The coronavirus crisis-led lockdown could wipe out about 40% of the defence sector’s micro, small and medium enterprises within three months unless a support package is put in place by the government, an Ernst & Young study shows. The study, which involved discussions with Indian defence industry representatives, says that a complete revival of all MSMEs is expected to take a year and the cost of products could go up marginally when production is resumed.
ET has a copy of the report which accountancy firm Ernst & Young shared with industry representatives. “It is anticipated that due to complete halt of all activities, the problems of cash flow, raw material prices and logistics problems will arise after lockdown is over,” the study by Ernst & Young, India, says. “It appears that complete revival of any MSME shall require at least 6-12 months.” There is concern that input cost for defence equipment may rise and suppliers of raw materials have already started reaching out due to a ‘low supply, high demand situation’ as imports have been hit by the lockdown as well.
The study says there’s concern among manufacturers that defence modernisation may be impacted after the lockdown is lifted as budgets are stretched, and adds that there should be no reduction in capital procurement, even if training activities have to be tapered in the coming months. According to the study, the industry wants the government – which is the sole buyer of defence products to be proactive in the coming months by placing orders that are already in the pipeline and making necessary payments on time.
“As far as the issue of financial resources for procurement from industry is concerned, it is important to realise a way so that military modernisation doesn’t not take a hit. Capital defence budget consists not only of modernisation, but also land, construction work, etc. The 20% cap should be enforced on the budget outlay for such segments without hampering military modernisation,” the report says, alluding to the spending curbs announced by the government earlier in the month.