Defence Industry

Corporatisation of OFB & Fault lines of India’s Military Industry Capability
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Issue Net Edition | Date : 07 Oct , 2021

Corporatisation was listed as one of the 167 transformational ideas to be implemented in the first 100 days of NDA manifesto (2019). The delay in corporatisation of 41 ordnance factories which have a hoary history of 246 years, with a credible record of providing requisite firepower to the defence services during the three wars and Kargil spat is understandable, given the powerful and entrenched unions that they have with 81500 employees. The ostensible objective of the government is to improve autonomy, accountability and efficiency in the ordnance factories. There have been three committees which have been drumming up corporatisation. While the TKA Nair Committee (2000) had suggested converting OFB created in 1979 to OF Corporation Ltd, Vijay Kelkar who is the father of PPP and Offset Policy in Defence manufacturing had recommended that the new OFB Corporation should be given Nava Ratna status like the HAL, which will help them to enter in to JV arrangement with OEMs, co-develop products with reputed design houses, and get in to ToT arrangement. Admiral Raman Puri in 2014, while chiming in corporatisation recommendation of the past, recommended splitting OF corporation in to three clusters viz., weapons, ammunition and combat vehicles. Further Adm Puri suggested that Weapons, Ammunition and Explosive should be under exclusive control of the proposed PSU, Combat Vehicles be produced in a PPP mode, low tech items like clothing, uniforms, shoes and tents should be privatised.

The present arrangement of the government is significantly different in the sense that four more PSUs will continue to handle gliders, parachutes, optics, components and ancillaries, and products designed for troop comfort. While three PSUs viz Munition India, AV Nigam and Advanced Weapons and Explosives make sense, the other four PSUs would perpetuate the lack of quality, delay and high price that products like shoes, uniforms and parachutes typically reflect. While it made sense during the world wars when private sector capability was inadequate, India after 1991 with its thrust on Liberalization, Privatization and Globalization (LPG) could not perpetuate making these low tech, non-strategic items in captive ordnance factories.   The government is persisting with these items, largely due to bellicose unions based in factories located at Kanpur, Jabalpur and Cassipore. Such half-hearted move of the government will carry the dregs of inefficiency, tardiness, poor quality and high price.

The defence manufacturing sector was late in embracing economic liberalization by a decade. In 2001 it allowed private sector to participate 100% in defence manufacturing, and 26% in FDI. While level playing field doctrine as advocated by Prof Kelkarto give equal opportunity to private sector players has encouraged companies like L&T, Mahindra & Mahindra, Godrej & Boyce, Tatas and a number of IT companies, the paltry 26% FDI has hardly enthused any major OEM to set up base in India. The government then announced an offset policy in 2014 to leverage India’s big ticket acquisition with promise of outsourcing, boosting exports and bringing in critical technology. The experience so far has been dismal, except for some trickle outsourcing order for low tech items. Dispirited by OEM’s lukewarm response to 26% FDI, the government increased the limit to 49% in 2014 and to 74% in 2020 for getting technology in niche areas. This is where India’s military industry capability shows a sorry picture, with weapons, propulsion and sensors predominantly imported. The highly hyped indigenous aircraft LCA is powered by a GE 404 engine from USA, while radar is sourced from ELTA, Israel. The Kaveri engine development by GTRE has been an unmitigated disaster. MBT, the showpiece indigenous tank, in powered by German MTU engines. Despite the significant hike in FDI, the inflow has been only $300 m during April to September 2020.This is largely due to the caveats put for allowing 76% FDI.

India has the dubious reputation of being the second largest importer of conventional arms (9.5%) as per SIPRI 2021 report. Our Self Reliance Index was assessed by the Kalam Committee in 1993 as 30%, with a road map to increase it to 70% in a decade’s time. The Committee had identified a number of critical subsystems like Focal Plane Array, Passive Seekers, Stealth, AESA radar, RLG where India’s design & Development quality need to be significantly ramped. Even material like Carbon fibres, required by ALH is not indigenously produced. India’s defence PSUs like HAL has been producing SU 30 on technology transfer documents from Russia. Similar is the story of T90 produced in Avadi tank factory based on technology transferred from Russia. Its making to foreign design rather than making from indigenous design. We are stuck with Know How rather than Know Why, which is the sine qua non of a knowledge society which excels in design. The general diatribe against Defence PSUS is that they are good integrators of imported subparts rather than manufacturers in the true sense. No wonder value addition of HAL in SU 30 production is less than 20%.

On the other hand, tank factories at Avadi have a record of 87% indigenisation of T 90. The major problems afflicting OFB are not lack of autonomy or accountability but the wherewithal to improve capability. The R& D spending in OFB is as low as 0.7-0.8% of their turnover, while HAL spends around 7-8%. The other big drag has been expenditure on New Capital which is less than 1% of their revenue expenditure. The capital expenditure is also measly at 3-5% of total expenditure. While the OFs have a well-run Renewal and Replacement budget to replace obsolete machines, they invest very little in new state of capital and machinery. In the corporatized environment, they will have better access to funding New Capital and R & D. The other issue, bandied against OFs is about their high pricing. This is true as the overheads are of the order of 30% as against less than 10% in private sector counterparts. The criticism regarding delayed supply and poor quality in ammunition and clothing is largely justified. The Defence PSUS do not have a significantly better record in terms of price, quality and delivery. ALH, SU 30, Patrol vessels are testimony to the persistent criticism from the user services.As an instance, when there was competition with GSL for IPVs, L& T bagged the order at 30% less cost than GSL and delivered much faster than previous record of GSL.

The corporatisation of OFB has to be seen in the overall context of improving India’s Military Industry Capability, improvement in Self Reliance Quotient, design capability in critical systems and quality, time and cost effectiveness. The shift from MMRCA ToT contract with HAL (Buy& Make) to Buy from Rafale directly is a clear demonstration how HAL has not been meeting user expectation and also of ToT partner. Assigning bulk of offset commitments from HAL to Reliance Company further buttresses the trend to prefer private companies over Defence PSUs. From captive producers, the Government is clearly opening out to the private sector. Another major development has been the ToT contract with Tatas rather than HAL for building 40 C295 transport aircrafts. This is the first time that a major ToT is being availed of by a private company. L& T has also edifying record in the ATV program and designing stabilization platform for ship based launching of Trithvi missile (Dhanush).

HAL had signed a Design & Development Contract with Russia for Co-Production of FGFA, a fifth generation aircraft. The contract is as good as closed after initial hype. This clearly shows that efficiency of DPSUs and OFs has become a matter of serious concern, apart from quality, cost and timely delivery aspects. On the other hand, JV with Russia for manufacturing BrahMos missiles has been a success. MR SAM is another success story where a Co Design & Development with a design house of Israel has been a success. Instead of gloating over corporatisation of OFB, the government must do sober thinking how to increase in parcelling out many items from DPSUs & OFs like ALH (HAL), Surveillance Vessels (GSL) and low tech items produced by OFB to private sector and only concentrate on strategic items like fighter air crafts, frigates and submarines. Besides increased allocation to research, design capability is required. The present soft option of import rather than JV with reputed OEMs, Jt D&D with design houses is the need of the hour. Research cannot be the monopoly of DRDO. The Private sector, academia and design houses must be part of this march which will not only improve our SRI quotient and Military Industry Capability in general. Politics & rhetoric of Atma Nirbharbhar Bharat must give way to pragmatism, collaboration & strategic thinking.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Prof (Dr) SN Misra

was previously Joint Secretary (Aerospace), Ministry of Defence, Government of India.

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