The Role of MSMEs in India’s Defence Sector: Driving Self-Reliance and Technological Innovation

A country’s defence architecture cannot be completed without the involvement of different enterprises in its functioning, especially without the help of its innovative enterprises. India’s defence sector also takes the help of one of the most innovative enterprises from the Micro, Small, and Medium Enterprise (MSME) sector for their different needs of logistics and operations. In this context, MSMEs are emerging as key players in the quest for self-reliance and technological advancement for the Indian defence sector. This report aims to examine the crucial role of MSMEs in India’s defence ecosystem, focusing on their contributions to technological innovation and self-reliance in defence procurements.

According to the 2023-2024 report of the Standing Committee on Defence, approximately 14,000 MSMEs and 329 startups are actively engaged in defence production in India, signalling the robust MSME ecosystem of the Indian Defence Sector. These enterprises form a vital part of the defence manufacturing ecosystem, primarily serving as Tier II, III, and IV suppliers to Defence Public Sector Undertakings (DPSUs), Directorate of Ordnance (DOO), and private Original Equipment Manufacturers (OEMs) currently engaged in multiple projects for Indian armed forces, from providing potable water to making satellites based on quantum communications.

To further integrate MSMEs in the process of defence tech, the Indian government has set an ambitious target for the defence sector, aiming for a turnover of ₹1.75 lakh crore in aerospace and defence manufacturing by 2025, with exports reaching ₹35,000 crore. This vision has  the potential to create significant opportunities for MSMEs in order to strengthen their position in the global market. In addition to this, different CPSEs and PSUs also play an active role in the defence manufacturing ecosystem process. The SFOORTI scheme of GoI aims to provide different services for the promotion of MSMEs and can be very beneficial in creating new avenues for new startups in defence tech.

In contrast to this, it is also important to acknowledge that even after so much effort over the years, the data shows that the MSMEs are still floundering and have not been able to fulfil the aim of becoming the main drivers of the Indian economy. This requires both policy plus opportunity. Even though there are different policies which has been framed by the GoI to support the MSMEs, creating a place for opportunity with equity is still in the process. But to resolve this problem,  in November 2018, to provide support and outreach to the MSME sector, 12 initiatives were launched by the government of India in order to direct CPSEs to do 25 per cent of procurement needs from MSMEs only. In this regard, initiatives like UDYAM and GeM(government e-marketplace ) have been very helpful. MSMEs as a sector have huge potential to contribute to India’s growth story and can help India to become self-reliant in defence tech with their cumulative efforts. The report will look at the contribution of MSMEs to defence production.  

Contributions to Self-Reliance

MSMEs are playing a crucial role in India’s journey towards self-reliance in defence production:

1. Import Substitution: MSMEs are actively developing components and subsystems that were previously imported, reducing dependency on foreign suppliers.
2. Innovation and Flexibility: Their ability to innovate and adapt quickly to changing requirements makes MSMEs invaluable to the sector.
3. Cost-Effective Solutions: MSMEs often provide more economical alternatives to products manufactured by larger entities.
4. Enhancing Manufacturing Depth: By participating in various tiers of the supply chain, MSMEs significantly increase the depth of domestic manufacturing capabilities.

Technological Advancements

MSMEs are at the forefront of technological innovation in the defence sector, especially with defence tech startups playing the most crucial role:

1. Advanced Electronics: Companies like Logic Fruit Technologies are developing high-performance embedded computing solutions for defence applications.
2. Aerospace and Defence Systems: Tata Advanced Systems Limited (TASL) collaborates with global defence companies to produce cutting-edge aerospace and defence solutions.
3. Indigenously Designed and Manufactured Products: Paras Defence & Space Technology Limited focuses on research and development excellence, producing indigenously designed, developed, and manufactured (IDDM) defence technologies.

Government Initiatives Supporting MSMEs

The Indian government has implemented several initiatives to bolster MSME participation in the defence sector:

1. Technology Development Fund (TDF): This scheme provides funding of up to ₹50 crore per project to encourage MSMEs and startups to develop defence technologies. The aim should be to increase the corpus of funding to attract more talent in the defence ecosystem.

2. Defence Industrial Corridors(DICs): The primary objective of DICs is to promote the domestic production of defence equipment. The establishment of corridors in Tamil Nadu and Uttar Pradesh aims to facilitate MSME participation in defence manufacturing. Additionally, DICs aim to reduce India’s reliance on foreign imports and strengthen the country’s defence manufacturing capabilities.
3. Innovations for Defence Excellence (iDEX): This program supports startups and MSMEs in developing innovative defence and aerospace technologies. This program has the potential to list down strategies which can be very crucial in new forms of warfare such as Space and Cyberwarfare. 
4. SRIJAN Portal: An online platform that helps identify items for indigenisation, supporting MSMEs in defence manufacturing. This portal aims to open new possibilities for the private sector to explore emerging technologies based on digital technologies.

Global Comparisons and Best Practices

Several countries have successfully integrated MSMEs and new startups into their defence sectors, providing valuable lessons for India in this process of defence tech collaboration:

1. Israel: Known for its robust defence innovation ecosystem, Israel has successfully integrated startups and SMEs into its defence industry, fostering cutting-edge technologies. Israeli startups like TriEye and Airobotics are using autonomous systems in creating advanced weaponry for armed forces.
2. United Kingdom: The UK’s Defence and Security Accelerator (DASA) program supports SMEs in developing innovative defence and security solutions. It is now considered as one of the most crucial initiatives in European Union in defence sector.
3. United States: The Small Business Innovation Research (SBIR) program in the US provides funding to small businesses for defence-related R&D. Companies like Palnatir are the products of these initiatives.

Success Stories with Indian Startups and MSMEs

Several Indian MSMEs have made significant strides in the defence sector creating different innovative technologies for the armed forces:

1. Bharat Forge: Bharat Forge Limited is an Indian multinational company founded by Nilkanthrao A. Kalyani on 19 June 1961. This company has been involved in forging automotives, energy, construction and mining, railways, marine, aerospace and defence industries alongwith successfully manufacturing artillery guns, demonstrating the potential of private sector involvement in critical defence manufacturing.
2. Zen Technologies: Founded in 1993 in Hyderabad, this startup is developing the training simulation solutions for the defense industry. Some of the technologies included in its product portfolio are live and virtual simulation solutions for firearms, mining, tanks, driving and unmanned aerial vehicle (UAV).
3. Paras Defence & Space Technology Limited: Emerged as a key player in India’s Defence and Space landscape, focusing on indigenously designed and manufactured products. It is one of the leading private sector enterprises operating within the Defence and Space segments, distinguished by our Indigenously Designed Developed and Manufactured (IDDM) capabilities.

Challenges and Opportunities

Despite the progress, MSMEs face several challenges in the defence sector:

1. Complex Procurement Process: The defence acquisition process can be time-consuming and challenging for small enterprises. This needs to be simplified, especially in the context of new and advanced technologies such as AI and Quantum where changes in technology happen rapidly.
2. High Entry Barriers: The sector has significant technology and capital requirements that can be difficult for MSMEs to meet. Including small startups working on high-end technologies related to space and cyberspace is essential in comparison to relying on only government agencies like ISRO or DRDO for all their technological needs is not strategic.
3. Limited Access to Finance: Many MSMEs struggle to secure funding for defence projects. Increasing the pool money of Startup India to a bigger corpus can help, along with dedicating a fixed amount for startups working on defence tech.
4. Technology Deficit: Keeping pace with advanced defence technologies can be challenging for small enterprises with limited R&D budgets. Due to this, a significant amount of brain drain happens, and India’s most talented individuals move to Europe and the US for further opportunities. The government has to create different programs to bridge the technology deficit and give market access to new startups and companies working on defence tech. 

These challenges and opportunities are intertwined and present new possibilities altogether. The government’s focus on indigenisation and the increasing demand for advanced defence technologies create a favourable environment for MSMEs to expand their capabilities and market share.

Analysis

MSMEs are proving to be the backbone of India’s defence manufacturing ecosystem, playing a crucial role in achieving self-reliance and driving technological innovation. Their ability to provide cost-effective, innovative solutions and their flexibility in meeting evolving requirements make them indispensable to the sector. We have always heard of Big Tech companies like FAANGs, which are playing a great role in the defence sector of India. Though India has missed the Big Tech opportunity to create its own Google and Facebook, it still has the opportunity to leverage Small Tech companies. Using the consolidated power of MSMEs in the field of technology, India can aim to achieve a self-reliant Viksit Bharat by 2047.

In terms of technological advancements in alignment with the need for new and advanced technologies such as AI, the availability of GitHub Copilot and different AI-based applications for software development, optimisation, workflow, and execution can optimise the operational processes in government agencies like ISRO and DRDO more streamlined, focused, and sophisticated. Thus, incorporating new AI-based startups in the operations of our national agencies, especially those functioning around AI, can be a game changer in this regard in terms of enhancing productivity and efficiency.

As India continues its journey towards becoming a global defence manufacturing hub, the role of MSMEs will only grow in importance. With continued government support, strategic partnerships, and a focus on innovation, MSMEs have the potential to transform India’s defence landscape, reducing import dependency and boosting exports. The success of India’s self-reliance initiative in defence will largely depend on the ability of MSMEs to rise to the challenge, innovate, and integrate seamlessly into the global defence supply chain. As demonstrated by the growing number of success stories, Indian MSMEs are well-positioned to meet this challenge and contribute significantly to India’s defence capabilities and economic growth.