Defence Industry

Corporatisation of Ordnance Factory Board: A Strategic Necessity for India
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Issue Courtesy: South Asia Monitor | Date : 26 Sep , 2020

An Empowered Group of Ministers has been constituted under the chairmanship of Defence Minister Rajnath Singh to oversee and guide the entire process of corporatisation of Ordnance Factory Board (OFB), including transition support and redeployment plan of employees while safeguarding their wages and retirement benefits.

Dating back to 1775, the OFB is a very old organisation comprising of 41 ordnance factories, 13 ordnance research and development (R&D) centres, and nine ordnance institutes of learning spread all over the country at 24 different locations. Presently functioning under the Department of Defence Production of the Ministry of Defence, it is the key supplier of a wide variety of products to the armed forces, which include armaments, ammunition, equipment, clothing, and also troop comfort items.

How it all started

It may be relevant to recall that India’s first Prime Minister Jawaharlal Nehru reportedly opined that India did not need an army – the police were sufficient. India’s second Defence Minister V.K. Krishna Menon believed that ordnance factories were better off producing pressure cookers and coffee percolators. The result was that the Indian Army, globally acknowledged as about the best in World Wars I and II, was pitched into 1962 Sino-Indian war, woefully under-armed, ill-equipped, and insufficiently clad and not to mention, numerically under-strength. Ironically, it was thanks to the Chinese that the Indian Army’s then 70 years old .303 bolt action Lee-Enfield rifle was replaced by the 7.62 mm self -loading rifle produced by Rifle Factory, Ishapore. It is a good weapon but was replaced by a lighter 5.56mm INSAS (Indian small arms system), which is not a fair match for the assault rifles held by the Chinese and Pakistan armies as well as the terrorists supported and armed by both these rogue nations.

While the Indian Army is still shopping for an assault rifle, after over half a century of dependence on exporting almost 70 percent of tanks, guns, warships, fighter aircraft and other critical equipment, Prime Minister Narendra Modi’s recent call for ‘Atmanirbhar’ (self-reliance) is expected to accelerate the process of manufacturing of all the mentioned material in India.

Often in the past, items supplied by OFB were found to be sub-standard, overpriced as compared to the market and also failed to achieve the target as indicated by the CAG (Comptroller and Auditor General) report (shown in the table below).

Moreover, with the opening-up of the defence sector to the private industry, the armed forces are able to procure comparatively better products at competitive rates. Accordingly, the government declared 275 items manufactured by Ordnance Factories as non-core items in April 2017, another 93 in November 2017 and 39 in January 2018.

Debate over corporatisation of OFB

The corporatisation of the OFB announced by the government has been debated for a long time. It was first suggested by the T.K.S. Nair Committee in 2000, the Vijay Kelkar Committee in 2005, the Raman Puri Committee in 2015 Corporatisation of OFBs formed part of the BJP government’s ‘167 transformative ideas’ to be implemented in 100 days of its second tenure, ie by October 2019. The government floated a proposal for corporatisation in July-August 2019 but the trade unions called for an indefinite strike against the decision on August 20, 2019. This strike was called off on August 26, 2019, only after assurances by the Secretary, Defence Production that the government had not taken any decision yet towards corporatisation of OFB.

In September 2019, the government instituted a committee to address the concerns of the employees and in November 2019 issued a press release notifying the “proposal to convert ordnance factories under the OFB into a 100 percent government-owned public sector unit to provide functional and financial autonomy and managerial flexibility so as to enable the organisation to grow at a faster pace and play a greater role in defence preparedness of the country while also adequately safeguarding the interests of the workers.”

With the government determined to implement the decision, it was finally announced by the Finance Minister Nirmala Sitharaman as part of Defence Reforms package. On Sep 11, the government announced setting up the Empowered Group of Ministers. Other ministers in the EGoM are Home Minister Amit Shah, Finance Minister Nirmala Sitharaman, Minister for Law & justice Ravi Shankar Prasad, Minister of State for Labour & Employment Santosh Kumar Gangwar and Minister of State for Personnel, Public Grievance & Pension Dr Jitendra Singh. 

The trade unions have now once again called for an indefinite strike calling the government’s decision as “arbitrary, illegal and unjustified.” Nearly 82,000 employees of all 41 ordnance factories across India have gone a month-long strike.

A major concern of the OFB employees is that corporatisation is the first step towards privatisation and is likely to result in layoffs and job cuts. The government has made it very clear that it is not thinking of privatisation in the near future and that after corporatisation OFB will function like various PSUs (public sector undertakings).

Need for corporatisation

Corporatisation is aimed at putting OFB at par with other Defence PSUs. That means it will be managed by its own board of directors with broad guidelines from the government, which is expecting the corporatized OFB to raise its turnover to Rs. 30,000 crore ($5 billion) by 2024-25 annually against exiting Rs. 12,000 crore ($1.75 billion), and has set up a high-level panel to work out a roadmap to achieve the same. The Vice-Admiral Raman Puri Committee recommended grouping existing ordnance factories under three or four categories with core competencies. A likely structure maybe four categories with a number of factories allocated for production each. These are: ammunition-to be produced at eight factories, weapons- to be produced at seven factories, explosives-to be produced at six factories and combat vehicles to be produced at three factories.

Corporatised OFB will be allowed to forge partnerships with the private sector as per the Defence Ministry’s approved policy and will continue to receive orders from the country’s security forces. It will also be granted a special preference of 15 percent above the L1 price for “Make” and “Buy and Make” category products. The centre will support OFB in case of losses, by way of loan for 30 percent of the total shortfall and by way of equity investment for balance 70 percent of the amount. The working capital for the next five years will be provided by the Department of Defence Production (DDP) as a one-time corpus fund. Capital investment for ongoing and sanctioned projects will also be provided.

Government expects numerous benefits of corporatisation:

    • Improved efficiency – Better management of its functioning with greater autonomy in functioning and dynamic decision making, also resulting in timely delivery and better quality supplied by factories.
    • Competitive pricing – So far, a cost-plus mechanism is followed by OFB to fix the prices. In this system, the price is fixed by taking the maximum estimated cost, plus 20 percent to cater for contingencies which are further raised by another 8 to 15 percent next year. This led to overpricing with CAG even pointing out that in some cases OFB is charging even more than the import value of the equipment. Corporatisation is expected to lead to reduced and competitive pricing, since OFB will be competing with private players in defence industry, albeit with some advantages.
    • Flexibility in technology acquisition – OFB will be free to form strategic alliances with Indian and overseas companies to boost innovation and develop new products. The factories, if modernised and managed properly, will be able to unlock its true potential and be the main key in Make in India projects.
    • Financial independence – OFB may no longer be dependent on the government for funding as it will be able to generate funds through other means like being listed on a stock exchange similar to other DPSUs. This will enable it to achieve financial independence and the money can be efficiently used for modernisation, R&D, and boost innovation. 
    • Optimum use of idle capacities – Idle or under-utilised capacities of the factories will be better utilised post corporatisation.
    • Increased Defence Export – Corporatized ordnance factory can use the idle capacities to generate surplus production over and above the requirement of armed forces, which can be exported to generate better revenues.
    • Improved equipment state – Armed forces being the biggest customer of ordnance factories, they are likely to benefit immensely from corporatisation with better pricing and improved product leading to an improved equipment state and better customer satisfaction.

In view of the unprecedented tension between the Indian Army and the Chinese Peoples’ Liberation Army on the Line of Actual Control since early May 2020, it is vitally important for ordnance factories to be able to meet large requirements of arms, ammunition, vehicles, and various equipment.

While formulating laws for corporatisation, the government will need to ensure that they do not compromise with the logistic support to the forces during war.

It should be very clear that India’s armed forces are in a state of preparing for war.


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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

Anil Bhat

is a strategic analyst and former spokesperson, Defence Ministry and Indian Army.

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