New defence enterprises begin an uncertain journey


icon November 16, 2021

An official statement, issued alongside by the Press Information Bureau, claimed that the move will enhance functional autonomy and efficiency of the enterprises and unleash new growth potential and innovation.

By Amit Cowshish

Dedicating seven new defence manufacturing enterprises to the nation on October 15, Prime Minister Narendra Modi said this move would create new opportunities for the youth and the Micro, Small and Medium Enterprises (MSMEs). These enterprises, he added, will become “a major base of India’s military power in the coming times”.

An official statement, issued alongside by the Press Information Bureau, claimed that the move will enhance functional autonomy and efficiency of the enterprises and unleash new growth potential and innovation.

These inspiring proclamations hide the haze surrounding the future of the new enterprises carved out of 41 ordnance factories. These factories were managed by the Kolkata-based Ordnance Factory Board (OFB) under the administrative control of the Department of Defence Production (DDP). It is a mystery why, despite its direct control, the DDP could not arrest the OFB’s downward slide.

The OFB was one of the oldest organisations, predating the Indian Railways by more than a century. Its history goes back to 1712 when the Dutch Ostend Company established Gun Powder Factory at Ichhapur in Kolkata’s suburbs. The OFB network grew over the years to become the second largest public sector defence manufacturing conglomerate in Asia.

With the OFB now becoming history, focus shifts to sustainability of the new enterprises and their ability to deliver the intended results. What the future has in store for the enterprises and whether these will indeed become the backbone of India’s military prowess depends on several factors, beginning with the question whether the new enterprises are here to stay.

This question arises because in her budget speech on February 1, Finance Minister Nirmala Sitharaman had announced that the government intended to reduce the number of public enterprises in the strategic sectors -defence being one of them- to the bare minimum and the surplus enterprises shall be privatised, merged, subsidiaries with other enterprises, or closed.

With the creation of seven new enterprises, the total number of defence public sector undertakings (DPSUs) has gone up to sixteen. If the government decides to minimise the number of companies, some of the sixteen DPSUs will certainly be affected.

While the axe could fall on any of the old or new enterprises, some of the new ones like the Troops Comfort Limited (CFL) and Gliders India Limited (GIL) seem more vulnerable.

These two enterprises manufacture clothing and leather products like military uniforms, winter clothing, tents, parachutes, and boots, apart from equipment like skid boards and inflatable rubber boats.

The fact that these are low-technology products which can easily be made by the private sector could weigh against them when the time comes to decide how the number of defence enterprises is to be reduced to the bare minimum. Till the deed is done, Damocles sword will keep hanging on the vulnerable enterprises, affecting their performance.

Second, in the foreseeable future, the new enterprises will continue to execute the orders they already have in hand. Some new orders which would have been given by the armed forces to the ordnance factories may also come to them. In the circumstances, generation of additional employment or creation of new business opportunities by these enterprises does not seem imminent.

Third, these enterprises will need substantial sums of money to modernise their production facilities and ramp up R&D efforts to design, develop, and manufacture superior products to remain ahead of their competitors. This is important because sooner or later, the enterprises will have to start competing with the private sector to win new contracts and bag export orders.

Much is being made of the past indents worth Rs 65,000 crore placed on the ordnance factories being converted into 66 contracts. Considering that the OFB earned practically no profit from the sale of equipment and ammunition to the armed forces, the new enterprises will not be able to generate surplus income, unless they are allowed to renegotiate with the armed forces and include a profit margin in the existing and future contracts.

The government’s decision to make advance payment of Rs 7,100 crore to the new enterprises will also be of little help in modernising the production and research facilities as this amount will have to be spent by them for executing the current contracts against which the advance is paid. Consequently, it remains unclear where the money for capital investment by these enterprises will come from without which they cannot unleash their growth potential and promote innovation.

Fourth, several legacy issues remain to be resolved. The uncertainty over the future of the officers and workmen, transferred en masse from the OFB to the new enterprises, is probably the most pressing issue. The decision to continue with the terms and conditions, which applied to them before corporatisation, for the next two years helped in averting an immediate crisis, but this is by no means a permanent solution. It will take a lot of doing to resolve this problem.

Lastly, while the new enterprises have indeed acquired an independent legal status because of corporatisation of the OFB, this change in itself cannot enhance their functional autonomy. The new enterprises will continue to be under the administrative control of the DDP, often bordering on interference.

Going by the ceaseless criticism of the older DPSUs’ performance by the armed forces and several defence analysts, the nature and extent of DDP’s control requires a complete reorientation. It remains to be seen if the DDP would be willing to create a framework to minimise its control and maximise the enterprises’ autonomy, so that the latter could be run professionally by their management.

(The author is former Financial Advisor (Acquisition), Ministry of Defence. Views expressed are personal and do not reflect the official position or policy of Financial Express Online.)

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