Defence Public Sector Units needs restructuring and fresh investment

By Rohit Srivastava

New Delhi. 19^th October, 2015. Indian defence manufacturing base is primarily occupied by the Defence Public Sector Undertakings (DPSUs) owned by the department of defence production, Ministry of Defence. This makes the defence manufacturing an in-house affair.  The department of defence production manufactures products ranging from cloths to aircrafts and air craft carriers. In-spite of such varied and large product portfolio India still remains the world’s largest weapon importer. Lot of blame is put on the inefficiency of defence PSUs for this situation, which is partially true, but some of the blame has to be borne by the shenanigans at the Raisina Hill who could not revitalize the DPSUs with time.

Most of them are struggling with many of the ills common to the Indian public sector, like labour unions, inefficient work culture, low investment in human resource, etc to name a few, but unlike other public enterprise the DPSUs can neither be sold out nor government can reduce its share beyond a point. India needs to have control over defence manufacturing. India is still far away from developing complex system of controlling the strategic industries in private sector. Indian industrial policy and legal system is not capable of handling the complexities and challenges that arises when the strategic industries are in the hands of private sector. Only developed nations with very stable system of governance can allow such liberties. Indian political system is yet to develop consensus over many of our fundamental policy issues and defence being a sensitive sector, we can’t afford to liberalise strategic industries beyond a point without risking nation to serious consequences.

DPSUs are manufacturing either through licensed production of imported system from raw material or from totally knocked down kits or manufacturing DRDO developed systems. In the case of DRDO developed system, DPSUs do not have much say in development of technology or manufacturing design. There are ambiguities in the technology transfer from DRDO to DPSUs. Since, DRDO is continuously developing system or upgrading them, it does not make much sense for them to part away with technology. There is always a case for institutional interest. This is not a very desirable situation for  the government. Production units grow when the next upgrade is developed parallel to ongoing production line, so as to keep the product relevant to market.

In case of license production the DPSUs come with open and shut case as the total number of system to be manufactured may

or may not make case for an investment in the reverse engineering or investment into technology absorption. Therefore, once the import contract is over the production line stops and the investment is left ideal.

DPSUs do charge the investment in production line to user, one of the reasons why DPSUs always make profit, but ultimately the money goes from defence budget and this system does not give value for money.

The way out of this vicious cycle is neither straight forward nor one solution fit all. Many products being manufactured by Ordinance factories can be procured from markets like clothing, boots and other items of these kinds. The commercial manufacturers are in better position to reduce the prices of goods and keeping in mind the large market that services offers where bulk sale is made, the commercial enterprises will be more than willing to increase the quality and reduce the prices. Companies will make investments to bring the world’s best products to defence forces. Similar investment is not possible from government enterprises.  The same principle applies to low to medium tech products. Government should either sell those DPSUs or can go for Government Owned Company Operated (GOCO) where companies will not have to invest in production line or human resource and would reduce the production cost for private vendors.

They are national asset and need to be taken care of with investment, long term planning, futuristic technology infusion, investment in training of human resources etc. to make them deliver what India needs in future. As of now Indian forces’ needs are well known and majority of the products are going to be imported, a reality that can’t be changed, but India has to become self sufficient in defence production and will have to remain so for distant future and for this the restructuring of DPSUs have to begin now. The core around which the Indian defence industry would grow will be the DPSUs. There is a case for fresh investment in DPSUs.  

Government of India is pushing Make in India as a main method of procurement of weapons both from Indian as well as foreign vendors. Since in private sector there are hardly any existing manufacturing units in defence sectors, the manufacturing of the large weapons like artillery guns, armoured vehicles, troop carriers, missile systems etc. could be done in the DPSUs with surplus production capacity. Many of the future procurements under the Make in India are of those systems which were being license manufactured in India, like Infantry Combat vehicle, which is being pursued through FICV programme.

If the winner of FICV contract, takes the OFB’s Medak plant on lease where Sarath(ICV) were manufactured then the company would be able to utilize the trained manpower, established manufacturing infrastructure and machinery and investment could be made in training the manpower for the latest manufacturing techniques and machinery. The best corporate practices will also be introduced into the plant. This would be a win –win situation for all. This is one of the models through which the Public-Private Partnership can reduce the cost of manufacturing and can also substantially upgrade the existing manufacturing units of DPSUs.

For advanced and strategic system manufacturing units, government needs to invest money in developing DPSUs R&D

facilities, technology absorption capabilities, manufacturing design capabilities which would make the DPSUs capable of developing next upgrades of the indigenously developed systems. The next upgrades, for both indigenous and imported system, should be developed in the manufacturing units. Presently, DRDO is developing the next upgrades; it should be relieved of this duty immediately. Across the world , cutting  systems are developed by the manufacturers only. The whole process of research, prototyping, testing, manufacturing when done in house the learning experience get shared and the institutional knowledge gets created which becomes the foundation of the next system. Mirage 2000-5 is the base of the Rafael and so is Su-27 for Su-30. This is the global practice for last 200 years of industrialisation. This is how world best companies continue to create best products. And our DRDO developing and DPSU manufacturing has not been very fruitful.

It’s time that government should begin the process of fresh investment in DPSUs. The private sector should also be brought on board  to see which company can develop some sort of partnership with which DPSU. The restructuring and fresh investment in DPSUs would become a core through which the emerging private sector and foreign vendors could be connected. The disorientation that exist in defence sector could be cured to some extent.