Defence Sector Reforms & Corporatisation of Ordnance Factory Board

Prelude          
In Part I, we looked at the historical background and colonial legacy of Ordnance Factory Board and the many challenges it faces leading to sub-optimal functioning of an institution which should have been a prime component of our ‘Atmanirbharata’, and vital for our strategic autonomy and comprehensive national power (CNP). Accordingly, one major component of the special economic package of Rs. 20 lakh crores announced by PM Modi on 14 May 2020 to revive the Indian Economy from the fallout of COVID, are key structural reforms in the defence sector.

Soon after a day, on 16 May the Finance Minister revealed the ingredients of the reforms, one being the ‘Corporatisation of the OFB’. Defence Minister Rajnath Singh followed up and announced on August 9, 2020 a list of 101 types of military equipment, weapons and ammunition which will be progressively barred from being imported starting December 2020. The ‘Negative Import List’ of 101 embargoed items comprises not just simple parts, but also some high technology weapon systems like artillery guns, assault rifles, warships, sonar systems, submarines, light transport aircraft, light combat helicopters (LCHs), radars and light combat aircraft. Any item on the ‘negative list’ can now only be sourced from the domestic industry. MoD will place orders worth Rs. 4 lakh crore with the domestic industry over the next 5-7 years by cutting down on these imports. For now, India remains a top importer of weapons and equipment.

Reforms Announced in Defence Sector
The key highlights of the announcements for the defence sector as given out in the press release issued by the Government of India are enumerated[i] as follows:

Policy Reforms in Defence Production

  • FDI limit in the defence manufacturing under automatic route[ii] will be raised from 49 to 74 per cent. This could well be a game changer as tweeted by the FM.
  • There will be time-bound defence procurement process and faster decision making will be ushered in by setting up of a Project Management Unit (PMU) to support contract management; Realistic setting of General Staff Qualitative Requirements (GSQRs) of weapons/platforms and overhauling Trial and Testing procedures.
  • Enhancing Self Reliance in Defence Production
  • ‘Make in India’ for self-reliance in Defence Production will be promoted by notifying a list of weapons/platforms for ban on import with year wise timelines, and indigenisation of imported spares, and separate budget provisioning for domestic capital procurement as brought earlier; resulting in reduction of huge defence import bill.
  • Improve autonomy, accountability and efficiency in Ordnance Supplies by Corporatisation of Ordnance Factory Board.

Industry Reactions:  The reforms announced by the government to boost indigenous defence production have been welcomed by the Confederation of Indian Industries (CII) and various private defence companies operating in the country[iii], as they are of the opinion that these reforms will provide a boost to domestic manufacturing in the defence sector.

Increase in FDI from 49 to 74 Percent: Will it be a Game Changer?

Private sector was permitted to enter the defence industry from May 2001 up to 26 per cent[iv] and raised to 49 per cent later in 2015.[v] Many studies including the ones conducted by the government showed dthat any FDI below 51 per cent ( FDI up to 100 per cent was also offered in case of state of the art technologies, after government approval[vi]) will not attract investment in India, mainly due to inability to participate in decision making. A few JVs were set up, but indigenisation efforts did not take off.

National Payoffs by Increasing FDIs:Few obvious advantages which accrue by increasing FDI to 74 per cent are broad basing of defence industrial base; induction of niche technologies; will encourage foreign defence conglomerates to set up subsidiaries specially under the ‘Buy Global-Manufacture in India’; create an eco-system to procure spares and parts from the local manufacturers to cut down on the cost of the equipment further cementing ‘Make in India’ during crisis situations; catalyst for making India as an ‘Export Hub’ for defence equipments, especially when nations are looking for alternative destinations to China; boost to our economy in terms of foreign exchange, create sensitive infrastructure and provide employment. Some of the challenges and concerns in raising the FDI limit are; valid concerns on threat to national security if foreign nations/company intervenes/interferes in the functioning; challenge to our indigenous industry to grow (rules allow JV in niche technology/when we don’t have the tech); however, the overall benefits override any negatives.

Corporatisation of OFB

A Move Long Time Coming: The corporatisation of OFB announced by the Government was incorporated in Modi 2.0 manifesto as part of their ‘167 transformation ideas’ but has been debated since a long time. The corporatisation was first suggested by the Nair Committee in 2000 and thereafter by Kelkar Committee in 2005 and Raman Puri Committee in 2015.[vii] Despite stiff opposition from the trade unions who are calling it ‘arbitrary illegal and unjustified’, the government appears determined to implement it. The rationale for doing so has been covered in Part I.  

Overview of Corporisation

The Corporatisation of OFB will put it at par with other DPSUs managed by its own board of directors with broad guidelines from the government.[viii] The growth envisaged is a turnover of Rs. 30,000 crore by 2024-25 annually against exiting Rs. 12,000 crore. A high level committee under Vice Admiral Raman Puri Committee recommended grouping existing ordnance factories under three or four verticals with core competencies. A likely structure categorising factories into four verticals of Ammunition, Weapons, Explosives and Combat Vehicles is shown in Fig. 1 below:

Corporate OFB will be allowed to forge partnerships with the private sector as per the MoD’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 per cent  above 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 per cent  of the total shortfall and by way of equity investment for balance 70 per cent  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.[ix]

Benefits of Corporatisation: Some important benefits which will accrue post corporatisation are; improved efficiency leading to increased production capacity, greater autonomy and faster decision making; competitive pricing as competing with the private industry; induction of niche technology from the best sources/nations; increasing flexibility and financial independence; earnings through exports; and most importantly benefits to Armed Forces who will get more ‘bang for the buck’ for modernisation and procurement of latest systems improving capability and capacity. Some of the concerns of the employees and critics have been highlighted in Part I.

Separate Budget Provisioning for Domestic Capital Procurement:To boost indigenization and private defence sector, the government has promised to set up a separate budget for internal capital procurement. This ideally should be over and above the Defence Budget, with provision for R&D which is the hallmark of all growing powers. One thought which needs further study and analysis is to place Department of Defence Production (DDP) under the Department of Military Affairs (DMA), and Corporate OFB under the Ministry of Industry for optimal functioning.

Conclusion

We live in a multi-polar, multi-domain world which is currently going through a turbulent, violent phase forcing nations to carry out strategic balancing to retain/enlarge exploit strategic space. Nations are concurrently carrying our cooperation, competition, confrontation and engaging even in conflict if national sovereignty dictates so. India believes in ‘strategic autonomy’ and one of the vital ingredients to attain it is by becoming self-reliant in defence, in terms of forces, munitions and equipment, including niche technology. Corporatisation of OFB is likely to be a decisive step and a game changer towards self-reliance in defence production. Hopefully, it will transform ordnance factories into a modern, state of the art facility with flexible and better decision making in its functioning. It will make them more competitive and hopefully convert it to a profit earning organisation within next few years. However, the more important part will be the execution of these reforms on ground. The exact contours and timelines for implementation is still to be released by the government and is eagerly awaited by the Indian and foreign defence companies. Corporation of OFB is a defining step towards a ‘Aatmanirbhar Bharat’.

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[i]‘Finance Minister announces new horizons of growth; structural reforms across Eight Sectors paving way for ‘Aatmanirbhar Bharat’, Ministry of Finance, 16 May 20

[ii] The entry of Foreign Direct Investment by non residents into India is regulated through two routes –automatic route and approval route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment.But, in the case of approval route, government agencies regulate and scrutinises foreign investment while approving it.

[iii] Piyush Pandey, ‘Confederation of Indian Industries lauds defence initiatives’, The Hindu, 16 May 2020

[iv] Revision of existing sectoral guidelines and equity cap on Foreign Direct Investment (FDI)’, Department of Industrial Policy and Promotion (DIPP) Press Note No 4, 21 May 2001,  available at https://dipp.gov.in/sites/default/files/press4_01.pdf

[v] ‘Review of FDI policy on various sectors’,  Department of Industrial Policy and Promotion (DIPP) Press Note No 12, 24 Nov 2015,  available at https://dipp.gov.in/sites/default/files/pn12_2015%20%281%29.pdf

[vi] ‘Review of FDI policy on various sectors’,  Department of Industrial Policy and Promotion (DIPP) Press Note No 5, 24 Jun 2016,  available at https://dipp.gov.in/sites/default/files/pn5_2016.pdf

[vii] ‘Committee for Corporatisation of Ordnance Factory Board’, Press Information Bureau of India, 02 Dec 2019, available at https://pib.gov.in/Pressreleaseshare.aspx?PRID=1594520

[viii] Laxman Kumar Behera, ‘In Favour of Corporatisation of Ordnance Factory Board’, IDSA, 21 Aug 2019, available at https://idsa.in/idsacomments/in-favour-corporatisation-ordnance-factory-lkbehera-210819

[ix] ‘Corporatization of Ordnance Factory Board (OFB)’, Defence ProAc, available at https://defproac.com/?p=9550

Lt. Gen. PR Kumar (Retd.)
Lt. Gen. PR Kumar (Retd.)
Lt. Gen. PR Kumar retired from the post of Director General of Military Operations (DGMO) of the Indian Army. As DGMO he was responsible for the entire operational planning, preparation and execution of plans and border management. After his retirement he has been writing for numerous Think Tanks on international and national strategic issues and on security related aspects. He also delivers talks in Armed Forces and Educational institutions.

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