Defence Industry

Challenges of Setting up Defence Corridor for Make in India
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Issue Vol. 33.2 Apr-Jun 2018 | Date : 17 May , 2018

Defence manufacturing in India is undergoing a significant change to achieve self-reliance in defence equipment. More and more AONs have been issued under Make India, Buy and Make India Categorization. The quantum of Offset obligations under defence contracts are also increasing. Offset obligations in defence contracts open up a wide array of opportunities for Indian entities mainly for MSMEs and start-ups interested in the defence sector. With large no of big ticket acquisitions in the pipe line and ‘Make in India’ Projects, there are huge opportunities in the Defence Sector.

A common facet of the modern defence industry is the requirement to work collaboratively with different companies, often across separate territories, to produce a platform and maintain it throughout its lifetime.

While the new Greenfield clusters had led to SEZs, a combination of green field and brown field option has led to NIMZs, whereas purely Brownfield options have led to emergence of concept of Defence Corridor. Defence corridors are the latest strategy to address ‘Make in India’. It is important to look at the evolution of these concepts so that the difficulties in implementation of the concepts leading to newer form can be appreciated. The ultimate test of success of any of the models would lie in addressing the concern of ‘Make in India’ in addressing the concern of industry, attracting investments, generating employments, creating contemporary technologies, aiding the growth of manufacturing sector and making India Self-reliant. This paper discusses unique need of the Defence Sector, tracks the evolution of the concept of Defence Corridors from SEZs, NIMZs, Industrial Corridors and examines to the extent Defence Corridors can address the ‘Make in India’ and further makes suggestions to make them an effective tools for ‘Make in India’.

The key to ‘‘Make in India’’ success is to put in place supporting eco-system through quality infrastructure, getting technology and investments from abroad and facilitating development of technologies for self reliance in Defence. Cluster-based economic development is premised on the idea that a geographic region, and the businesses that it contains, can compete more effectively when everyone in the region works together to the common benefit of all the stakeholders. Participation in a cluster enables firms to operate more productively, as have better access to resources such as information, ideas, technology, suppliers, and markets than they would have if they were operating in isolation. The cluster theory applied to a specific geographic area with policy intervention for liberal Tax laws has taken various forms such as SEZs, NIMZs, Industrial Corridors and Defence Industrial Corridors with primary objectives of creating a better eco-system for manufacturing.

While the new Greenfield clusters had led to Special Economic Zones (SEZs), a combination of green field and brown field option has led to National Investment Manufacturing Zones (NMIZs), whereas purely Brownfield options has led to emergence of concept of Defence Corridor. This paper discusses unique need of the Defence Sector, tracks the evolution of the concept of Defence Corridors from SEZs, NIMZs, Industrial Corridors and examines to the extent Defence Corridors can address the ‘Make in India’.

…any modern defence platform is multi-disciplinary, single players do not find themselves competent across all the domains, they are dependent on supply chain for complimentary investments.

Industry Clusters and Defence

Industry clusters, which are groups of geographically proximate firms in the same industry, are a remarkable feature of the geography of economic activity (Krugman, 1991). Firms in a cluster gain many performance advantages (Doeringer & Terkla, 1995) due to the external economies of scale (Fujita, Krugman, & Venables, 2000; Krugman, 1991); ease of access to information; proximity to specialized vendors and customers; and reduced transaction costs, among others (Porter, 1998, 2000). In a cluster, firms have free access to local information and networks due to their physical proximity (Gertler, 1995, 2003).

Marseille, Marignane, specializing in manufacturing of aircraft parts and helicopter design is worth mentioning. This southern hub of France employs a large number of the locals in its high-tech and design houses, aerospace simulator development and training centres. In Malaysia, maritime cluster in Lumut and Manjung, Perak has attracted around 200 maritime industries specializing in various capabilities in the shipping and related industries with a naval academy to train the Navy and industry on maritime technology and STRIDE, the government’s defence research organisation, to undertake research in the maritime sector.

Cluster development leading to competitive advantage for the specific industry requires collaboration for adoption of new technology, research, training, partnership, Govt Support for Infrastructure, triggering the development of clusters over a number of years. The various ways in which cluster activity is catalyzed, is by creating specific investment zones and directing various policy and infrastructure initiatives like tax breaks, better common infrastructure etc. In India, various concepts like SEZs, NIMZs and Industrial Corridors are translation of cluster concept.

Uniqueness of Defence Sectoral Hub

Defence is not a single homogenous sector, but a heterogeneous sector comprising interplay of various facets of technology. Moreover, most of the players have their foot prints in both civilian market and defence market. Thus, specific targeting of the Defence Sector is a difficult proposition. Considering the facts that, any modern defence platform is multi-disciplinary, single players do not find themselves competent across all the domains, they are dependent on supply chain for complimentary investments.

As technology obsolescence is very fast in Defence Sector, the model of development for the future need to factor in how industry can adapt to Industry 4.0 standards.

A common facet of the modern defence industry is the requirement to work collaboratively with different companies, often across separate territories, to produce a platform and maintain it throughout its lifetime. All said and done, User drives the acquisition process, who defines his requirement. The Designer knows the trade-offs in the requirements and knows, what is achievable. The manufacturer only knows whether such design is scalable to a high volume of production. Thus, different organs must interact continuously to find a solution without knowing which road it should take. Co-location of different stakeholders makes the collaboration easy through many of the informal networks that develop around such clusters.

Challenges of ‘Make in India’ for Defence:

Defence manufacturing in India is undergoing a significant change to achieve self-reliance in defence equipment. More and more AONs have been issued under Make India, Buy and Make India Categorization. The quantum of Offset obligations under defence contracts are also increasing. Offset obligations in defence contracts open up a wide array of opportunities for Indian entities mainly for MSMEs and start-ups interested in the defence sector. With large no of big ticket acquisitions in the pipe line and ‘Make in India’ Projects, there are huge opportunities in the Defence Sector.

Few countries have been able to develop an independent, local defence industry. Most lack the complex, interdependent capabilities in research, industry and organization needed to design and produce state-of-the-art defense materiel. As a result, they spend significant budget to import equipment or assemble under license. Thus ‘Make-in-India’ dream to be successful must address the technology, skill and infrastructure issues. The first challenge development of technology is in advanced electronics and materials, which cut across all the verticals. The second challenge regarding development of technology is relative immaturity of Material Science to use lighter and stronger intelligent material. The answer to development of technology in advanced electronics and material science lies in the synergy between association of industry and academia with defence research establishments, with technology inputs through offsets to bridge the gap.

The third challenge is around talent availability for the industry. The industry needs engineers with a background in mechatronics (mechanical and electronic engineering), composites (combination and strength of materials) and system integration knowledge. Few Indian universities though offer courses tailor made for the defence and aerospace sector (Mithel, 2012). “One of the big challenges for the realization of ‘Make in India’ vision for the sector is the availability, at efficient price points, of globally comparable industrial and engineering talent with experience in the sector,” said Rahul Gangal, partner, Aerospace and Defence, Roland Berger Strategy Consultants (Sanjai, 2015). The current sources of supply of talent are largely from the defence PSUs and user services. Neither they are not adequate in quantity nor in terms of skills and quality, considering revolution in technologies. The answer to this issue is simple but not short-term. It lies in building enough engineering and research capability in our institutions.

Exports growth of SEZs in India remained fluctuating over the period of time, yet exports from SEZs have witnessed a significant rise of around 22 fold from Rs. 22000 crores in 2005-2006 to Rs. 5 lakh crores in 2013-14

The fourth challenge is meeting expectations of the industry, who not only wants faster clearance of their proposals for setting up or shifting their bases, but also tax benefits like in SEZ, faster decision making in awarding long term contracts, support in building their capability and faster inspection and payments for supplies to Defence.

As technology obsolescence is very fast in Defence Sector, the model of development for the future need to factor in how industry can adapt to Industry 4.0 standards.

Special Economic Zones (SEZ)

A SEZ is a geographical region that has economic laws that are more liberal than a country’s typical economic laws. An SEZ is intended to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. By offering privileged terms, SEZs attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure. Units situated are deemed to be outside the customs territory of India. Therefore, goods and services coming into SEZs from the domestic tariff area (DTA) are treated as exports from India, while goods and services rendered from the SEZ to the DTA are treated as imports into India.

The Infrastructure support given to SEZs is of two types; first by Facilitating internal functioning of SEZs (power generation plants and distribution network, internal water supply, sanitation and sewerage, and internal roads) with direct implications on productivity; and second by linking SEZs with non-SEZs through a supply chain (railway tracks, roads and bridges, airport facilities, telephone lines and telecom network).

The maximum number of SEZs are in IT/ITES Sector, Biotech, Textiles, Pharma and Engineering (Ediga, 2015). Exports growth of SEZs in India remained fluctuating over the period of time, yet exports from SEZs have witnessed a significant rise of around 22 fold from Rs. 22000 crores in 2005-2006 to Rs. 5 lakh crores in 2013-14 ( Sharma et al).

The Delhi-Mumbai Industrial Corridor is a mega infra-structure project of USD 90 billion (Rs. 4,23,000 crore)…

National Investment and Manufacturing Zones (NIMZ)

NIMZs are one of the important instruments of the National Manufacturing Policy (2011), which are a combination of production units, public utilities, logistics, environmental protection mechanisms residential areas and administrative services. It would have; Processing area: where the manufacturing facilities, along with supply chain and infrastructure logistics and other services will be located, and a Non-processing area, where include residential, commercial and other social and institutional infrastructure will be located.

The processing area may include one or more Special Economic Zones, Industrial Parks & Warehousing Zones, Export Oriented Units, DTA units duly notified under the relevant Central or State legislation or policy. Essentially, NIMZs seeks to have multiple industries located closely so that they can benefit from co-location, further aided by infrastructure and friendly business regulations to lower the cost of production. These NIMZs, with minimum area of 5000 hectares, are positioned as “self-governing and autonomous bodies”.

As per new guidelines by DIPP, NIMZ units are exempted from capital gains tax, Capital gains tax on sale of plant and machinery subject to proceeds being reinvested in NIMZ plant. NIMZs are eligible for Viability Gap Funding (VGF) subject to cap of 20% of the project cost. NIMZs will be assisted in getting long-term soft loans and will be allowed to access ECBs for internal infra development.

Economic corridors

Economic corridors are meant to attract investment and generate economic activities within a contiguous region, on the foundation of an efficient transportation system. They are meant to provide two important inputs for competitiveness: lower distribution costs and high-quality real estate. The corridor approach for industrial development primarily takes advantage of the existence of proven, inherent and underutilized economic development potential within the region. The strategy of an industrial corridor is thus intended to develop a sound industrial base, served by competitive infrastructure as a prerequisite for attracting investments into export oriented industries and manufacturing.

Most of the clusters have already emerged as major towns and are facing congestion and high levels of pollution and they need immediate boost of investment to remain competitive.

Industrial corridors

Five industrial corridor projects across India have been identified, planned and launched by the Government of India. These corridors are spread across India, with strategic focus on inclusive development to provide an impetus to industrialization and planned urbanization. In each of these corridors, manufacturing will be a key economic driver and these projects are seen as critical in raising the share of manufacturing. Smart Industrial Cities are being developed along the Corridors. These cities are being developed to integrate the new workforce that will power manufacturing and will lead to planned urbanization.

The Delhi-Mumbai Economic Corridor and NMIZs:

The Delhi-Mumbai Industrial Corridor is a mega infra-structure project of USD 90 billion (Rs. 4,23,000 crore) with financial & technical support from Japan, covering an overall length of 1483 KMs between the political capital and the business capital of India, i.e. Delhi and Mumbai. This project incorporates 09 Mega Industrial zones of about 200-250 sq. km., high speed freight line, three ports, and six airports, a six-lane intersection-free expressway connecting Mumbai & Delhi and a 4000 MW power plant. Several industrial estates, clusters and industrial hubs are planned to be developed along this corridor to attract more foreign investment. Funds for the projects are from the Indian government, Japanese loans, investment by Japanese firms and through Japan depository receipts issued by Indian companies.

NIMZs in other Industrial Corridors:

Fourteen NIMZs outside the DMIC region have also been given in-principle approval. Industrial corridors and NIMZ, touted as the harbinger of industrial development in the country can make suitable impact on economic growth, subject to robustness and responsiveness in their design and implementation in right earnest bringing all stakeholders under one umbrella.

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Most of the clusters have already emerged as major towns and are facing congestion and high levels of pollution and they need immediate boost of investment to remain competitive. Existing clusters — an outcome of market forces despite policy and regulatory constraints — are in a better position to exploit the advantages of better infrastructure, technological up gradation, skill availability, and regulatory and tax simplifications. The focus is on removing complex infrastructure bottlenecks and implementing challenging reforms. Projects such as dedicated freight corridors should connect existing clusters through a dedicated rail line rather than utilising the existing congested passenger heavy railway network.

Defence industrial production corridors

A defence corridor refers to a route or a path along which domestic productions of defence equipment by public sector, private sector and MSMEs are lined up to enhance the operational capability of the defence forces. Budget 2018-19 proposes to develop two defence industrial production corridors, the locations of these corridors are strategically decided, taking into account a natural ecosystem. The first corridor plans to link Chennai and Bengaluru and will pass through Coimbatore and several other industrial clusters. The Southern corridor will extend from Chennai, Hosur, Coimbatore, Salem and Tiruchi. MOD has initiated a consultation exercise with the industry and MSMEs, at the five nodal points in the Sothern Corridor. A Detailed Project Report (DPR) will be prepared by a top consultancy firm for the ‘Tamil Nadu Defence Quad’. The second corridor will be in Bundelkhand — a region divided between Uttar Pradesh and Madhya Pradesh. As per news report, this will be – a Rs 20,000-crore defence industrial production corridor, which will generate 2,50,000 jobs.

Since FDI in defence calls for deeper scrutiny, India can start promoting FDI in non-defence R&D and then leverage on the technologies for defence applications.

As most of the design and prototype building centers are concentrated in Bengaluru and Chennai with a concentration of DPSUs and DRDO laboratories, it is logical and strategic to have the first brown field corridor. However, the intention behind the second corridor is the regional development. Thus, the first corridor compared to the second will benefit out of the existing industries, academic and research laboratories around the same.

Suggestions

No country can excel in all the areas of Defence Manufacturing, giving constraints of its resources. India should seek global leadership in only select areas that are “Critical-to-Security”. The Dual-use Application Program(DuAP) in US and Civil–Military Integration Promotion Department (CMIPD) in China have become successful models for civil-military integration. Since FDI in defence calls for deeper scrutiny, India can start promoting FDI in non-defence R&D and then leverage on the technologies for defence applications.

All the existing players need to have a presence in the Defence Corridors, from the USERs, QA Establishments, DPSUs and OFBs, DRDO lab. If they cannot relocate, they can have suitable outreach facilities with suitable empowerment to the officers manning then, so that local level coordinating decisions can be taken without being sent upwards for validation of concept, for formation of consortium for Mission-Mode Projects. The two centers of Excellence proposed, one for Electronics, the other for Advance Materials need to be set up in the Corridor. Special Industry 4.0 oriented training centers can be put up to support the industry in adoption of new standard. Special support should be given for Robotics, artificial Intelligence, Cyber Physical Systems, Data and Internet Security.

Corridors can assist in adoption of Lean Manufacturing to reduce the waste at various stages of the supply chain by adoption of Kaizen, TQM and Six Sigma etc. Necessary mechanism to access the Consultants on easy terms can be coordinated. The operational capability of the Industry can be enhanced by complimentary investment from the Government by using the resources from SME exchange.

Defence Corridors is a welcome step by the Government. To ensure presence of all stakeholders, the CEO of SPV should be allowed to provide preferential treatment to the units outside the corridor to relocate in the corridor.

Small steps like allowing High quality Arbitration and Adjudication Mechanisms, Industrial Courts to resolve contractual issues in fast track mode, CEO of the Special Purpose Vehicle, empowered to give the construction Permit in the cluster; effectively strengthening single window system through IT integration would go a long way in addressing the pending burning issues to improve rank in ‘Ease of Doing Business’.

Corridors can assist in setting up Credit Rating System. They should clearly communicate what they are looking for, and what information SMEs can provide to ensure that the rating is favorable. This would enable them to tap loans or equity investments from the SME Exchange. A graduated level of Charter membership of the Corridor can be given, given unit’s contribution to Exports, R&D, Turnover, so that graded system of benefits can be given by the CEO with his discretionary powers without being pushed upwards. Corridors can assist the SMEs connect to social venture capital funds, mentoring networks, and entrepreneurship groups. Corridors can put up effective single window system by integration of its IT architecture.

Corridors can assist the SMEs to adopt innovative information and communication technologies on a large scale like Software as a Service (SaaS) and Infrastructure as a Service (IaaS) to achieve cost-effective, improved versions of existing products on pay to use service.

Corridors can assist SMEs for Co-Creation of products and marketing. For example, IT Company can work with an engineering company and develops software to track all information. This software once it passes the rigors of testing and can be made available without unnecessary investment in in-house capability and research.

Corridors can set up Design bureau in line with Russia, where continuum synergy is maintained between scientific institutes, design bureaus, and in-house industrial research units. Scientific institutes are the main source of new ideas for products and processes in the Russia, involved in fundamental research. Design bureaus were differentiated as those that designed structures or designed new products and processes, which begin their work after receiving the initial research and development phase from scientific institutes. Design bureaus transmit working drawings and other technical documents for prototype testing or directly to the end-user production facility to an experimental factory. The large scale system integrators like OFB and DPSUs can set up their design bureaus, assisting SMEs to develop new products.

Conclusion

With globalization, there is an urgent need of a dynamic and self-sustaining culture of innovation and cluster based approach for the development of MSMEs. In the “Knowledge-Based Economy”, Competitive advantage is less derived from access to physical resources and more from the ability of organizations and societies to generate ideas and to translate them into economic and social value. The innovation potential can be significantly enhanced with clusters, as seen in Silicon Valley, a hot bed of innovation. The density of the starts up makes it entrepreneurial. The cluster allows seamless flow of people, ideas and capital making it hotbed of innovation. Such a Defence Corridor with academia industry hand in hand would promote collective learning; ensure steady supply of the skilled manpower. Such cluster’s dense social networks and open labour markets would encourage experimentation and entrepreneurship.

In tune with the trend for Smart manufacturing, Defence Corridors can create a virtual information network to link all stakeholders.

Investment required for creating a new cluster is pretty high. It is not known whether there will be FDI flow resulting in new facility, shifting of existing facility under large industry to this hub and finally MSMEs shifting to this hub. Thus, it would be more prudent to improve existing clusters rather than creating new ones. Thus, Defence Corridors is a welcome step by the Government. To ensure presence of all stakeholders, the CEO of SPV should be allowed to provide preferential treatment to the units outside the corridor to relocate in the corridor.

Defence Corridors to be effective must address the issues being faced by the SMEs, such as access to finance, market and knowledge. Corridors can assist in setting up Credit Rating System; enable them to access capital through SME exchange and assist the SMEs connect to social venture capital funds, mentoring networks, and entrepreneurship groups. Corridors can assist the SMEs to adopt like Software as a Service (SaaS) and Infrastructure as a Service (IaaS) through cloud computing to enable access to the technologies. Corridors can assist in adoption of Lean Manufacturing to improve their operational capability. Corridors can set up Design bureau by the large scale system integrators like OFB and DPSUs, assisting SMEs to develop new products. Corridors can facilitate testing, IP services and improve the quality of the infrastructure by better communication network.

The benefits proposed to be made available for NIMZ, such as job loss policy, expeditious approvals and clearances, ‘green’ incentives, etc. should be extended to Defence Corridors. In tune with the trend for Smart manufacturing, Defence Corridors can create a virtual information network to link all stakeholders. Defence Corridors can form the important link between Industries and ‘Make in India’ mission, not only through formal mechanism of co-location and delivery of world-class infrastructure and business services, but through informal networking of stakeholders, industries leading to unlocking of innovation potential of Indian Industries.

References: 

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Dr JP Dash & Devinder Kumar

Dr JP Dash is an IOFS Officer belonging the Indian Ordnance factories and is current Addl General Manager at Ordnance Factory Khamaria. Devinder Kumar, an IOFS Officer belonging the Indian Ordnance factories and is currently posted as Joint General Manager in Ordnance Factory, Medak.

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