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Going back in time – PSUs continue to call the shots in the defence ministry

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The entry of PSUs into mega tender ‘reserved’ for private industry is a symptom of continued protectionism. It’s a challenge the government has to tackle.

The two minor mentions that defence managed to get in the otherwise social sector-heavy budget speech pertained to the private industry – an upcoming policy for the domestic production of arms, and the setting up of two new military industrial corridors.

That in its fifth budget, yet another policy for ‘Make in India’ in defence is being announced is adequate indication that things have not gone as the government would have liked. The simplest of reasons could be that the sole customer – the military – is not placing orders for arms and ammunition, without which new manufacturing units, and jobs, cannot come.

But, a look at the detailed defence budget also shows that all resources allocated for modernisation have been utilised by the government. So, where is this money going and why are we not seeing new factories, research and development facilities, and production lines cropping up across the country?

The answer lies in the familiar old story – most orders for guns, warships, fighter jets, and missiles are being placed with government-owned public sector units. Not only that, the powerful PSU voice within the government directs and shapes decisions on all critical things – from individual procurement to larger policy.

A case in point has been the prolonged effort of the defence ministry to place long-term orders for purchasing ammunition from the industry.

It was meant to be THE transformational project to kill two birds with one stone, create thousands of jobs by unlocking the competitive potential of private industry, and free up foreign dependence of the mammoth Indian military for its most critical requirement – ammunition.

However, the ambitious plan mooted two years ago seems to have succumbed to PSUs calling the shots on policy, despite a stated (and vocal) promise of the government to promote private sector participation.

Ammunition and the Army

If an army marches on its stomach, the military runs on its ammunition. It is needed every year, lakhs of rounds of all shapes and sizes, throughout the country, with soldiers using them on firing ranges, stocking up reserves, and the occasional pounding of Pakistani positions across the Line of Control.

Despite being the most critical component, the Indian military always seems to be running out of it. Critically low ammunition holdings have been routinely flagged by the military itself, and successive parliamentary panels over the years.

The problem was that the state-owned Ordnance Factory Board (OFB) was not producing the quality and quantity needed by the forces, forcing heavy imports. With ‘Make in India’ in focus, the defence ministry decided to place competitive contracts with the private sector for ammunition – 10-year supply contracts for different types of rounds required by the three armed forces.

Seven tenders that were issued by the defence ministry generated much interest, given the value of work they represented. Armour-piercing fin-stabilised discarding sabot (APFSDS) round requirements, for example, were in excess of $1.26 billion.

The idea to bring in the private sector for this, however, has been dealt a death blow, with PSUs knocking on the door. In a recent amendment, the government has allowed PSUs to compete against the private sector for these contracts.

The consolidated resources available with cash-rich PSUs will give them a strong advantage, much to the disappointment of the industry that was looking at entering the global ammunition market by picking up on Indian orders. There are more examples – government-owned shipyards winning a streak of recent naval orders after underbidding against private yards including Larsen & Toubro; the Defence Research and Development Organisation managing to scuttle a mega order for anti-tank missiles that were to be manufactured by the Kalyani Group.

Unless policy formulation is unshackled from the continued protectionism that PSUs enjoy, unlocking the potential of the private sector will remain an uphill task. There are several options on the table that can be considered. Stricter control on PSU finances is one on the lower end – ensuring they don’t get an unfair advantage by rotating money received for previous orders to underbid the private sector.

A more drastic one on the higher end is moving out the defence production department from South Block to the Ministry of Heavy Industry, to avoid a conflict of interest in policy making.

How the government tackles this challenge will decide whether Indian defence companies will have a future as globally competitive entities.

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  1. What kind of article is this? It does not seem to be well researched. If the PSUs are winning in the competitive bidding, what is wrong with that? If the performance is bad, there are (should be) provisions under the contract to make such PSUs liable. The private sector has to invest a lot in these sectors instead of waiting for the government to offer sops to them.

    Please come up with articles with more rigour. Do a follow-up article on whether the defence ministry is actually penalising these PSUs under the contract for under-performance.

  2. Why Pvt companies, which are competitive, are so fearful of competition? It appears that above action was taken by the government without thinking through the legal aspects the action would have raised. Now that, Shri H C Gupta, IAS(Retd.) has been convicted for making available the government resource for private gain, though for no returns to him or others, the government appropriately decided to act within the realm of fair play.

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