Indian Defence Industrial Base (DIB): Strong on Order Books; Wobbly On Efficiency?

Despite a large DIB and a huge captive defence market, India has not been able to enhance domestic production capabilities till date. The need of the hour is providing competitive environment to the Government-owned defence manufacturing units and not orders on platter.

The Indian Defence Industrial Base (DIB) has been the exclusive preserve of the state and has been the primary source of indigenous development and production of defence equipment. There are a total of nine Defence Public Sector Undertakings (Defence PSUs) and 41 Ordnance Factories (OF) under the administrative control of Department of Defence Production, Ministry of Defence. The responsibility of DPSUs and OFs is to provide advanced defence equipment to the Armed Forces as well as to enhance the country's self-reliance in defence production. Regrettably, despite substantial national investments in capacity building, assured order book, partnering and licence production agreements with foreign OEMs, most of the Defence PSUs are dependent on external sources for their production needs along with the country’s continuance dependence of imports at 60-70% dominating the induction of equipment.

We need to deliberate, despite such a large DIB and a huge captive defence market, why India has not been able to enhance domestic production capabilities? Is it due to rules of engagement in defence production? Or due to the continuance biased approach of Defence Ministry towards the DPSUs?

Overloaded Order Book

One of the main reasons of India still not being able to develop a robust DIB is because of the fact that the DPSUs and OFs which are primarily accountable for indigenous development and manufacturing of defence equipments are overloaded with defence orders. Resultantly most of the programmes in hand get delayed impacting the modernisation of Armed Forces. Look at this; according to the latest official information given by the Government, the total orders with public sector, currently, have topped the whopping mark of Rs 2,31,981 Crores ($32.5 Billion approx.) with the public sector aircraft manufacturer Hindustan Aeronautics Limited (HAL) on top of the list with order book of nearly Rs 60,000 Crores. It is followed by Bharat Electronics Limited (BEL), the proclaimed aerospace and electronic equipment manufacturer of Indian Armed Forces with an order book of Rs 56000 Crores and the shipbuilding manufacturer Mazagon Dock Shipbuilders Limited (MDL) with an order book of nearly Rs 52000 Crores.

The details of the current order book for each of the DPSUs are given here:

Notwithstanding their non-performance in defence manufacturing over the years, the DPSUs are overloaded with defence orders. Currently, the total orders with public sector have touched the whopping mark of Rs 2,31,981 Crores which is enough for them to stay in business for a period ranging from at least 5 years to 10 years

As seen, the aforementioned DPSUs current order book is enough for them to stay in business for a period ranging from at least 5 years to 10 years. Consider this, the country’s sole manufacturer HAL has firm orders of Su-30 MKI aircrafts including the recent clearance of 12 Su-30 MKI aircraft worth Rs 11000 Crores, 83 Light Combat Aircraft (LCA) Tejas Mk-1A jets worth Rs 50,000 Crores, 200 helicopters under a joint venture with Russia worth Rs 20,000 Crores and 15 indigenous Light Combat Helicopters (LCH) worth Rs 3,000 Crores. Besides this, the DPSU also have in pipeline - Light Combat Aircraft (LCA) Mark II and after that Advanced Medium Combat Aircraft (AMCA) coming up. So, there is seen a long visibility on the order book for HAL. Furthermore, as per HAL, over the next five year, it expects its order book to reach Rs 2,0,5000 Crores approximately. And mind it this is minimum anticipated order book position.

Same is the case with another DPSU, BDL which is currently into manufacturing of various anti-tank guided missiles namely MILAN - 2T, Konkurs M, Invar, SAMs like Akash and MRSAM, underwater weapons like lightweight torpedo (TAL), the heavyweight torpedo (Varunastra), C 303 and counter measures dispensing systems for various aircraft platforms of the Indian Air Force. These on-going orders worth Rs 7200 Crores are enough to keep it booked for next 5 years at least. Further, the DPSU is expecting another Rs 8,000 Crores in the next two years and total potential orders of around Rs 25,000 Crores in the next five years. To be noted, that barring one export order; all others came from the Indian Defence Forces.

These are just two examples, the scenario of swelled up order books is the same with almost all the mentioned DPSUs. Also, it needs to be mentioning here that most of the indigenous projects/orders to design and manufacture in hand of these DPSUs are facing delays in execution or not meeting the QRs of end-users. For instance, the Main Battle Tank (Arjun) and the Light Combat Aircraft (Tejas), engines (Kaveri engine), manufacturing of submarines/frigates (Project 75, Project 15) or various missile programmes (Akash, Agni, NAG ATGM), to quote a few, have not only consumed huge resources but have taken decades to develop and reach the end-user. Fig given below depicts some of the defence programmes undertaken by the DPSUs that are seen or have been facing time and cost overruns.

Corresponding situation prevails with regards to the Ordnance Factories whose workload primarily comes from the Armed Forces. The order book for OFB currently stands at more than Rs 58,000 Crores. However, it seems relatively possible that they will be able to deliver as they are unable to meet the annual Value of Issues (VoI). As per a CAG report, the target for 2019-20 for 41 Ordnance Factories was estimated as Rs 16,850 Crores, however by 31st July 2019, the Value of Production was 20% which is 39% less than the target, while the Value of Issue (supply) to the Army (the principal and largest customer of OFB accounting 80% of total share) was only 15%, which is 55% less than the target. Further, according to the report, there is a shortfall in 24 different types of ammunition and explosives and another 21 types of major principal items, including items like Dhanush guns, and T-90 battle tanks have not taken off the way by the OFB as they should have.

Undeniably, over the years, these public sector units have grown both in size and as well as in their portfolio of items. However, the growth of in terms of range and depth of production has not supported with the requirements of the Armed forces. This is evident from huge arms import by India. This in turn raises the question on the capability and efficiency of DPSUs and OFs in meeting the requirement of Armed Forces requirements. Moreover, most of the projects assigned to the Government owned entities are characterized more by time and cost overruns, defects and poor quality issue.

A System Fine-Tuned Towards Defence Public Sector Organizations?

Despite this, it is saddening to see that these DPSUs/OFs are still given preferential treatment by way of giving them defence orders on ‘nomination’ basis i.e. without competitive bidding/the tendering process. Not only this but these has vast infrastructure, investments, and technology collaborations at their disposal through Government support, resultantly they are flourishing whether they deliver or not. This of course has also resulted in a lack of a level playing field till date and resulting in restricted capability building & underutilization of private sector capacity. Even, when it comes to joint ventures with foreign OEMs with regards to a defence procurement involving technology transfer, it is the DPSUs and OFBs that are given preference  most of the times especially in the case of OFB. Since, the OFB cannot generate business on its own and exports are hardly developed with pricing of products being completely controlled by the Government, so orders are given to them abundantly to keep their businesses going whether they deliver or not.

Though  the Government launched the ‘Make in India’ initiative in 2014 along with introduction of  sub-head policies such as Make-I, Make-II, Strategic Partnership, Indigenous Design and Development and Manufacturing (IDDM) over the years to develop a strong industrial base keeping in focus the enhancement of manufacturing and participation of the private sector in defence. But these seems to be mere rhetoric as the much hyped 'Make in India' projects involving private sector such as Futuristic Infantry Combat Vehicle (FICV) project, Tactical Communication System (TCS) and Battlefield Management System (BMS), are in limbo even after almost 4 years. Furthermore, the ‘Strategic Partnership (SP)’ model which was primarily meant for creating capacity in the private sector over and above the capacity and infrastructure that exists in the DPSUs also seems to be nowhere. With the lobbying from DPSUs, the Government has allowed the DPSUs to participate in Strategic Partnership (SP) model programmes. Due to this, the DPSUs are now jumping in fray despite their overloaded order books and poor delivery record in segments detailed below:-

  • Recently it has been reported that the state-run HAL is pushing for its inclusion in the Indian Navy’s 111 Naval Utility Helicopters (NUHs) programme under SP model for an estimated Rs 21,738 crore programme. Earlier, it had submitted two separate responses to the Indian Navy’s Expression of Interest (EoI) - one proposal to participate as a DPSU and the second proposal from the HAL-led joint venture, Indo-Russian Helicopters Ltd (IRHL), but both of them were dropped from the final shortlist of Indian Strategic Partnership hopefuls. The Ministry of Defence which is yet to issue Request for Proposal (RFP) for selected vendors is likely to take a fresh look at the proposal to include HAL. On the other hand, the Indian Navy and other private players have objected to HAL’s inclusion.
  • As for Project 75-I programme, another SP project, under which six submarines are to be built for the Indian Navy worth Rs 50000 Crores approx., the Government this year shortlisted the DPSU Mazagon Dock along with the private sector shipbuilder Larsen & Toubro (L&T).

Though, the MoD is yet to finalise the Indian companies which could be enlisted as potential strategic partners under the SP model, nonetheless allowing the entry of DPSUs in most of the defence programmes will give unfair advantage to the already over loaded DPSUs also giving a clear indication of their clout. To, this extent, lobbying by HAL to get ‘at a critical stage of the NUH-SP program, is neither unique nor surprising as this has been the ‘common scenario’ over the years, hardly any private company has been awarded any major defence order. Seems like that the Government, is not interested in giving private sector a fair chance which has been proving their mettle. Rather, firms like L&T and TATAs, Mahindra have indeed been successful in coming out with world class technologies and that too in timely manner. This is one of the reasons that DPSUs dominate the defence production/manufacturing till date with occupying almost 78 percent while the share of private companies still remains nominal (22 percent) as compared to DPSUs in defence production till date. Refer Fig and Table.

Way Forward

The Government should keep in mind that India would not been one of the world’s largest importers of weaponries if the DPSUs were a trademark of competence. At present, what the public sector organizations needs the most is competition and not mere orders on platter. In every sector be it land, air or naval defence procurement programmes these DPSUs and OFs are seen to exert complete monopoly especially in aerospace segment wherein HAL, till date is the only aircraft manufacturer in the country. It is high time that the Government take some concrete stand by focusing on end-users preference and timely delivery of weaponries. And this can only happen if we involve the efficient private sector which can only thrive if the Government places firm orders and in quantities that make it viable to invest. Thanks to the lobbying by the public sector entities, that the Government most of the times nominates them to manufacturing of big-ticket defence procurement programmes. This needs to be checked in future indigenous defence programmes to be undertaken. Private firms also cannot compete with DPSUs whose massive infrastructure has been created by Government. Private firms have to consider the investment, the cost of money and making a profit which is not the case with public sector. Lack of level-playing field will continue to hold back private sector in the defence sector unless the Government takes some concrete steps in this regards.

Comments are closed.