India Aerospace and Defence Sector: Challenges faced by Start-ups

Mayank Maheshwari, Analyst, CMR SemiTronics Practice

Mayank Maheshwari, Analyst, CMR SemiTronics Practice

The India aerospace and defence sector has seen a steep growth in the past decade, with government capital spending quadrupling from US$ 3 billion in 2000 to US$ 12.2 billion in 2010. India’s national defence budget, which is US$ 37.33 billion for the current fiscal year (FY 2014-15), is expected to grow to US$ 65.4 billion by 2020, making India the fourth biggest defence spender in the world.

There are many factors impacting the aerospace and defence sector with several policies to provide impetus and act as enablers but certain changes and requirements exist.

As the new government at the Centre has announced the ‘Make in India’ programme, support for the India ESDM ecosystem to take a leap towards design-led manufacturing of electronic modules to serve the defence, internal security and aerospace segments is poised to grow. Policy reforms are a clear indication of the government’s earnest desire to promote India’s aerospace and defence industry.

Industry players, on their part, have appreciated these moves, but their main contention is that if the government really wishes to promote the defence sector, they need to revamp some of the tax and regulatory policies applicable to the sector. This has been and remains a key demand of the industry.

Some of the challenges that were highlighted by aerospace and defence start-ups include:

  • Funding: This remains a key challenge for any start-up that plans to raise funding for their vision. Many hurdles are encountered even if an entrepreneur wishes to source seed capital.
  • Domestic Selling: It was highlighted that, traditionally the government is keen to procure products from outside India. There is low preference to domestic players, especially the start-ups. However, there are instances where the solution sold by a foreign company in India has several components manufactured out of India by these start-ups.  For instance, some defense companies based out of Israel are getting several of their key components  manufactured out of India and then sells the entire product to defense agencies in the country.
  • Domestic versus Foreign Players: Domestic manufacturers have to adhere to the country’s strict tax policies; on the other hand, taxation rules are much more simplified for foreign players.

Government of India can overcome these challenges by assigning an oversight role to DRDO to develop a process for selection of products from domestic manufacturers as well as keep tabs on all those companies that export their products to other countries. By maintaining a standards-based rating mechanism, the government can start directly procuring suitable products from domestic manufacturers.

DRDO can prepare guidelines on the lines of the Directorate General of Supplies and Disposals (DGS&D) for providing Consultancy Services to manufacturers desirous of availing Rate Contract prices, finalising tender documents for their own procurement and providing quality assurance support. Such a system will help start-ups in the aerospace and defence sector prepare themselves to bid for tenders and to face competition from large domestic and international players. We at CyberMedia Research (CMR) can provide our expertise to DRDO in building up a set of guidelines so that India’s ESDM start-ups can become active participants in the country’s aerospace and defence ecosystem.

Government can further nudge DRDO to provide a platform for registered start-ups to use their labs / infrastructure for product development, bringing new innovations to market, and help start-ups partner with established players to sustain their business operations in the open market.