The defence production in the country is distributed among three sectors:
(i) Defence production by government sector – Ordnance Factories Board (OFB)
(ii) Defence public sector units (PSU)
(iii) Private sector
Defence PSUs and OFB work under the Department of Defence Production, which is a part of the Ministry of Defence.
Ordnance Factories
The OFB was set up in 1979 and its network today consists of 41 ordnance factories, 9 training institutes, 3 regional marketing centres and 5 regional controllers of safety. The oldest ordnance factory at Ishapur, near Kolkata was set up by the British as far back as 1787. At present, these factories are divided under five clusters or operating groups and they produce a range of arms, ammunition, armoured and infantry combat vehicles including tanks, clothing items and others such as parachutes and optical devices for the defence services.
Ordnance factories are spread all over the country as can be seen from the map.
Nearly 80,000 people work at ordnance factories and are considered as government employees.
The value of goods supplied by all ordnance factories together was around Rs. 20,000 crore in FY 2017.
Ordnance factories occupy nearly 60,000 acre of land, some of which is very valuable as it is in big cities like Kolkata, Pune, Kanpur, Jabalpur, Dehradun, etc.
The value of assets of ordnance factories has been claimed by the government to be only Rs 75,000 core. The actual value of assets including the land is nearly ten times more.
Defence PSUs
The sector consists of 9 PSUs:
1. Hindustan Aeronautics Limited (HAL): produces aircrafts and helicopters; it is the largest defence PSU.
2. Bharat Electronics Limited (BEL): produces various defence electronics products and systems.
3. Bharat Dynamics Limited (BDL): produces various missile and other weapons
4. BEML Limited (BEML): produces for weapons for defence and equipment for railways, mining and construction
5. Mishra Dhatu Nigam Limited (MIDHANI): produces alloys of steel and titanium
6. Mazagon Dock Shipbuilders Limited (MDL): produces warships and submarines
7. Garden Reach Shipbuilders and Engineers Limited (GRSE): produces warships
8. Goa Shipyard Limited (GSL): produces warships
9. Hindustan Shipyard Limited (HSL): largest shipyard for maintenance and production of warships
Defence PSUs are the largest supplier of goods to defence services in terms of value. Their sales together were around Rs. 45,000 crore in FY 19.
Private Sector
The major corporate groups which have already entered defence production are Tata, Mahindra, Hinduja, Kalyani, L&T, Ambani and Adani. Some of these groups have formed joint ventures with foreign defence equipment suppliers. The private sector is already supplying armoured vehicles, artillery systems, ammunition, missiles and air defence solutions and small arms, besides others. Though the private sector supplied defence equipment worth only around Rs. 17,000 crore in FY 19, it plans to grow rapidly.
The government has drawn up plans to make India a major defence producer. In FY 2019, the total defence production by all the sectors together was around Rs. 80,000 crore only. The government wants it to be nearly doubled to Rs. 1,75,000 crore by 2025 and it also wants to export Rs. 35,000 core worth of goods.
Privatisation of Defence Production
The privatisation of defence production began 20 years back and has been carried out step by step since then.
2001: Defence production opened for private sector and 26% FDI was permitted but both required licenses.
2016: FDI limit raised to 49% and no license required.
2020: FDI limit raised to 74%.
Another push to privatisation was given through the Defence Procurement Procedure (DPP) 2016 which introduced the Strategic Partnership Policy (SPP). This allowed selected Indian private sector companies to partner with foreign original equipment manufacturers (OEMs) to jointly manufacture fighter jets, helicopters, submarines and armoured vehicles. Global defence suppliers wanting to tie-up with Indian private sector companies would receive formal assurances from the Indian government to get the necessary licenses. The government would, therefore, play a facilitating role for the entry of Indian and foreign groups in defence production.
Another step to promote the privatisation of this sector was taken in July 2019 when 275 items, so far produced by ordnance factories, were declared “non-core”. “Non-core” items can be purchased from the private sector. The 275 products account for about 40% of the present production of ordnance factories. This step will lead to idling of capacity in many ordnance factories which would make many workers “surplus”.
As a result of these steps taken from time to time, the share of the private sector in defence production is steadily growing.
The privatisation of defence PSUs through sale of shares has also been pursued for many years. During the last five years the partial privatisation of Hindustan Aeronautics Limited (HAL), Bharat Electronics Limited (BEL), Bharat Dynamics Limited (BDL), Mishra Dhatu Nigam Limited (MIDHANI), Garden Reach Shipbuilders & Engineers Ltd (GRESE) and Mazagon Dock Shipbuilders Limited (MDL) has been carried out by the government by reducing its shareholding in them. The government shareholding in BEML Ltd. had already been brought down over the years to 54%. Now BEML is being fully privatised with the sale of another 26% shares, which will make the government a minority shareholder in BEML.
The attempts to corporatize ordnance factories have been going on since 2016 but they have met with strong opposition of workers. In 2019, when the government revived the plan to corporatize and workers went on indefinite strike, the government promised that no steps would be taken to privatise this sector without consultation with the employees from this sector. However it again announced the plan to corporatize in 2020, and in June 2021, the decision was taken by the government to dismantle the OFB and create 7 corporations. The government has taken the unprecedented step of bringing out an ordinance, the Essential Defence Services Ordinance 2021, on 30 June 2021 to ban strikes by defence workers in order to throttle their opposition to corporatization and privatisation. A bill to replace the ordinance was introduced in the Parliament on 22 July 2021.