Rethinking the defence PSU model

UPSC Syllabus: Gs Paper 3- changes in industrial policy and their effects on industrial growth.

Introduction

India’s ordnance factories have long supported defence preparedness through specialised manufacturing and technical expertise. In October 2021, the government corporatised 41 factories under the Ordnance Factory Board (OFB) into seven Defence Public Sector Undertakings (DPSUs) to improve efficiency, competitiveness and quality. Despite reported profits and export growth, concerns remain over accounting, strategic manufacturing, technological self-reliance and governance. The central question is whether commercial efficiency serves defence sovereignty.

Evolution of India’s Ordnance Factories

1. Strategic Importance: Ordnance factories have supported India’s defence preparedness by manufacturing weapons, ammunition, equipment and other essential military supplies.
2. Specialised Expertise and Strategic Manufacturing: Ordnance factories developed expertise in metallurgy, chemicals and ballistics, functioning as Original Equipment Manufacturers (OEMs) for critical defence products and earning the reputation of the ‘Fourth Arm’ of defence.
3. Corporatisation of OFB: In October 2021, the government corporatised 41 ordnance factories under the Ordnance Factory Board (OFB) into seven Defence Public Sector Undertakings (DPSUs) to improve efficiency, competitiveness and product quality.
4. Seven New DPSUs: The restructuring created:

• Munitions India Limited (MIL)
• Armoured Vehicles Nigam Limited (AVNL)
• Advanced Weapons and Equipment India Limited (AWEIL)
• Troop Comforts Limited (TCL)
• India Optel Limited (IOL)
• Gliders India Limited (GIL)
• Yantra India Limited (YIL)

Performance of the New DPSU Model

1. Reported Profitability: Except Yantra India Limited (YIL), the newly formed DPSUs reportedly recorded profits and increased export orders, indicating some positive outcomes after corporatisation.
2. Historical Supply Contribution: Comptroller and Auditor General (CAG)-validated data recorded OFB supplies worth ₹20,876 crore in 2016–17, highlighting its earlier contribution to defence production.
3. Possible Base Effect: Revenue growth based on the pandemic-disturbed Financial Year (FY) 2019–20 baseline may exaggerate the apparent improvement in the DPSUs’ financial performance.
4. Accounting Changes and Reported Turnover: Inter-factory transfers, earlier treated as internal transactions, are now recorded as commercial sales, potentially increasing aggregate turnover without a proportionate rise in physical output.

Key Issues and Concerns in Defence Corporatisation

1. Commercial Metrics and Long-Term Investment:

• Greater emphasis on Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) may encourage short-term returns, potentially affecting modernisation, Research and Development (R&D) and investment in complex defence technologies.
• The shift from user satisfaction and operational reliability towards EBITDA may prioritise short-term returns over modernisation and long-term research and development.

2. Declining Public-Sector OEM Role: Private firms may secure prime contracts using foreign designs and technology transfers, while public factories undertake subcontracted manufacturing, weakening their Original Equipment Manufacturer (OEM) capabilities.
3. Uneven Distribution of Strategic Risks and Gains: Private entities may retain commercial benefits from defence contracts, while public factories undertake hazardous and strategically important manufacturing activities.
4. Intellectual Property and Sovereign Knowledge: Technology transfers and collaboration may expose valuable public-sector expertise, requiring IP safeguards and fair public value retention.
5. Limits of Export-Led Self-Reliance: Exports concentrated in semi-finished components, castings and foundational chemicals may not translate into greater exports of complete defence platforms.
6. Leadership Vacancies and Appointment Delays: Defence Public Sector Undertakings (DPSUs), including Bharat Electronics Limited (BEL), Bharat Dynamics Limited (BDL), BEML Limited and Mazagon Dock Shipbuilders Limited (MDL), have faced leadership vacancies. Selection delays, changing criteria and administrative clearances can affect institutional continuity.
7. Implications for Critical Defence Projects: MDL’s prolonged leadership vacancy raised concerns during preparations for the Project 75 India (P-75I) submarine project, highlighting the importance of timely appointments in strategic defence institutions.

Way Forward

1. Adopt Strategic Performance Indicators: Evaluate DPSUs through operational reliability, equipment quality, indigenous technology and user satisfaction, alongside financial indicators.
2. Assess Actual Production: Separate accounting changes and inter-factory transactions from genuine increases in physical production and value addition.
3. Strengthen Modernisation and R&D: Ensure sustained investment in research, advanced manufacturing capabilities and long-term technological development.
4. Preserve Indigenous Manufacturing Capabilities: Strengthen public-sector OEM capabilities and ensure that strategic production knowledge remains available within India.
5. Protect Intellectual Property: Establish clear safeguards for technology transfers, public-sector expertise and fair sharing of commercial benefits.
6. Reform Leadership Appointments: Ensure timely Public Enterprises Selection Board (PESB) selections, stable eligibility criteria and faster administrative clearances to strengthen institutional continuity.
7. Rationalise ACC Approval Processes: Consider appropriate delegation of appointment powers by the Appointments Committee of the Cabinet (ACC), while retaining necessary accountability and oversight.

Conclusion

Corporatisation should be judged not only by profits, turnover and exports, but also by reliable equipment, indigenous technology and manufacturing depth. Better accounting, protected expertise, sustained modernisation and timely leadership appointments can strengthen the DPSUs. Commercial discipline must support India’s long-term defence preparedness and sovereignty, rather than displace these strategic goals.

Question for practice:

Examine the impact of corporatisation of India’s ordnance factories on defence preparedness, indigenous manufacturing and strategic autonomy.

Source: Businessline ; The print