DIIA REGIONAL ACTIVATOR – BENGALURU 2017 EVENT REPORT

About the Event

Objectives of the Event

Sessions and Speakers

Outcomes

Recommendations

Conclusion

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About the Event

The DIIA Regional Activator was organized on the 8th July at the Lalit Ashok Bangalore for the

purpose of building an Alliance for Self-Reliance in the Indian defence sector. The event

witnessed a packed house with attendance far exceeding the initial seating capacity of 150. Over

a 100 different Small and Medium Enterprises (SMEs) engaging in the defence sector were

represented at the event.

Objectives of the Event:

1. To create an alliance for self-reliance.

2. To set in motion the process of implementing the idea of self-reliance through policies

and procedures so that it begins to deliver tangible results within the next decade.

3. To elicit suggestions and proposals from members of the industry about policy changes

that would shape the future of the industry.

4. To raise awareness about DIIA and its mission among MSMEs, members of the press,

and policy makers.

5. To grow membership of DIIA, especially among the MSMEs in and around Bengaluru.

6. To reach out to allied organizations with similar vision and objectives as DIIA for

indigenization and self-reliance, such as among the academia, other industry

organizations etc.

Sessions and Speakers

DIIA Regional Activator Bengaluru was a daylong conference on the theme “Building an

Alliance for Self Reliance”. The conference included three sessions and two panel discussions on

themes such as: “Public Procurement and Make in India”, “Lessons from Product Indigenization

– A Case study of the Akash Indigenous Missile Program” and the “Opportunities in Defence

and Aerospace for MSMEs”. The dignitaries and guests of honor included:

● Shri P. Muralidhar Rao – National General Secretary, BJP.

● Shri R.V. Deshpande – Minister for Large & Medium Scale Industries and Infrastructure,

GoK.

Accompanying them on the dais for the lamp lighting ceremony were Dr. R.K. Tyagi, Mr. Rahul

Chaudhary and Cmde. Mukesh Bhargava from the board of DIIA. Professor RajaramNagappa

from the National Institute of Advanced Studies (NIAS), the Knowledge Partner for the event,

and Padmashree Dr. Prahlada, distinguished scientist and former director, DRDL were also part

of the distinguished panel for the opening ceremony.

Kicking off the conference, Shri Rahul Chaudhry, Chairman of DIIA and CEO of Tata Power

SED delivered the Welcome Address in which he laid out the pressing need for creating a

defence industrial base to facilitate tierization of the industry. Mr. Chaudhry stressed that if India

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is to reach its potential of being the second largest economy in the world by 2050, it must ensure

that a robust defence industrial base, as, at the present no substantial value addition happens

within India in defence products meant either for use by our forces or for export. Such value

addition is only possible if all members of “Team India” – the public sector, the private sector,

academia and the Indian diaspora – come together to contribute for the national interest. Mr.

Chaudhary also emphasized that due to the unique nature of the defene market in India where the

government is the only buyer, the government has to lead the way in ushering in changes in

defence procurement procedures as well as promoting exports. Citing the example of developed

countries, Mr. Chaudhry drew attention to the fact that no country exports its products at full

costs, preferring instead to cash in on the marginal cost advantage. Domestic orders on the other

hand, are processed at full cost.

Shri P. Muralidhar Rao, National General Secretary, delivered the keynote address. Shri

Muralidhar Rao emphasized the critical importance of the defence sector to any nation and how

import dependence can compromise the ability of a nation to protect its interests both at home

and abroad. Taking an example from human anatomy, Shri Muralidhar Rao compared the

continued habit of import dependence of an economy to the muscles of a body that become used

to performing a certain activity and thereafter continue to perform in the same manner out of

sheer inertia. To develop a new set of muscles would mean breaking out of this inertia. In the

same way, to reorient the defence sector to become self-reliant would take a lot of effort and bold

policy measures.

The Presidential Address was delivered by Shri R.V. Deshpande, Minister for Large & Medium

Scale Industries and Infrastructure, Government of Karnataka. Shri Deshpande talked at length

about the various measures that the Government of Karnataka had taken to ensure that the state

emerged as a leader in the defence and aerospace sector while fostering a culture of innovation

that promoted indigenous R&D.

Professor Rajaram Nagappa provided the concluding remarks to the inaugural session by

highlighting the role that academia can play in providing critical intellectual capital as well as

policy direction to the industry. Professor Nagappa stressed the need for greater collaboration

between industry and academia.

A meeting with members of the press followed the inaugural session. At the same time a

demonstration of the Akash missile – a successful instance of private public partnership allowing

for the integration of MSMEs into the value chain - was held for the members of the press. The

press was briefed about DIIA, its’ mission and objectives as well as the objectives of the ongoing

conference.

The second session on “Public Procurement and Make in India” featured a panel consisting of

Sh. Ashok Kanodia, Shri Amit Cowshish, Shri Nilesh Tungar, and Dr. Shubha V from CSIR-

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NAL. The members of the audience showed great interest in the talk and fielded many questions

to the panel.

Shri Amit Cowshish, Former Financial Advisor (Acquisition) and Distinguished Fellow at

IDSA spoke at the length about the new Defence Procurement Policy and the changes to the

General Finance Rules (GFR), 2017. Shri Cowshish stressed on the need for forums like DIIA to

provide specific inputs and feedback to the Ministry of Finance/DIPP as well as the individual

procurement entities on issues concerning policy and procedure for promoting procurement from

the local sources, in order to ensure that the Make in India program achieves its objectives.

Shri Ashok Kanodia, CMD at Precision Electronics Ltd took the podium next. Known to be an

articulate and captivating orator, Shri Kanodia presented the various challenges facing MSMEs

in the defence sector in a manner that kept the audience thoroughly engaged.

Dr. Shubha V. Technical and Business Consultant and Chief Scientist (retd.) at CSIR-NAL

informed the audience about the various advances in R&D happening in India. Dr. Shubha

explained that being a primarily research oriented laboratory, NAL had developed a wide range

of solutions for the defence sector, but did not have either the mandate or the resources to

directly sell them in the market. To this end, she exhorted the MSMEs to partner with institutions

like NAL to enable indigenous R&D to become more widely acceptable in the market. Dr.

Shubha lamented the fact despite possessing the best scientific talent and despite being home to

some of the most groundbreaking research in science and technology, there is still a widespread

belief that Indian products are inferior to their western counterparts in terms of quality and

performance. Dr. Shubha assured the audience that institutions like NAL were more than capable

of providing the industry with the highest quality systems with performance and precision

benchmarks comparable to or higher than their foreign counterparts. Stressing the need for a

change in the policy framework to enable domestic innovators to compete at par with foreign

vendors, Dr. Shubha cited the example of DRISHTI – an indigenous visibility measurement

system developed by NAL that was unable to compete with similar foreign made designs despite

being a world class product, primarily due to a prohibitive policy environment that doesn’t

provide for a level playing field for domestic innovators.

The next session on “Akash Missile Programme and the Development of a Robust Industrial

Base” was chaired by the eminent journalist Dr. Anantha Krishnan M, inarguably the liveliest

session of the day with a high degree of audience participation. Taking an unconventional

approach to a topic of utmost gravity and complexity, Dr. Krishnan ensured that the audience

could understand the various nuances of the insights shared by the very eminent speakers in this

session. Key speakers in this session included Padma Shree Dr. Prahlada (Former Distinguished

Scientist and Chief Controller, DRDO), Shri G. Chandramouli (Program Director, Akash Missile

Program), Shri V.V. Parlikar (Director RD&E(E)), SmtHemlatha K (GM Strategic Planning at

BEL), Prof PM Soundarajan (NIAS), Shri Rahul Chaudhry (Chairman of DIIA and CEO of

Tata Power SED) and Cmde. Mukesh Bhargava (VP at L&T Heavy Engineering). The

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discussions in the session brought out the need for greater public-private partnership in the

development of strategic missile systems to ensure that the Make in India initiative is

implemented in letter and spirit. The immense potential for economic development through job

creation that can be unlocked if greater indigenization in introduced in the ecosystem of strategic

missile development was also highlighted by the eminent panaelists.

The final session of the day was titled “Opportunities for Industry in Aersopace and Defence”

and was commenced by Dr. Rajeev Gowda, Member of Parliament and Professor at IIM-

Bangalore, in his capacity as the Chair. Col JP Uniyal from BrahMos Aerospace, Mr. SK Tandon

from HAL, Dr. Kanwarjit Singh from Tejas Networks, Prof P Srikumar from NIAS and Shri

JitnedraJadhav from NAL were the speakers.

Starting off the session, Col JP Uniyal, (Director Business Development & Product Support),

BrahMos Aerospace spoke on the topic Building a Strong Vendor Base – “The BrahMos

Experience”.

Shri S.K. Tandon, GM(IMM) at HAL gave a detailed presentation on Opportunities for

MSMEs with HAL in which listed many of the vendors of HAL who have emerged as valued

suppliers for HALs keystone projects like LCA and Su-30 MKI. Mr. Tandon also explained in

detail about the tendering process followed by HAL and the specifications that MSMEs must

adhere to while bidding for orders from HAL. Mr. Tandon also elaborated on HALs dedicated

policy to encourage MSMEs and startups, the various opportunities for business that vendors can

explore with HAL and the expectations that HAL has from its vendors in terms of product

quality, delivery timelines, pricing and traceability through documentation.

Professor P. Srikumar, NIAS gave a talk on “Value Addition in the Supply Chain – How Indian

Industry Has Been Missing Out”

Dr.Kanwarjit Singh, Vice President (Technology) of Tejas Networks spoke on “Scaling Up an

MSME – The Tejas Experience”. Mr. Singh emphasized the importance of scaling up to the

global level for MSMEs and startups in the aerospace and defence sector. Mr. Singh advised that

the most effective way of achieving this would be via setting up companies through the Public

Private Partnership model (PPP) and setting targets for them in terms of export volumes and

products which would be published annually and tracked publicly. Additionally the government

should make indigenization targets public, while all DPSUs and OFBs should be mandated to

show the percentage of foreign sourcing in their balance sheets. Measures like these, Mr. Singh

argued would ensure not just greater indigenization but a vibrant and thriving aerospace and

defence industry capable of matching up to global standards.

Shri Jitendra J. Jadhav, Director, CSIR-NAL spoke on Opportunities for MSMEs with CSIR-

NAL.

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The concluding remarks were presented by Shri Rahul Chaudhry and Cmde. Mukesh Bhargava

in which they thanked the distinguished speakers as well as the gathered audience for their

valuable time in making the DIIA Regional Activator Bengaluru a grand success.

Outcomes

The following outcomes have been achieved in the immediate term:

● Critical Feedback and Support from the Industry – Various suggestions were

received from the representatives of the industry present during their interaction with the

panelists and speakers. These invaluable proposals have been captured in this report’s

recommendations. The prime thrust of the MSME members was the tierization and equal

payment terms.

● Significant Increase in Membership - Close to 70 new members have joined DIIA in

the follow up to, and in the aftermath of the DIIA Regional Activator Bengaluru. This

figure is in sync with the unofficial target that the organization had set for itself while

planning for the even

● Countrywide Media Coverage – The DIIA Regional Activator Bengaluru and the issues

of self-reliance and indigenization raised at the forum were covered by almost all leading

dailies including The Hindu, Deccan Herald, Deccan Chronicle, The New Indian

Express, DNA, etc. Additionally, live coverage of the event was shared in video as well

as text snippets via the social media. There was a significant rise in the engagement of

DIIA’s content on various social media platforms, such that DIIA acquired a larger

following for the issues it raised at the forum.

Policy Recommendations

Following the daylong interactions between experts from various fields and the MSME

representatives who participated in the seminar, a number of policy suggestions emerged. These

are summarized below:

Tierization of the industry by a ‘Market Maker’ MoD

The Ministry of Defence, in its role as a facilitator and financier of all the procurement needs of

India’s defence establishment, guides itself by the Defence Procurement Procedure. As the single

buyer for Defence products and services, Ministry of Defence requires a transparent procedure

that makes the single-buyer market work by a set rules and avoid corruption. However, in a

strategic sector such as Defence and High-Technology, the Ministry of Defence, has dual goals –

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transparency in procurements as well as development of robust defence industrial base. Being the

only buyer in this market, MoD’s actions or the lack of them, can make or break the defence

industry of our country. Therefore, realizing the special significance of defence industry as a

strategic sector that is as important as the armed forces in our nation’s defence, MoD needs to act

and do everything possible to strengthen the defence industry in India. As far as this latter goal is

concerned, the Ministry of Defence has to act like a ‘Market Maker’ and not just a consumer in

the market. As the Market Maker, the MoD needs to facilitate the development of a tierized

defence industry that has industrial units of all scales and strengths, working together to develop

innovative and indigenous defence and hi-tech solutions for the country.

A Tierized industry is vital to the development of a ‘Robust Defence Industrial Base’ as sought

under the Defence Production Policy (DPrP). The Government is promoting the Strategic

Partners (SP) Model that calls for the development of large vendors with in-house capabilities.

However, such vertical integration would lead to an industrial ghettoization of small vendors – a

situation where small vendors would have no space in the market and would die out of sheer lack

of orders. The demise of such SMEs would also take away valuable capabilities from our

industry. SMEs are at the forefront of indigenization and innovation as they understand the

nuances of the niche products/technologies they deal with on a day to day basis. Depending on

SPs and eradicating the SMEs is believing in a mindset that is vestigial of the socialist model of

economy with central planning and large public sector companies with no private sector

participation. This model has failed in the past and the spirit on 1991 reforms allowed us to truly

understand our potential when the private and the public sector work together. A similar mindset

is required to nurture the MSMEs and cultivate a robust Defence Industrial Base. The Tierization

of the industry would create the necessary hygiene to grow industries which can deliver

indigenously at the component level as well as the level of systems of systems engineering. Our

recommendations for the rapid Tierization of the Industry are as follows:

Back to Back Payment Terms from DPSUs-

Cost of capital is very high in India and private companies often face the problem of maintaining

cash flows due to erratic payment policies followed by DPSUs. DPSUs will have to be instructed

to provide payments terms as received from the government so that the entire industry can

benefit from the same industry friendly payment terms that the government has envisaged.

Additionally, alternate provision should be made for financial instruments such as Bank

Guarantee (BG) etc. that are cost prohibitive for the startups and the SMEs, so that small scale

players can participate and grow in the market without fear of dealing with cash flow problems

vital to a new business and highly prohibitive in a high-cost of capital environment.

Moving away from International Benchmarks for Prices

Foreign OEMs sell products in the export market on marginal costs. Their business reality is

such that they can design, develop and produce products at massive upfront investments but can

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recover all their costs by selling the equipment to their home government. Therefore, by the time

the export of the technology/equipment is allowed by the home government, all development and

production costs have already been offset and any future sales can be conducted on the marginal

price of producing just another unit of the equipment with zero costs for design, development,

and production setup. Since the marginal costs do not include the initial investment into the

design, development and set-up of production facilities, the costs of producing and selling export

items are lower than the average cost of procurement that the home country pays. Hence, the

comparison of the average costs of indigenous products being designed, developed and produced

in India against the marginal costs of exports by the Foreign OEMs is an exercise against the

understanding of basic economics.

Indian products should be favored on price point against imports if the policy objective of the

government is to indeed achieve ‘Strategic Self-Reliance in Defence’. Though running counter to

the simple business logic applied by our MoD, such a policy is, in our view the only way in

which the Make in India policy can truly be implemented in letter and spirit.

A policy of cultivating a large vendor base of MSMEs needs to be followed vigorously. It

would have the following advantages:

▪ Supporting MSMEs helps mitigate the risk imposed by the complexity and scale of the

advanced defence systems development, by spreading it across the entire supply chain

instead of accumulating it within one company.

▪ Small and medium enterprises providing components for complex systems such as

airplanes and fighter jets are best suited for innovating the next generation of that

product. Since these SMEs have limited scale, they only take orders for a few products

and end up specializing in those products by repeat orders instead of becoming

generalists. This is the strategy followed by all major systems of systems engineering

companies in the world.

Product Strategy needs to be adopted to energize the MSME ecosystem in the defence

sector. The DRDO can act as technology partner and incubator for MSMEs looking to

innovate in the field of defence technology. The expectation should be work together for the

development of concrete products. DRDO would partially fund, mentor and manage the

D&D projects along with the industry.

A change in mindset towards greater appreciation of and eradication of distrust for the

indigenously developed products is needed prior to, or at least in synchrony with any real

policy shift towards Make in India. For instance the practice of allowing foreign companies

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to bid for contracts with self-certification while requiring Indian companies to get approvals

of users is a classic case of using double standards to deliberately hamstring Indian vendors.

Such policies might have their origins in genuine concerns about the quality of Indian

products many decades ago, but in the present circumstances when Indian R&D is at par with

the best in the world, such policies are anachronistic and must be done away with at the

earliest.

Order amendment procedures of the MoD need to be streamlined in line with the

changing times. Too frequently in the past situations have arisen where contracts have been

entered into with foreign vendors that have been inordinately delayed or have turned out to

be of lower quality than expected. In such a situation if an Indian vendor can be found that

can deliver the same product at the same or even at marginally higher prices, and if the end if

the end user has provided their approval for the same, the MoD must facilitate the

amendment of the order so that Indian firms may benefit and Make in India may truly be

implemented in letter and spirit.

Progressive Customs Duty – At present our custom duty advantage is to the tune of 10%.

This does not fully support the spirit of Make in India as it does not make sense to impose the

same quantum of duty on fully built systems as well as smaller components. A progressive

customs duty that better reflects the requirements of the sector is the need of the hour. A

pyramidal, progressive customs duty structure would inhibit the import of completely built

systems into India, be more encouraging of local manufacture and support greater value

addition by being most lenient on the import of components that local producers could use

for indigenous design, development and production. For instance we can have a structure that

imposes a duty of 20% on the import of complete systems, 10% on sub-systems, and 5% on

components.

Cost of R&D Infrastructure – R&D is often the single largest component of a new firm’s

expenses, besides being time consuming. Defence and aerospace being a high-tech industry

where the technological landscape changes very fast, and even the smallest advancements in

technology can have a critical impact on the nation’s security, it is critical for firms to invest

in the best R&D infrastructure. However for SMEs and startups, the high costs can be

prohibitive and consequently, can stifle innovation. The government should consider

absorbing the cost of setting up R&D infrastructure by a firm during the procurement process

in order to promote innovation in the defence and aerospace sector.

Conclusion

The Government has been bold in its articulation of the policy goals – Indigenization, Self-

Reliance, and Design, Develop and Make in India. Now it needs to act upon its intentions by

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realizing and spreading mindset change in the entire governmental hierarchy – MoD is not just a

customer in the market, but also the Maker of the Market. If MoD wants to create and sustain

Defence Industrial Base to make India Self-Reliant against all security threats, then the Ministry

has to pay the premium of setting up of the industry, provide incentives for companies engaging

in R&D, not buy the cheaper foreign products that are priced at the marginal cost rather than the

full cost of production, adopt Life Cycle Costing in its decision making and impose progressive

customs duty structures on imports of complete systems.

The DIIA Regional Activator Event Bengaluru was able to provide the Alliance for Self-

Reliance with a critical momentum that bodes well for the development of a robust Defence

Industrial Base (DIB) in the country. DIIA is aptly set to be the coalition of academia, industry

and policy personal that could reinforce the policy principles of strategic self-reliance and usher

in the requisite collective action to see through that the changes imagined at the highest level of

governance are followed through in letter and spirit at even the last step of impact.