy refinement in this regard.

Shri Shashi Mouli Choubey, IDAS, Deputy CDA, O/o PCDA New Delhi, underscored certain keypoints, viz. importance of maintaining a balance between audit and payment processes, mentioning the successful endeavour for timely payment within seven working days. He mentioned that clarity in contract terms and delivery periods is essential, advocating clear definitions and explicit outlining of essential documents to avoid confusion and delays caused by missing or unspecified documents. Shri Chaubey further highlighted the challenge of stage payments in GeM contracts combining services and hardware, emphasising the necessity of clarity on payment breakdowns and terms even in online contracts. Additionally, adherence to Letter of Credit (LC) payments conditions as per the extant orders on the subject was mentioned, noting the cost implications and confidentiality concerns. He emphasised the significance of clear terms of contract, timely payments, and compliance with norms to facilitate smooth financial transactions and mitigate potential issues. He elaborated on the role of Buyers to adequately educate the vendor about contractual terms and conditions, to obviate future delays, penalties and audit complications.

Commodore Bunty Sethi (Retd.), UKIBC, spoke on three critical aspects of the defence industry. Firstly, he emphasised the paramount importance of quality standards, which are non-negotiable especially in aerospace and maritime sectors, where strict requirements for environmental and shock resilience are enforced. Although adherence to these standards is prioritised by few established companies, the approval process is lengthy, and only a few vendors are approved. Secondly, he highlighted the deficiency in R&D and design capabilities among many Indian firms, leading to reliance on foreign technology and hindering indigenous innovation despite substantial investment. Lastly, Shri Sethi stressed on the imperative for Indian companies to integrate into the global supply chain, adopt international standards, and learn from foreign counterparts to compete effectively in supplying to the Indian Armed Forces and beyond. By aligning with global practices, Indian firms can enhance their capabilities and position themselves for success in the defence sector.

Colonel (Dr.) Rajneesh Singh (Retd.), Research Fellow, Centre Coordinator, Defence Economics and Industry Centre, MP-IDSA, concluded the Roundtable discussions by summarising the key topics addressed and expressed optimism for future progress in the areas discussed. He emphasised the crucial role of MSMEs and Startups in the defence sector, stressing the need for ongoing support and guidance. Col. (Dr.) Singh underscored the necessity of establishing a supra-structure to coordinate activities among stakeholders and the industry effectively. He highlighted the Director General, Amb. Chinoy’s vision for MSMEs to enhance competitiveness and thrive in the defence industry’s control-oriented environment. Moving forward, Col. (Dr.) Singh expressed hope for concerted efforts to foster the growth and sustainability of MSMEs and Startups in the defence industry, and extended sincere thanks to all the participants.

The report has been prepared by Dr. Shayesta Nishat Ahmed, Research Analyst, Defence Economics and Industry Centre, MP-IDSA.