Prime Minister Narendra Modi dedicated seven new government-owned defence enterprises to the nation 15 on October. Writing for the Times of India the same day, Defence Minister Rajnath Singh hailed this ‘historic decision’ as one of the biggest reforms carried out by the government since 2014.
There is no denying that reorganisation of 41 ordnance factories managed by the Kolkata-based Ordnance Factory Board (OFB) into seven public sector enterprises is a huge step, but it is only the beginning of a long journey along a road fraught with several uncertainties.
Now that the deed is done, the focus must shift from self- congratulatory proclamations about the possible benefits of this move to figuring out how the intended objectives of corporatisation -enhancing functional autonomy, efficiency, and the growth potential of the new enterprises- are to be achieved by the enterprises, even while the threat to their very existence looms in the background.
It may be recalled that in her budget speech on the 1st February this year, Finance Minister Nirmala Sitharaman had announced that the government would reduce the presence of the public sector enterprises in the strategic sectors -defence being one of them- to the bare minimum and the surplus enterprises shall be privatised, merged, subsidiarised with other enterprises, or closed.
Instead of coming down, the total number of public sector enterprises in the defence sector has gone up to sixteen with the addition of the seven new enterprises. This puts a big question mark over the future of not just the new enterprises but also some of the older ones, as all of them would be equally affected by the policy to reduce the number of enterprises.
The vulnerability on this count is more real than imaginary in the case of some of the new enterprises like the Troops Comfort Limited (TCL) and Gliders India Limited (GIL), whose long-term commercial viability is anyway a matter of concern.
The TCL comprises two clothing factories located at Avadi and Shahjahanpur, and another two equipment factories located at Kanpur and Hazartpur. These factories make combat uniforms, tents, some leather items like boots, cold climate clothing, and miscellaneous equipment like skid boards.
As for GIL, it manufactures various types of parachutes and inflatable rubber boats at Ordnance Parachute Factory, Kanpur, which is the only factory under its belt.
What these factories make are low-technology products which the private sector is also capable of manufacturing without having to make huge investment. As a matter of fact, considering that one of objectives of corporatisation was to encourage competition, the government would be remiss in not promoting the private industry to manufacture these products.
The entry of the private sector can make the market for these products highly competitive. The fierce competition, coupled with uncertainty about continuous flow of orders from the armed forces and the unpredictable quantum of demand, could put tremendous pressure on the new enterprises, threatening their very survival. This may also apply to some of the other new enterprises.
The concerns about the long-term commercial viability are also linked with the question of modernisation of the production and R&D facilities -very negligible at present- owned by the new enterprises. This is necessary for developing and manufacturing state-of-the-art products to remain ahead of their competitors. It is unclear where the money will come from for this.
It is true that the indents worth Rs 65,000 crore placed on the ordnance factories in the past have been converted into 66 ‘deemed’ contracts and 60 per cent of the annual value of these orders would be paid to them by way of mobilisation advance which, for the current year alone, works out to Rs 7,100 crore. However, it is arguable if this will address the requirement of additional funds for modernisation.
The ordnance factories were supplying equipment and ammunition to their main customer, the armed forces, at no profit. Therefore, no profit is likely to accrue to the new enterprises from these 66 ‘deemed’ contracts which could be deployed for modernisation. The advance payments will also be of little help, as this money will have to be utilised for the purpose of executing the ongoing contracts.
How soon the new enterprises stabilise and how well they perform would depend on the willingness of Department of Defence Production (DDP) to confront tricky issues head on, and act swiftly to resolve them. As the administrative department in charge of all defence enterprises, it will have to provide a more effective leadership than has been the case so far.
The scepticism about DDP’s stewardship arises from the fact that throughout their downward slide that culminated in their corporatisation, the ordnance factories were functioning under its direct control and directions.
While corporatisation changes the nature of relationship between DDP and the ordnance factories in their new avatar as independent legal entities, this legality alone is not enough to ensure functional autonomy of the corporations and, more importantly, their performance in the domestic and export markets.
This too is borne out by the fact that the older DPSUs, which have all along been functioning under the DDP’s administrative control, are also continuously pilloried by the armed forces and the ‘strategic community’ for the time and cost overruns, inability to innovate, and questionable quality of products.
If the objective of functional autonomy of the new, and indeed the old, enterprises is to be achieved, the overall administrative control exercised by the DDP over them, bordering on interference, will have to be minimised. The initiative to cede large swathes of its turf will have to come from the DDP.
The DDP must lay down a framework for exercising its administrative control, leaving the enterprises to take their own decisions with the approval of their respective management in their best commercial interest.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of BharatShakti.in)