MSMEs in Partnership

Issues Details: 
Vol 10 Issue 5 Nov - Dec 2016
Page No.: 
Sub Title: 
Strengths of the MSMEs and where can we fit them into defence procurement plans to take advantage
Col KV Kuber (Retd)
Monday, December 5, 2016
Sector Overview
The MSME sector is an important pillar of Indian economy as it contributes greatly to growth of Indian economy with a vast network of around 30 million units, creating employment of about 70 million, manufacturing more than 6000 products, contributing about 45% to manufacturing output and about 40% of exports, directly and indirectly. This sector even assumes greater importance now as the country moves towards a faster and inclusive growth agenda. Moreover, it is the MSME sector which can help realize the target of proposed National Manufacturing Policy of raising the share of manufacturing sector in GDP from 16% at present to 25% by the end of 2022.  
Definition of the Sector
The sector is defined by the MSMED Act of 2006 to clearly indicate the Micro, Small and Medium enterprises. This has been defined separately for the manufacturing and services sector.
The share of MSME products in the exports from the country during last three years is as follows:
Year                                                Share of MSMEs  Products in the Exports 
2013-14                                        42.42%
2014-15                                        44.76%
2015-16                                        49.86%
Features of MSME Sector 
Office of the Development Commissioner, M/o Micro, Small & Medium Enterprises, has conducted 4th Census on MSMEs reference period 2006-07. Some of the socio-economic features of MSME sector in India are as given in Table below.
As per the 4th All India Census of MSME conducted by the Ministry of MSME, the number of functional and non-functional registered MSMEs in the country are 15,63,974 and 4,96,355 respectively. 
Although MSMEs contribute significantly to overall economy of the country, they face certain disadvantages, some of the credit related issues being: 
 • Availability of adequate and timely credit; 
 • High cost of credit; 
 • Collateral requirements; 
 • Access to equity capital; and
 • Rehabilitation of sick enterprises.  
The Government of India/Reserve Bank of India had set up many committees to improve the performance of MSME sector, the latest one being the Prime Minister’s Task Force on MSMEs, which provided a comprehensive framework for long term development of MSMEs, covering crucial issues and concerns relating to credit, marketing, infrastructure, technology, skill development, exit policy, labour, taxation, matter related to North Eastern Region and Jammu & Kashmir.  The Task Force recommended several time-bound action plans which are being implemented by different ministries of Government of India.
Where does the Ministry of Defence Fit In?
Defence Production, hitherto the monopoly of the public sector, was opened up to private sector for participation in the year 2001, despite the aggressive Industrial Policy statement of 1991. Thereafter a number of measures were taken to bring the private sector at par with the DPSUs(Defence Public Sector Units). MSMEs have been an integral part of the Defence Production process since long and the OFB/DPSUs have been cultivating the MSMEs to the extent they thought it was enough. To understand how much they integrated them into the production process and how much outsourcing they have done, let us have a look at some figures.
As a sample we can review the above two cases of the DPSUs which provide a reasonable representative indication. The value of production has been increasing over the years and they also have their order book full for a few years in the future. However, their outsourcing record is pretty dismal. 
MSMEs are largely dependent upon the large conglomerates and the OFB/DPSUs for their business expansions. MSMEs are recognised as Islands of Innovation and excellence. If India lives in Villages, Industry lives in MSMEs. MOD has recently come out with guidelines for outsourcing from the OFB and DPSUs. They have been instructed to gradually increase their outsourcing to an extent to just remain Integrators of systems. This will give a great boost to the MSMEs. Recently, in a seminar organised by Akash Media, CMD, BEL has indicated that BEL has increased its outsourcing norms to a great extent and is also complying with the MSMED Act of sourcing from MSMEs to the extent of 20%. This is indeed very good news for the Indian industry. If this spirit is adopted by all the DPSUs, the outsourcing from MSMEs will reach a figure of INR 8820 Crores. 
The vendor base of OFB and DPSUs boast of more than 3000 companies (going by the figures of each of the DPSUs, viz, HAL has 2500 vendors, BEL has more than 1800 vendors and so does OFB and others – some of whom may be common to all). Of these it is expected that about more than 1000 MSMEs are integral to the supply chain. Compare this number to the volumes of the 15.5 lacs of registered MSMEs. The potential is huge and the benefits of cultivating the MSME sector is the geographical reach to which industrial development can be extended. The government may like to mandate for the increase of vendor base from MSMEs.
A Platform for MSMEs to Show Case
Micro, Small and Medium Enterprises are the backbone of an economy. They are the most prolific job creators and pioneers in developing new ideas. That is why the MSME Ministry of Government of India wants to help these businesses in every possible way to facilitate the industry. A new step in this direction is the development of “Virtual Clusters.” While the government is taking few steps, industry at large also must provide complimentary development measures such as providing a platform for development of business and processes in the MSMEs.
One such measure is “Compass Communications(”, which essentially is a platform to integrate the potential for the companies under its umbrella and arm them with news, media campaign, seminars and conferences and also provide for a platform to show-case the potential of MSMEs with the stake holders. The idea is to connect all stake-holders on one common platform and arm them with requisite knowledge to enhance their business. In this case(Compass Communications), there will be a definite effort to also search and find business for the MSMEs and for the stake-holders reliable MSMEs. 
The companies need a proper communications plan, public relations, create advertisements, interviews, effective use of social media and integrating their capabilities through symposiums and workshops. 
What about the DPP and Defence Procurements
Defence sector is peculiar in its form with both types of procurements prevailing equally strongly both in terms of the budget involved and the opportunities it provides for the industry. While the Capital procurement is centralised, revenue is de-centralised. Capital route is time intensive while the revenue route is much faster, each governed by a different procurement procedure, the former by the DPP(Defence Procurement Procedures) and the latter by the DPM(Defence Procurement Manual). 
Revenue Procurements
Revenue procurements have a potential of more than INR 20,000 crores from the Ministry alone. This includes the revenue procurements for upgrades, maintenance, repair, overhaul and other services related procurements dedicated to the upkeep of the systems already inducted by the services. While the revenue directorates such as the MGO (Master General Ordnance) in the Army and the sister organisations in the other services, have a system of centralised procurements, there are a number of procurements that are governed and executed from the various commands of the three Services. In addition to all this are the procurements from the OFB and DPSUs. Therefore, MSMEs do have a huge potential for getting interfaced with the industry at large. While all of this is, true and happening, large corporates that are eying contracts from MoD are the Tatas, Mahindras, L&T and Bharat Forge and so many others in that space also are cultivating MSMEs as part of their supply chain. This opportunity is by itself in excess of INR 10, 000 crores.
What about Capital Procurements
For the first time; in DPP 2016, MSMEs have a mention, that too eleven times in different contexts so as to provide them with adequate reach into the entire system, sometimes with an incentive and sometimes with mandated entry. The foreword from the Raksha Mantri, for the first time has mentioned MSMEs and I quote, “DPP 2016 also provides greater impetus to the MSMEs, with certain category of ‘Make’ projects reserved exclusively for them”. The preamble speaks of the requirement to enhance the role of MSMEs in the defining sector as a defining feature of the DPP. MAKE procedure in both categories of MAKE-I and MAKE-II, provide for a Right of Refusal, for the MSMEs, for all contracts below INR 10 crores in the former and INR 3 Crores in the latter. Even for the conduct of the feasibility studies conducted for the MAKE category of projects, the Ministry would invite amongst other industry associations, the MSME associations. Also, the guidelines for shortlisting of Indian vendors for issue of EOI (Expression of Interest), a general relaxation is provided for the MSMEs. To top it all, the net-worth criteria defined for industry has recommended only a positive net-worth without any pre-conditions.
In the DPP there are several schemes that are in the beat range of the MSMEs, viz, the INR 100-150 crore range. These are mostly within the powers of the Services HQs (Vice Chief’s powers) and a few even a bit beyond these, all of which can be attempted by the MSMEs as an opportunity.
So, the government has taken initiative to promote MSMEs, it is for us in the industry to help the government to realise their objective, of creating a formidable Defence Industrial base. 
Where do Offsets Figure in all of this Offsets were introduced as part of the Defence procurements (Capital Procurements), in the DPP 2006. Since then a number of improvements were made to the offsets guidelines to make it more flexible and industry friendly. International best practices have been included in the offsets guidelines and plenty of freedom has been provided to the foreign OEMs to execute offsets as part of the capital procurement process. A special provision has been provided for choice of MSMEs as Indian offsets Partners with foreign OEMs as an incentive to provide them with a 150% offsets credits for any work they do with them. While the offsets opportunity is pegged between 10 to 12 bn USD in the next five years, MSMEs must also target the OEMs and optimise the incentive provided by the Indian Defence Ministry. One could intelligently guess this opportunity to be anything between USD 800 million to at least USD 1 bn in the next five years. This translates into at least USD 150 million or about INR 600 crores each year, in addition to the revenue and other opportunities in capital procurements. 
What then is the Opportunity for the MSMEs
In all, the opportunity is large, the demand side is pretty huge with all the incentives provided by the Government of India. The supply side has been discussed earlier in this paper, and presents a huge number of registered MSMEs to the tune of more than 15 lacs of them, interspersed in geography and disciplines with niche capability in many cases. The meagre 2 to 3000 active MSMEs in this segment need to be increased considering the nature of the industry and the demand side dynamics. This can come in from the synergistic sectors of automobiles which have a huge number of them active and involved in making the sector where it is today. So is the case with the Electronics sector, this important synergy needs to be built in, due to the demand on the Strategic Electronics side in the Aerospace and Defence sector.
How do we get Our Act Together?
We have heard and read of the Public-Private partnership model and Joint Ventures in the sector. The government has also relaxed the norms for FDI and eased the licencing process. It is always not possible for an MSME to be able to address a given opportunity in the strategic sector. This calls for high degree of skills, certifications, capex and product capability as against the process capability. This provides an opportunity for the MSMEs to get to-gather and form alliances. The alliances may be in the form of partnerships, as MSME to MSME partnerships. 
Concept of Virtual clusters as envisaged by the Ministry of MSME and virtual relationships as envisaged by “Compass Communications”, do go a long way in bringing capabilities of MSMEs to the forefront. The niche capabilities of MSMEs can be fruitfully exploited by bringing in MSMEs with complementary capabilities together to address an opportunity. The department of Industrial Policy and Promotion(DIPP) envisages an Association of Persons(AOP) as a legal entity. There could however be many models like Teaming Arrangements, technology partners, virtual JVs with a back to back relationship defined on each’s strength.
Can we bring in a 360 degree  relationship by interfacing the MSMEs in opportunities in revenue procurement, capital procurements, acquisitions from OFB and DPSUs and most importantly with OEMs to bring them into the global supply chain. 
MSMEs are at the heart of the industry and provide them with such capability in innovation, cost reduction, flexibility in operations, adaptability, operations research, productivity and all that the industry may dream of. It is imperative for the large conglomerates to cultivate niche MSMEs into their supply chain, for their own benefit. They can work on small margins and in fact work better when challenged. DRDO’s most challenged innovations and research found the backyards of industry into the MSMEs, DRDO acknowledges their support, so do the OFB and DPSUs.
A communications platform which can reduce the communication gap amongst various stakeholders would go a long way to find the integrated approach,  a 360 degree coverage and interface for the MSMEs, which they so very critically require.
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