Defence Industrial Corridors need focused government effort for growth

File Photo: India-Russia Joint Venture BrahMos missile during the Republic Day parade.

By Anurag Garg

Formation of Defence Industrial Corridors (DICs) is one of the most significant steps in pursuit of local capability development and capacity creation by the Indian government. DICs announced for states of Uttar Pradesh and Tamil Nadu can prove a boon for these states’ economy, just like the uptick that happens when a large automotive Original Equipment Manufacturer (OEM) sets up shop in any state and is typically followed by its supply chain.

Significant Aerospace and Defence (A&D) industrial capability exists today in states of Karnataka, Andhra Pradesh and Telangana, supported by the supply chains of key Defence Public Sector Undertakings playing the anchor role – which makes these states the preferred destinations for A&D companies in India and globally, when thinking of setting up operations.

However, none of these capability belts have been developed as a formal DIC. Hence, this announcement is of significance given Indian government’s intent towards driving DICs’ set-up and growth in a programme-managed fashion, rather than letting them grow at their own pace in a fragmented manner. This will also result in creation of lower volume but high quality of specialised jobs in those states, in turn, enabling these states to attract furthermore investments.

The foreign companies will benefit from coherence on where the government is promoting them to set up operations, and possible support with faster approvals and potential tax breaks or incentives, depending upon what the government may offer to attract foreign companies. The Indian industry will be able to capitalise on possible inflow of foreign anchor OEMs and Tier-1s, accessing whom is a challenge while operating in India, and may result in possible play in their global supply chain.

It is expected that formation of DICs will not only result in faster pace of indigenisation and enhanced quantum of local content, it will also energise the defence sector in India. To ensure that DICs energise the defence sector in India, it would be critical that there is some certainty of demand for any company setting up operations in these DICs, so that economic viability of the new operations is ensured. In addition, there must be minimal process steps and faster approvals to secure land and to start operations – ideally done from a single window.

Photo: The two Defence Industrial Corridors announced by the Indian government.

The logistical connectivity of DICs, and policy or regulatory structure must support the operations to drive domestic sales as well as exports in equal measure. For example, the government may think of doing away with import duties on critical A&D grade raw materials or equipment, even if the end product is supplied locally.

The government and industry must work in tandem to ensure that DICs emerge as a grand success. The government must not go ahead with the approach of just finding tenants for DICs, and rather must decide what strategic problem is to be solved via setting up of DICs. For example, facilitating set up of operations to locally manufacture A&D grade raw materials and electronics, which are typically imported, would do a great service to the intent of local manufacturing.

This will not be simple, as the government will also need to understand the current capabilities of each DICs’ ecosystem, to ascertain the primary role the DIC will play to solve these strategic problems, and the gap from the capabilities required to deliver these products or services.

Subsequently, the government must identify projects to improve the supporting infrastructure, supply chain services, Research and Development (R&D) infrastructure, and make necessary investments in this direction. Furthermore, the government must enable funding services, DIC governance and marketing, so that these DICs are jump started to be self-sustaining.

From the industry’s standpoint, it is critical to aim to build globally competitive capabilities, and to target India and global demand operating from DICs – this will ensure that the economic viability of the operations is supported by a wider addressable market base, beyond just addressing the Indian defence sector demand.

Having said all of this, there can be no better catalyst than faster pace of awarding big Make-in-India procurement orders, which will provide a lot of confidence to the industry to move fast towards setting up operations in these envisaged DICs.

(The writer is Director – Aerospace and Defence at PwC India)

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