Strengthening the defence value chain: How are MSMEs contributing?

India has made substantial progress towards Atmanirbharta in defence production, which has significantly enhanced overall output and exports. A remarkable development, what strikes me particularly is the MSME sector’s contribution in transforming the defence manufacturing landscape.

India’s continuous push for indigenisation is creating a favourable environment for small players to innovate, design and manufacture products and solutions for the defence sector. Today, MSMEs are actively participating in defence production, leading to a reduction in import dependency and a simultaneous boost in exports. The private sector’s share in defence production reached 22 per cent in FY24—highest in the last eight years.1 With the Government of India setting a defence production target of USD25 billion and an export target of USD5 billion by 20252, I believe further accelerating growth in the MSME sector will be crucial.

So, what’s driving this growth? Let’s take a look. Amidst these global vulnerabilities, India stands at a crossroads of opportunity.

A. Incentivising MSME participation

To attract start-ups and MSMEs in defence production, the government has introduced several incentivisation measures. For instance, in FY24, INR1,500 crore had been earmarked for start-ups and MSMEs from the total budget allocated for procurement through domestic private industries.³

B. Enhancing innovation through targeted schemes

To promote small businesses involved in innovation and design of defence products, several schemes—Innovation for Defence Excellence, Technical Development Fund and Make Project of Defence Acquisition Procedure 2020—are in place.

C. Integrating MSME into defence supply chains

To promote self-reliance and develop a conducive production ecosystem, the Department of Defence Production has designed a specific scheme to promote MSMEs in defence. Under this, various outreach programmes, in collaboration with industry associations, are conducted across the country, which aim to boost the overall visibility of small businesses and start-ups.

While the momentum is strong, there are certain challenges defence MSMEs encounter. For instance, difficulties in securing funding and inefficiencies in payment schedules hamper the smooth functioning of this sector. Currently, there are about 8,000 MSMEs in defence and the target is to double this figure.⁴ I believe that further introducing both fiscal and non-fiscal reforms to address issues, such as funding gaps and regulatory compliances, will help integrate more businesses in defence value chains.

With estimates suggesting that India’s defence sector holds a potential ordering opportunity of USD138 billion over the next 10 years⁵, further promoting and strengthening MSMEs in defence will be crucial.

^[1] Dashboard, Department of Defence Production, accessed on 24 June 2024
^[2] India’s Progress as a Defence Manufacturing Hub, India Foundation, 2 March 2022, accessed on 24 June 2024
^[3,4] Understanding MSMEs�� Role in Making India Atmanirbhar in Defence Production, News18, 4 October 2023, accessed on 24 June 2024
^[5] India’s Defence Sector has Opportunities for USD138 billion Over Next 10 Years, The Economic Times, 11 May 2024, accessed on 24 June 2024

Author

Neeraj Bansal

Partner and Head India Global

��㣨Leyu�� in India

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