Indian Defence Review

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.

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’.

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.

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.

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).

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.

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.

Click to buy (Vol. 33.2 Apr-Jun 2018)

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.