(Editor’s Note: Corrections in paragraph 3 and 4, to read the economic package as Rs 2,000,000 crore or Rs 20 trillion or $266 billion, and production target Rs 30,000 crore as $4 billion respectively.)

By Ayaskant Das

The Ordnance Factory Board (OFB) has fallen short of its production target for the last financial year ending Mar. 2020 by over Rs 1,000 crore ($135 million), a poor indicator of its performance. That does not deter the 82,000 employees of the Indian State-run arms manufacturing organisation to oppose the OFB corporatisation move of the Narendra Modi government.

The Modi administration has late last week announced the setting up of a powerful ministerial group headed by Minister of Defence Rajnath Singh and Minister of Home Affairs Amit Shah as one of its members to push for the corporatisation of the OFB, a Nehruvian institution modelled on the Soviet Union-style military industry.

India’s Union Finance Minister Nirmala Sitharaman, who is also member of the Empowered Group of Ministers on the OFB corporatisation question, had spelt out the intent of the government while announcing the fourth tranche of the Rs 2,000,000 crore (Rs 20 trillion/$266 billion) financial package of the central government to tackle the economic downturn of the COVID-19 pandemic.

Employees of the 41 arms factories that operate under the OFB have, on the other hand, demanded an advance five-year indent from the Indian Army, under the present set-up and structure, for a production target of Rs 30,000 crore ($4 billion).

The OFB has now been for several years under the radar of the Government of India for its inability to operate in a profitable manner.

Following the launch of the ‘Make in India’ initiative by the Modi government, there has been a growing demand, from the private and public sector alike, for restructuring the OFB in order to allow the arms factories, some of which are as many as two centuries old, to cater to a wide range of consumers other than the Indian Army.

Since the British rule, when these arms factories were first established, the Indian Army remained the sole consumer of products manufactured by the OFB.

“In the past three years, for example, the OFB has been unable to meet its target production consistently. It was only in the financial year 2017-18 that the achieved production was higher than that of the target. But it was only marginal. The OFB has failed to meet its target production almost every year,” a senior Ministry of Defence official told Defence.Capital.

In the financial year, 2016-17, the achieved production was only Rs 14,824 crore ($1.98 billion) as against a target of Rs 15,356 crore ($2.04 billion). In 2017-18, while the target set for the OFB was Rs 14,115 crore ($1.88 billion), it achieved a production of Rs 14,127 crore ($1.89 billion).

Similarly, in the financial year 2018-19, the OFB achieved a production of Rs 12,766 crore ($1.7 billion) as against a target of Rs 13,767 crore ($1.84 billion). All these figures are exclusive of Goods and Services Tax.

The move at corporatisation has met with stiff opposition from all employees’ associations of the OFB cutting across political affiliations. These include the All India Defence Employees Federation that is backed by the Left/Communist parties, the Indian National Defence Workers Federation that is affiliated to the Indian National Congress and also the Rashtriya Swayamsevak Sangh-backed Bharatiya Pratiraksha Mazdoor Sangh.

“It is a matter of grave concern that the laxity of the Indian Army, which is the sole consumer of arms manufactured by the OFB, is never considered while looking at losses. Orders placed by the Indian Army are erratic. Indents for production are never provided at the beginning of the financial year though that is when we begin calculating profit and loss statements,” said C. Srikumar, General Secretary, All India Defence Employees Federation.

“For production, we need to make material procurement from a range of sources including other ordnance factories, private vendors, certain public sector units and a from a number of foreign countries too,” Srikumar said.

“Five-year indents from the Indian Army should be provided for ammunition while three-year indents are needed for all other items. This will help OFB to plan its material procurement. Allocations for the OFB are never made separately in the annual budgets of the central government and it is a part of the budget allocation for the Army,” he said.

Workers’ associations say OFB factories will invariably not be able to meet their production targets even after corporatisation if armed forces’ needs are communicated in spurts and remain inconsistent in the future.

The recognised workers’ federations had embarked on an indefinite strike in Aug. 2019, following moves by the central government at corporatisation. The strike had been called off after the government appointed a High-Level Official Committee to address various concerns of the workers including their interests and benefits, salaries, future workload and other service matters apart for the demand for achieving Rs 30,000-crore ($3 billion) target production within the present set up.

All three recognised employees’ federations have raised concerns about the terms of reference handed out to the High-Level Official Committee, squarely rejecting the option of corporatisation at least for the next five years. The federations have expressed fears that corporatisation might be the first step towards privatising the arms-manufacturing state-run OFB, which will lead to job losses.

“The fate of the public sector units across the country is well known. Many of them are being privatised. The Bharat Sanchar Nigam Limited and the Hindustan Aeronautics Limited are cases in point. Ordnance factories, which are war reserves at par with the armed forces, cannot be subjected to the crisis that other public sector units are facing,” said Mukesh Singh, General Secretary, Bharatiya Pratiraksha Mazdoor Sangh.

“We have already proposed for restructuring of the OFB at par with the Railway Board, the Indian Space Research Organisation, or the Department of Atomic Energy, so that it can be empowered for its effective functioning,” Mukesh Singh said.

During the stalemate of the OFB employees’ federation with the central government in Aug. 2019, the defence ministry had clarified regarding the workers’ apprehensions on privatisation.

Senior ministry officials had told protesting workers that corporatisation will not lead to privatisation. However, this assurance now stands on shaky ground given the fact that the central government has decided to do away with public sector enterprises in all sectors.

Announcing the fifth and financial tranche of the Rs 20,000 lakh crore ($2.66 billion) stimulus package on May 17, Nirmala Sitharaman said that the government will formulate a new policy wherein no more than four public sector units will be allowed in any strategic sector.

The central government is yet to announce the list of strategic sectors, which will be considered for limited disinvestment. However, it is believed among policy experts that defence manufacturing will invariably figure in the list of strategic sectors.

In the past, several Parliamentary Standing Committees on Defence have studied the functioning of the OFB and recommended various steps in their reports for modernisation of the arms factories.

It has been noted by successive Standing Committees that sufficient resources have never been allocated to Ordnance Factories for research and development (R&D), even though they are expected to compete with the best global players in the manufacture of arms.

The allocation for research and development at ordnance factories was a mere Rs 100 crore ($13 million) in the revised estimates of 2017-18, Rs 5 crore ($667,323) less than budgetary estimates; and Rs 105 crore ($14 million) in the budgetary estimates of 2018-19.

The 43rd Report of the Parliamentary Standing Committee on Defence had recommended in its report that modernisation of Ordnance Factories be undertaken in a planned manner with essential budget provided by the defence ministry and for its appropriate expenditure by the OFB.

“The Committee were disappointed to note that there was no increase in the allocations for R&D (Research and Development) of Ordnance Factories. Also, the inflation rate was not factored into. With this allocation, the Committee were apprehensive whether the key technological intensive areas as mentioned above were going to be materialised or not,” the report had said.

“Ordnance Factories play a significant role in ‘Make in India’ drive of the Government of India at least in defence sector. However, it was of utmost importance that the products being manufactured in Ordnance Factories were of global standards so that they could compete with private players also who are now joining the defence sector. To reach this objective, it was imperative that the production related infrastructure and capacity in OFs are enhanced up to required standards,” the committee said.

The 49th Report of the Parliamentary Standing Committee on Defence, which was tabled in Dec. 2019, takes a grim view of the fact that the defence ministry was non-committal in its replies so far as following the recommendations for modernising Ordnance Factories.

“The Ministry, in the action taken reply, has submitted inter alia that Ordnance Factory Board’s modernisation programme is focused on introduction of state-of-the-art machines to manufacture quality product with cost effectiveness, considering the current and long-term future requirements of its customers. However, the reply is conspicuously silent as to the allocation of adequate funds for R&D as desired by the committee,” the 49th report of the committee said.

Employees’ federations have, meanwhile, laid claim to various agreements with former defence ministers, including George Fernandes, Pranab Mukherjee, A. K. Anthony and Manohar Parikkar, where they had been assured that the OFB will never be corporatised.

Private players in the defence manufacturing industry though have welcomed the central government decision to corporatise the OFB and also consider it as a big shot in the arm of the ‘Make in India’ initiative. Dr R. K. Tyagi, a former chairman of Hindustan Aeronautics Limited, told Defence.Capital that the full potential of the OFB can only be unlocked when it is corporatised.

“The company will have its own board that can decide upon diversifications as well as acquisitions. At present, the OFB depends upon the Ministry of Defence for every day-to-day decision. As a corporate entity, the OFB will have its own balance sheets as well as profit and loss accounts that will result in greater degree of accountability and transparency,” said Dr Tyagi, who also is part of the Indigenous Defence Equipment Exporters’ Association and president of the Aeronautical Society of India.

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