Indian Defence Review

The IAF as the largest captive client for HAL, as well as the other two services, have never been happy with HAL as quality, reliability and punctuality have been issues that have constantly been the cause for voluble gripes. Any defence services official who has had personal experience dealing with HAL would most likely have nothing complimentary to say about the organisaton; the only exceptions would probably be service personnel who have been permanently deputed to HAL and become stakeholders in its continuation as an inefficient CPSE, making money at the cost of the services.

In March this year, the Stockholm International Peace Research Institute (SIPRI) published its annual report titled “Trends In International Arms Transfers – 2020” declaring India to be the second largest importer in the world for military hardware for the period 2016-2020 and the third largest military spender (behind US and China) for the year 2020. Not only is this mis-match a cause for national embarrassment, but also a pointer to the mediocrity of our defence manufacturing infrastructure which is largely public sector oriented. Indeed, our Central Public Sector Undertakings (CPSEs) have a dismal record per se. The last Economic Survey presented before the Budget 2020, points out that there were 366 CPSEs as of March 2020, of which 256 were in operation and only 171 booked any profit during FY 2019-2020. More significantly, the total profit of the profit-making CPSEs was Rs 138 crore, but the loss of the loss-making ones was Rs 44,816 crore.

Hindustan Aeronautics Limited (HAL) is the public sector face of aerospace manufacturing in India as a result of the post-Independence policies favouring and placing their faith in the public sector. Regrettably, HAL has not taken India to the forefront of global aerospace arena while some other public sector enterprises are indeed at the leading edge of technology. Meanwhile, the government and HAL’s lobby have ensured that the private sector has not been given the opportunity to exploit its full potential. For FY 2020-2021, HAL announced revenues of Rs 22,700 crore, borrowings of Rs 5,775 crore against a cash balance of Rs 6,700 crore. Significantly, this cash balance includes Rs 5,400 crore as advance payment for 83 LCA Mk IA aircraft; without that deal, the balance sheet would have been in the red. This article looks at the evolution of HAL, its poor productivity and performance, and the crying need to privatise it.

HAL as a Corporate Entity

Interestingly, HAL was founded as a private company – Hindustan Aircraft Limited – in December 1940 by industrialist Walchand Hirachand with the support of William Douglas Pawley, an American, in association with the Mysore Government, which granted it 700 acres of land gratis in Bengaluru. In March 1941, the Government of India (GoI) became one of the shareholders in the Company and subsequently took over its management in 1942. In January 1951, Hindustan Aircraft Limited was placed under the administrative control of the Ministry of Defence (MoD) and in August 1963, the Aeronautics India Limited (AIL) was incorporated as a company wholly owned by the GoI, to undertake the manufacture of MiG-21 aircraft under license. In June 1964, the Aircraft Manufacturing Depot, which had been set up in 1960 at Kanpur as an Air Force unit to produce the airframe of the Avro HS-748 transport aircraft, was transferred to AIL. Soon thereafter, Hindustan Aircraft Limited was amalgamated with AIL and the new entity named as Hindustan Aeronautics Limited (HAL). Since then, more and more infrastructure has been added on to its empire, largely to establish license production lines for aircraft the Indian Air Force (IAF) procured from foreign vendors. Only one indigenous combat aircraft, the HF-24, has been produced by HAL; the Light Combat Aircraft (LCA) Tejas is still not an operational aircraft as the LCA Mk1A is yet to be inducted although trainers and helicopters have been.

One fantasy of the Indian aerospace enthusiast envisages Walchand Hirachand continuing to run his original company without interference from the government; had that happened, the contours of HAL would have been profoundly different from its current mediocrity. Regrettably, the government held 100 percent promoters’ shares in HAL until 2018 when disinvestment that was driven by the fiscal necessity to monetise public assets, was initiated. However, investor enthusiasm for HAL’s Initial Public Offering (IPO) was lukewarm and Life Insurance Corporation (LIC), which itself lies in the public sector although not termed a CPSE, had to be pushed at the eleventh hour into buying 70 percent of the total IPO of Rs 4,200 crore (only Rs 4,088 crore worth of equity was eventually sold by the time the IPO closed). The shareholding pattern as on March 31, 2021 is GoI 75.15 percent, Foreign Institutional Investor (FII) 0.91 percent, Domestic Institutional Investor (DII) 20.32 percent and others 3.62 percent. The response to the IPO is an indicator of the perception of investors about HAL; let us take a deeper look into its functioning.

Productivity and Performance

HAL’s current manufacturing programmes are for Su-30MKI, LCA, Do-228, ALH Dhruv, Chetak, Cheetal and LCH helicopters while current repair and overhaul programmes cover Jaguar, Mirage, Kiran, HS-748, AN-32, MiG-21, Su-30 MKI, Hawk, Do-228, ALH, Chetak, Cheetah and Cheetal types. Major ongoing indigenous development programmes are the LCA Mk1A, Light Combat Helicopter (LCH), Light Utility Helicopter (LUH) and the Basic Turboprop trainer HTT-40.

Although too far back in history, the HF-24 saga deserves a mention here as it has an indirect bearing on HAL’s present status. Designed and built with the help of a German designer, it was the first jet fighter built in Asia. First flown in 1961, it had an excellent design, but HAL took the easier way out when it came to marrying it to a suitable power plant as it settled for the Orpheus engine as it was already being assembled in HAL for the Gnat being built under license by HAL. As a result, the HF-24 remained underpowered and only 147 were produced. The government and HAL did not display the enthusiasm that a private enterprise ought to have in finding the right engine to render the aircraft a supersonic one as the airframe was designed for that. Perhaps this blunder could have been corrected in subsequent designs taking off from the experience gained from the HF-24, but the whole idea of indigenous design and development of fighter aircraft was abandoned for two crucial decades as HAL contented itself with licensed production of aircraft the IAF acquired from foreign Original Equipment Manufacturers (OEMs) thereafter.

Only in 1983 was a sanction awarded for design and development of another indigenous fighter, the Light Combat Aircraft (LCA) Tejas, meant to replace the MiG 21. Its progress has been a sad and sordid saga, with delays at every stage. It was designed by Aeronautical Development Agency (ADA), a Defence Research and Development Organisation (DRDO) agency and produced by HAL. Only the LCA Tejas Mk 1 has been handed over to the IAF with a lot of fanfare; but it is not a fully operational aircraft. The LCA Tejas Mk 1A will be ready only in 2023, four decades from inception and the Mk 2 in the hazily distant future. Given HAL’s past history of delays any projection beyond two or three years is meaningless and inaccurate. Similarly, HAL’s grand projections about a fifth generation Advanced Medium Combat Aircraft (AMCA) can be set aside as probably achievable in the next decade or two.

The LCA Tejas was originally slated to be inducted by 1994, and the IAF would have liked to have 200 of this aircraft by now to replace all the fighters being de-inducted due to age. It has now signed up for 83 LCA Tejas Mk 1A and is looking around to buy another 114 multi-role fighter aircraft from foreign OEMs. The speed at which HAL is producing the LCA Tejas is about five per year as against the projected figure of 18. This is disconcerting and a cause for further concern. The delays and shortfalls in the LCA Tejas programme have come under fire from successive Comptroller and Auditor General (CAG) annual reports which have amply highlighted the internal inefficiencies of DRDO and HAL.

The Su-30 MKI was inducted into the IAF in 2002, and HAL started assembling it in Nasik in 2004. A 2018 review report by the MoD uncovered the fact that each Su-30 MKI being produced by HAL was costing the IAF Rs 417.69 crore whereas the OEM, JSC Sukhoi Company’s cost per unit was only Rs 269.77 crore. Considering that the total order was for 272 with 18 being supplied by the OEM and the rest assembled by HAL, the cost of indulging HAL for the nation is over Rs 37,500 crore. There is little doubt that the extra cost (55 percent more than the Russian unit cost) is attributable to lower efficiency, exorbitant man-hour rates and poor performance in carrying out repetitive task of assembling an aircraft.

The Su-30 MKI has had other HAL-related problems. Serviceability has been an issue right from the beginning and has never been better than 60 percent, a cause for thought and a pointer towards HAL’s production capability. A major overhaul falls due every 1,500 hours of operation or 11 years of calendar life. Incidentally, HAL is charging the IAF Rs 75 crore for each overhaul and there would be at least three overhauls for each of the 272 aircraft planned for IAF inventory during their expected lifetime of around 40 years. In anticipation, almost a decade ago, an upgrade programme was conceived with the plan to coincide it with the overhaul exercise. However, while the first overhauls started on schedule, upgrade programme made lazy progress. While HAL has been deflecting criticism by sheltering under exorbitant cost from OEM, holdback of technology by OEM and slow progress by DRDO to produce envisaged technology, it cannot expect total exoneration as it is the entity that is responsible and accountable for that aircraft’s manufacture, overhaul and upgrades.

The unexpected decision in 2015 by Prime Minister Modi for procuring 36 Rafale jets was preceded by a distasteful quest for a Medium Multi Role Combat Aircraft (MMRCA) for the IAF. First floated in 2001, by the IAF in anticipation of the gradual retirement of MiG 21s from active service, the proposed deal after due diligence, finally involved 126 Rafale jets of which Dassault was to provide the first 18 in assembled condition while the rest were to be produced in India by HAL. However, Dassault was not ready to accept responsibility for liability, damages and attendant clauses on access, inspection and post-manufacturing testing for the 108 aircraft being manufactured by HAL. Dassault’s reason for this holdback was the fact that it was not impressed by HAL’s facilities and functioning. Dassault felt that HAL had not built up any of the fixed assets that it considered as the minimum requirement and had briefed the Cost Negotiation Committee about this. Indeed, at the beginning of 2013, Dassault had indicated that its preferred partner for the manufacturing deal was Reliance Industries and not HAL.

HAL’s clout ensured that it remained the projected principal production partner for the Rafale deal. The lack of confidence in HAL can be gauged from the fact that Dassault was quite desperate to bag the Indian deal as the future of Rafale appeared at that time to hinge on the Indian deal and yet the deal fell through. HAL’s track record and its reputation within the Indian defence forces who are its major clients was such that Dassault was not willing to guarantee HAL workmanship in producing a sophisticated, modern fighter aircraft to the same standards as Dassault’s own. Dassault’s assessment of HAL and the subsequent demise of the MMRCA deal in 2015, are a deprecatory comment on HAL’s productivity and performance. As an aside, the 2018 review report mentioned earlier also stated that, had the Rafale been produced by HAL, the cost of production would have been 2.7 times more than the cost of French production.

Yet another cost associated factor relates to the British Hawk jert trainer which IAF procured in 2004. The first 24, acquired in fly away condition, cost Rs 78 core each, but the ones assembled by HAL, cost Rs 88 crore and this figure escalated to Rs 98 crore in 2010 and to Rs 153 crore in 2016, a 196 percent increase. While some of this cost can be attributed to inflation, the contribution of HAL’s internal inefficiencies and exploitation of HAL’s monopolistic hold, accounts for the rest.

Due to space constraints, mentioned above are only the major issues related to productivity and performance which, in turn, impinge on cost. The fundamental problem is that the government has both – a stake in HAL and the power to procure from it largely in single vendor type situations. The time has come to consider privatisation of HAL if its productivity and performance have to match the benchmarks of private industry.

Need For Privatisation

In February this year, Prime Minister Modi, speaking at a webinar on privatisation organised by the Department of Investment and Public Asset Management (DIPAM), said, “It is the government’s duty to support enterprises and businesses. But it is not essential that it should own and run enterprises.” Although he went on to state that the government was committed to privatising all CPSEs barring the bare minimum in four strategic sectors, one hopes that the government realises that HAL needs to be privatised on priority, especially since it is fiscal support in some way or the other that keeps it going.

Inarguably, India’s economy can ill afford the exorbitant costs of foreign defence wares. The nation’s defence budget is lamentably low due to a low priority accorded to defence spending by the government. More alarmingly, the defence budget has been shrinking as a percentage of GDP steadily. It dropped to 2.1 percent of GDP last year, the lowest since 1960s. Put succinctly, India cannot afford the defence wares it needs leave aside wants. ‘Make in India’ and Atmanirbharta have been bandied around since 2014 and 2020 respectively but, while the government has striven to derive political mileage out of these, the real effect on the ground has been unremarkable. These two magic words further threaten to perpetuate the legacy of HAL upon the nation in the name of indigenous production. The problem is the poor performance and the paltry productivity of HAL. The simple solution to this problem lies in improving the internal efficiencies of HAL while exploiting the infrastructure and the investment already sunk into HAL for the past eight decades. That can only happen if HAL’s public sector culture can be exterminated and private sector professionalism and result orientation ushered in to revitalise HAL to its true potential and to derive full return on investment already made into its infrastructure over past years.

HAL’s expertise lies in the defence aviation sector whereas the IAF and the aviation arms of the Indian Army and the Indian Navy hold the domain knowledge. However, it is the private sector towards which gravitate superior manpower, investor funds, entrepreneurial skills and above all, superlative managerial acumen. In other words, it is the private sector which has the drive to identify strengths, weave them together and deliver results, something that has not been forthcoming from HAL, all its self-praising hype notwithstanding. It is high time that this be realised at the highest level (Prime Minister’s Office) and the efficiency of the private sector be transplanted on to the weed-infected mess of HAL’s corporate culture. Perhaps the privatisation process can hand-pick some of the user base personnel directly from the services and induct them into the private dispensation that replaces the current structure.

The IAF as the largest captive client for HAL, as well as the other two services, have never been happy with HAL as quality, reliability and punctuality have been issues that have constantly been the cause for voluble gripes. Any defence services official who has had personal experience dealing with HAL would most likely have nothing complimentary to say about the organisaton; the only exceptions would probably be service personnel who have been permanently deputed to HAL and become stakeholders in its continuation as an inefficient CPSE, making money at the cost of the services.

Concluding Remarks

Realising the internally inefficient culture of the CPSEs, the government has been in confabulations with the National Institution for Transforming India (NITI) Aayog, Ministry of Finance and Department of Public Enterprises to find solutions. However, the thrust of their collective wisdom appears to be an evolutionary path – granting greater autonomy to CPSEs and allowing them to make their own business decisions to compete with the private sector. The need, on the other hand, is for a revolutionary change. The telecom sector has demonstrated the considerable advantage private management can have. The private sector has marshalled almost the entire market in this sector while public sector role has been eroded with the loss making remnants sustained by the government and ultimately the taxpayer!. Seen against this background, HAL, as a monolith and as a monopolistic aerospace public enterprise, continues to run with low productivity at the cost of sidelining private establishments.

During the MMRCA quest and the ongoing search for 114 Multi Role Fighter Aircraft (MRFA), all the foreign OEMs in the fray have most affirmatively shown their eagerness to partner with India’s private sector rather than with HAL. Some of them, namely Lockheed Martin, Saab, Dassault, and Boeing, have already forged alliances with Indian private entities in anticipation of netting the deal. As they all have extensive, long standing and incisive understanding of aerospace manufacturing, their unanimous assessment of HAL can be taken at face value. The inference is crystal clear – as long as HAL is a public enterprise, efficiency will remain at mediocre levels at best.

Indisputably, the government sees the benefits of privatising HAL, as also the inevitability of doing so, if Indian aerospace industry is to consummate the over-publicised slogans of ‘Make in India’ and Atmanirbharta and strive to achieve the oft stated ambition of turning India into an international aerospace hub. The mechanics of privatising HAL will no doubt be a complex process, given the well-entrenched public sector culture, aggressive unionism of a sizeable employee strength of almost 30,000 as well as terms and conditions of service that render shedding indolent employees legal challenges. A private management is unlikely to accept mediocre and unresponsive workers while getting rid of them would be impossible at worst and extortionately expensive at best.

Prime Minister Modi has shown the courage to take risks earlier and his penchant for being seen as a reformist is well known. Perhaps it is time for the PMO to get involved, resolve that the aerospace industry is of a strategic nature that is doomed to mediocrity if left in the public sector. The government needs to privatise it through the sheer muscle power it possesses, and has wielded unhesitatingly so far since 2014. Prime Minister Modi has still three more years to go for the next elections and if he can get this one huge task of privatising HAL done, the aerospace industry and the nation will be forever grateful as the benefits will be hugely munificent. That India may well become the world leader in the aerospace industry in a decade or two, is a distinct possibility and a corollary of that privatisation.