Indian defence sector waking up to the call of hour
The Economic Times, July 15, 2021

By Pradeep S. Mehta and Jithin Sabu

With the recent cabinet approval for corporatisation of the Ordnance Factory Board (OFB), the defence sector in India is moving forward in the right direction with much-needed reforms, which should have been initiated decades before. But, it's better late than never.

At a time when India is facing threats on the borders, and from the use of unaccustomed civilian technologies such as drones, it is vital for the Indian defence sector to fully equip its forces with modern equipment and technology. India should be aware that its adversaries are constantly upgrading their military arsenal with advanced technologies such as the modern hunter-killer tanks, which is posing a big threat to India.

The corporatisation of Ordnance Factory Board, if properly implemented and monitored, will help in inducting the state of art facilities and technology in the ordnance factories. Along with giving more decision-making capacity and flexibility to the factories management, corporatisation will also make them more productive and capable of earning profits by slashing the inefficient use of funds on expenditures such as overheads. It was astounding to know that overheads constituted 33% of the overall allotted budget on OFB for the year 2017-2018 according to the Comptroller and Auditor General’s Report of 2019. Adding to the shock is the fact that ordnance factories were able only to execute less than half of the orders in time.

These inefficiencies point to the pertinent need of restructuring the OFB to make it produce quality and cost-efficient equipment using the most-modern technologies and innovations in the sector. The corporatisation gives opportunity to engage professionals in managerial positions of the newly formed seven Defence Public Sector Undertakings (DPSUs) and thus bring a new life to the ailing ordnance factories. After corporatisation, OFBs should be free to enter into partnership with private entities and form strategic alliances with overseas companies, thus boosting innovation and transfer of technologies. Modern products of world-class quality can be produced in this way, which can be sold to overseas buyers, thus ensuring that the OFB generates returns for the taxpayer. If Atmanirbharta has to be promoted then it should not distinguish between the public sector and private sector. Both will create jobs and also pay taxes to the treasury. The government must maintain competitive neutrality so that the whole defence industry prospers in a competitive manner.
Apart from this, corporatisation also reduces the financial burden of the union government at a time when its coffers are struggling, because the Defence PSUs will no longer be entirely dependent on government funds. The DPSUs can now source funds using different means such as listing in the stock exchange. By achieving financial independence, the DPSUs can spend more on R&D, thus boosting innovation and modernisation of products. Advanced weapons and equipment can be made at competitive prices by the new DPSUs.

The OFBs (the new Opto-Electronics DPSU) should develop advanced drone detection technologies to tackle the new threat imposed by India’s neighbours. New drone and Unmanned Aerial Vehicle (UAV) designs and technology can be developed with the help of the iDEX system, developed by the government of India. A potential collaboration with Israeli and the US defence sector companies will help in production of modern defence equipment in drone and UAV domains. Israel is already in line to supply advanced Heron Mark-II drones to India for strategic surveillance in the borders.

Apart from corporatisation of OFBs, the defence sector in India has gone through a bunch of other significant reforms as part of the Defence Procurement Policy, 2020 (DPP), that will make big changes in its architecture. One such major reform is the rise in the Foreign Direct Investment (FDI) automatic approval from 49% to 74% which will help in attracting foreign funds to the defence-oriented ventures in India. It will potentially lead to sharing of the most modern technology and the knowhow in defence technologies between foreign and Indian companies. If responsibly used, this can bring revolutionary changes in the defence manufacturing sector in India. There are other reforms such as a separate capital budget for indigenous weapons procurement and a negative list for import of defence equipment in India, which will help in achieving self-reliance.

The DPSUs should also be empowered to receive offset funds from foreign companies which are supplying defence equipment to India. They are required to invest 30% of their gross receipts on Indian firms. Currently, many foreign companies do not find the necessary opportunity to invest their offset obligations.

However, corporatisation of OFB and other changes that the defence sector in India is introducing won’t be effective and achieve the desired outcomes, unless constantly monitored and evaluated by third parties. The Policy Planning and Force Development division of the Integrated Defence Staff College in India can undertake a detailed study of how the ordnance factories in a select group of countries are functioning and what lessons India can draw from them in terms of monitoring and evaluation. If the reforms are ensured to be implemented in its fullest, it can lead to revolutionary changes in the Indian defence sector. It will enable the sector to achieve self-sufficiency and reduce the huge burden of the defence sector on the national treasury. We should strive to get rid of the tag of ‘second-largest arms importer in the world’ and aim to become a big exporter of defence equipment.

The authors work for CUTS International, a global think tank working on trade, regulation and governance. Th e opinions expressed in this piece are those of the writers and do not reflect the views of

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