The year 2020 will long be remembered for the pandemic which originated from Wuhan in China and spread across the world,causing death and devastation in its wake. SARS- CoV-2, the virus that causes the coronavirus disease (Covid-19), has led to the temporary closure of innumerable industries with resultant job losses and has had an extremely debilitating impact on the major economies of the world. The Indian economy, which was already under stress from a variety of causes, was also adversely impacted. It was in such a bleak environment, that Prime Minister Narendra Modi delivered his Independence Day address from the ramparts of the Red Fort, with a clarion call for ‘Atmanirbhar Bharat’. The address was a clear enunciation of the vision of the Prime Minister and the thrust of his government to rejuvenate the economy whilst tackling the pandemic and the security challenges that beset the nation from an expansionist China and an intransigent Pakistan, intent on continuing its proxy war against India, through support to terrorism.
The Prime Minister’s address infused a sense of hope amongst the Indian masses and gave a clear and positive message to the Indian corporate, both public and private sector, that the government was committed to an economic revival based on self-reliance. The call for ‘Atmanirbhar Bharat’ was not new and had been made earlier by the
Prime Minister, but its reiteration on Independence Day was a clear message to all, of his governments resolve to chart India through the present difficult times and on to a more prosperous future. This has had its impact in the defence sector too, where two initiatives are set to strengthen India’s defence industrial base. The first pertains to the corporatisation of the Ordnance Factory Board (OFB) and the second to a decision by the Ministry of Defence to place 101 items for the military on the negative list, which were till now being imported.
Role Of the Private Sector
India’s defence needs can no longer be met solely by the public sector undertakings, and increasingly, the private sector will have to be called upon to manufacture a large part of India’s defence requirements. One of the first initiatives of the Narendra Modi Government when the NDA won the 2014 elections was to launch the Make in India programme. This was a clear signal to optimism of the private sector to be vectors in achieving self-reliance in defence manufacturing. Make-in-India is a decisive and bold step towards attaining strategic autonomy. While the public sector has to date played a crucial role in catering to the needs of the security forces, it lacks the capacity to meet all of India’s defence needs. Even seven decades after independence, India remains highly dependent on imports.
*Maj. Gen. Dhruv C. Katoch is Editor, India Foundation Journal and Director, India Foundation.
Speaking at a function in Shillong on 28 September 2019, Defence Research and Development Organisation (DRDO) Chairman G. Satheesh Reddy, while stressing on the need to focus on indigenous defence production said that as of now, indigenous produce in defence manufacturing is just about 45-50 per cent and we are dependent for the rest on imports.[i] The focus of the government is hence on improving defence capability through indigenous manufacture of most of the country’s defence needs. Towards that end, the Ministry of Defence (MoD) released on 3 August 2020, the draft Defence Production and Export Promotion Policy 2020, which aimed at a turnover of USD 25 billion in domestic defence sector production over the next five years, within which was set a target of USD 5 billion for exports in defence and aerospace goods and services.[ii] Earlier, the Defence Production Policy of 2011, which had as its objective the goal to achieve substantive self-reliance in design, development and production of equipment/weapons systems/ platforms and to create conditions conducive for the private industry to take an active role in this endeavour,[iii] while laudable, achieved little of significance.
Strategic sector dominance is a key requirement for a strong and stable India, and this cannot be achieved without the private sector being involved in the manufacture of defence-related platforms and equipment in a big way. Technology infusion, adapting to technological challenges, and organic technological advancement will be an essential pre- requisite of high-quality defence production. The government’s promulgation of export friendly measures has enabled India to increase defence
exports to USD 1.54 billion in 2019, which marks a quantum leap from the USD 0.28 billion exports achieved in 2014.[iv] However, there is still much to be done if Prime Minister Modi’s vision of achieving an export target of USD 5 billion in military hardware by 2025 is to be achieved.
Herein comes the importance of the measures recently announced to place 101 items used by the military on the negative list to boost indigenisation of defence production. The list is impressive and includes in its ambit light combat aircraft and helicopters, Short Range Maritime Reconnaissance Aircraft, Long Range – Land Attack Cruise Missiles, artillery guns, short-range missiles, shipborne cruise missiles, simulators, Wheeled Armoured Fighting Vehicles (AFV), Infantry small arms, some types of radars, ammunition of different types and a host of other items used by the military.[v] Local manufacture of these items will give a big boost to the indigenisation effort and enable the creation of a strong and vibrant defence industrial base. The private sector will have an important role to play in this effort.
The Corporatisation of the OFB
The decision to corporatise the OFB was announced by Finance Minister Nirmala Sitharaman on 16 May 2020. This was the fourth tranche of the ‘Atmanirbhar Bharat’ initiative,[vi] and was intended to provide greater autonomy to the Board while imposing higher levels of accountability, with a view to improving the quality of manufactured goods in an acceptable time frame and keeping such products priced competitively. The Foreign Direct Investment (FDI) limit in defence manufacturing under automatic route was
raised from 49 per cent to 74 per cent, and a large number of weapons and their spare parts were placed on the negative list, to promote indigenous production within the country. Also announced was the rationalisation of the tax regime for Maintenance, Repair and Overhaul (MROs) of the Aircrafts in the country. Earlier, the aircrafts had to fly abroad for the MROs. This issue had been highlighted in the January-February 2020 issue of the India Foundation Journal, and it is indeed heartening to see that the recommendations as given in the article[vii] are now being implemented.
The fourth tranche of reforms also aimed at boosting the capabilities of the private sector by allowing them to use ISRO facilities and other relevant assets. The geo-spatial data policy is also being liberalised to provide for remote-sensing data to tech-entrepreneurs. Future projects for planetary exploration and outer space travel have also been opened to the private sector,[viii] thus opening a wide array of avenues which were earlier not available.
Challenges of the OFB
The OFB is a subordinate/attached office of the Department of Defence Production and is based in Kolkatta. It has 41 Ordnance Factories, 9 Training Institutes, 3 Regional Marketing Centres and 4 Regional Controllers of Safety working under it. The principal products of OFB include tanks and armoured vehicles, artillery guns, small arms and other weapons and ammunition of various types. The OFB also manufactures troop comfort equipment like uniforms, tents, boots, etc. Main customers of the OFB are the Armed Forces, Paramilitary Forces and Central Armed Police
Forces, with the Indian Army being the primary customer and accounting for 75 per cent share of the total sales of the OFB.
The Ordnance Factories were set up and spread across the country as “captive centres” to serve the needs of the Armed Forces, but have been dogged by high costs, quality concerns and time delays in delivery of products. This has raised serious concerns over the functioning of the OFB which are amplified below:
- Monopoly Supply: As the OFB supplies products to the Armed Forces on a nomination basis, it has little incentive to improve its quality of products and maintain a timely delivery schedule. Because a captive market exists, the OFB does not have a dynamic system of getting customer feedback on issues which concern the The government has notified 275 non-core items of OFB which are now available to be procured from the market. These items were hitherto reserved for OFB, though they were readily available in the market.
- Quality Issues: The quality of products supplied by the OFB continue to be a cause of concern to the Armed Forces. The increasing number of cases of defective assemblies and components have been highlighted by the Service Headquarters in various forums. The high rate of Return for Rectification (RFR) cases indicate poor quality management and low-quality
- High Cost: High cost of products is primarily due to high overhead charges in OFB, including high maintenance charges and high supervisory and indirect labour Further, unethical procurement activities lead to extensive inventories, and the additional cost gets loaded on to the cost of production.
- Lack of Innovation: Little incentive has led to minimal innovation and technology development in OFB
- Low Productivity: Currently, there is low productivity of plant and machinery and workforce with a variation in productivity across the factories. Being the sole service provider for Armed Forces, there is no penalty for delayed delivery to the
The present state of OFB is inconsistent with the requirement of defence production centre, which calls for a great deal of flexibility at managerial and functional levels. Decisions like the modernisation of plant and machinery, joint ventures (JVs), Transfer of Technology (ToT) agreements etc. are all subject to government financial regulations and instructions, which reduces the leverage and flexibility of any dynamic production and marketing unit. As a government department, the OFB cannot retain profits and therefore has no incentive to make profits. Lack of a fixed tenure at the top management level impacts on motivation to push the organisation to the next level of efficiency by taking bold and visionary but sometimes unpopular steps. Therefore, the current structure of the OFB is not suited for carrying out production activities in a highly competitive industry, which requires managerial and technical flexibility for production and marketing activities.
Reports of Various Committees
Various committees have been formed over the years to look into the functioning of the OFB.
The 2000 T.K.A. Nair Committee Report suggested corporatisation and the conversion of the OFB into the Ordnance Factory Corporation Limited (OFCL). Self-reliance was the key, wherein the corporation could start its long journey by relying on its own strengths, revenues and surpluses for growth. The proposed structure would also enable appropriate future changes in line with the dynamic, fast-changing global environment related to the production of defence goods. With a sharpened focus and an innovative approach to competitive ground realities in each product and value chain segments in India and in world trade, the Indian armaments industry could thus be enabled to carve out an array of opportunities for itself.
The 2004 Vijay Kelkar Committee report observed that in the existing set-up, ordnance factories (OF) by the very nature of the products they manufacture and in the manner in which they manufacture, have to continuously face the problem of obsolescence of existing technology, accessibility to newer technologies and their inability to meet the requirement of the user. Sustaining the OF in the current structure would prove financially and strategically costly for the user and consequentially for the country’s defence preparedness. Therefore, the Committee recommended that all OF should be corporatised under one single corporation under the leadership of competitive management. The existing dispensation by the government to OF should continue for a period of three years to help to steer the changed process internally. It was observed that the formation of corporation alone would ensure that OF gets the desired functional autonomy and become accountable and responsible for their operations and performance.
The 2015 Raman Puri Committee observed that it is essential to change the current functioning of OFB as an attached office of the Ministry and a budgeted entity, as it is entirely incompatible with the modern methods of production and practices. The Committee recommended splitting the current OFB into three or four segments as appropriate and converting these segmented Boards into DPSUs. A year later, in 2016, the Shekatkar Committee of 2016 also recommended corporatisation of OFB. Based on these reports and to strengthen their self-reliance in defence production, the government, on 16 May 2020, announced under the Atmanirbhar Bharat package, that corporatisation of OFB would be undertaken to improve autonomy, accountability and efficiency in ordnance supplies.
Advantages and Challenges of Corporatisation
The proposed transformation of OFB from a Government department to a public sector corporate entity will have several advantages. It would enable the Corporatised OF to form strategic alliances with Indian and overseas companies to develop new products, carving out a niche in the international armament industry and penetrate the defence export market. It would also provide greater flexibility in technology acquisition through overseas assets.
Corporatisation would lead to the creation of a sustainable business model and facilitate leapfrogging technology and innovation for self- reliance in defence. It would also enable increased
production capacity and retention of capability and knowledge base, having an overall positive impact on the employment sector with the creation of jobs in the long run.
More importantly, top management in the corporatised structure would be in a position to provide leadership and could initiate a change process to respond to competition. Unshackled from government procedures and controls, it would lead to improved flexibility and dynamismin decision making, which in turn would open up possibilities of creating new streams of revenues by leveraging engineering and technological capabilities.
While reducing import dependency for arms and ammunition, it would enhance combat efficiency of the Armed Forces. The move away from cost-plus mechanism to competitive pricing enables the procurement of quality products at a lower cost and ensures customer satisfaction through timely delivery. With under-utilised capacities in factories being better utilised, there would be a further reduction in costs of production. Finally, as the corporate entity moves from production-based to a technology-based organisation, this would further enhance self- reliance in defence capability. Moreover, converting OFB into a 100% Government-owned public sector unit would also ensure better equipment for the soldiers, ensuring their safety and strengthening their efforts in defending national boundaries.
The challenge to corporatisation comes from the large number of employees in the OFB. The 41 OF and other units of the OFB have three recognised trade unions—All India Defence Employees’ Federation (AIDEF) which is a federation of Left unions; the Bhartiya Pratiraksha Mazdoor Sangh (BPMS), which is an arm of the RSS affiliate Bharatiya Mazdoor Sangh, and the Indian National Defence Workers’ Federation (INDWF). These trade unions have been opposing the proposed corporatisation and have planned to go on an indefinite strike from 12 October.[ix] Herein lies the challenge to reform in a sector as vital as defence. How this issue will be addressed will determine India’s quest to achieve self-sufficiency in defence production to at least 70 percent of its requirements. A strong defence industrial base will create a vast number of jobs and has the potential of enhancing India’s GDP by one or two percentage points. But for that, the fears and concerns of the over 4 lakh civilian defence employees will need to be addressed.
- [i]https://economictimes.indiatimes.com/news/defence/drdo-chief-urges-for-indigenous-defence-production/ articleshow/71350864.cms
- [ii]https://swarajyamag.com/news-brief/govt-releases-draft-defence-policy-to-reduce-dependence-on-imports- and-take-forward-make-in-india-initiatives
- [v]The full list of 101 defence items banned from import is available at https://psuwatch.com/list-of-101- defence-items-banned-from-import-by-ministry-of-defence
- [vi]Details of the reforms announced are available at http://ddnews.gov.in/national/fm-nirmala-sitharaman- unveils-structural-reforms-various-sectors-fourth-tranche-rs-20-lakh Also see https://timesofindia.indiatimes. com/business/india-business/fourth-set-of-governments-rs-20-lakh-crore-stimulus-package-highlights-of- nirmala-sitharamans-speech/articleshow/75774584.cms
- [vii]Gp Capt RK Narang, VM, Challenges of Indian Aviation MRO Industry, India Foundation Journal, Vol VIII, Issue No 1, January-February 2020, pages 80-87.
- [viii]Note 6,
- [ix]https://mumbaimirror.indiatimes.com/mumbai/other/4-lakh-defence-civilian-staff-go-on-strike-today/ articleshow/76760735.cms.