Appraisal Of Defence Production Establishments In India Commerce Essay


India has one of the largest and most significant defence production capabilities in the developing world principally owned by the government. These production capabilities together is termed as defence industrial base (DIB) in india and military industrial complex (MIC) in other countries. Post independence, prime focus was on industrialization to achieve economic self-sufficiency. Industrialization was viewed to be the engine of growth and jobs for the rest of the economy. Hence, the government has owned a large fraction of the industries and also tightly regulated the private sector. It was believed that public ownership was necessary to insure developments that would benefit the entire country. India decided early that the defense industries would be owned by the public sector, and the Indian inclination to establish a "socialist pattern of society" still dominates the defense industrial base.

Historical perspective

The Department of Defence Production was set up in Nov 1962, in the aftermath of the Chinese aggression to create a self-reliant and self-sufficient indigenous defence production base. The mandate for this department was to deal with R&D and production of defence equipment. The Department of Defence Supplies was created in Nov 1965 to forge linkages between the civil industries and defence production units and to cater for planning and execution of schemes for import substitution of defence requirements. These Departments were later merged to form the Department of Defence Production and Supplies. The Department of Defence Production and Supplies was renamed as Department of Defence Production in Jan 2004. The Department of Defence Production is headed by a Secretary and deals with matters pertaining to defence production, indigenisation of imported stores, equipment and spares, planning and control of departmental production units of the Ordnance Factory Board and Defence Public Sector Undertakings (DPSUs).

Department of Defence Production

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India's defense industrial capacity or base lies in three main classes of enterprises. These are:-

Ordnance Factories (OF),

Defense Public Sector Undertakings (DPSU) and,

Selected Civilian Public and Private Sector Manufacturing Establishments.

Presently, there are 39 OFs and 8 DPSUs located in various parts of India engaged in the task of manufacture of equipment and stores for Defence Services. Their capacities have been augmented and modernized selectively keeping in mind the emerging requirements of the Armed Forces. While the Ordnance Factories and Defence Public Sector Units (DPSUs) are manufacturing a wide range of products for the defence forces, the private sector has been involved in the supply of raw material, semi-finished products, parts and components of defence equipment. Both the OFs and the DPSU's are trying to move toward greater self-reliance. The government is also trying to promote greater civil sector participation in the defence production.

Ordnance Factories

The Ordnance Factories Organisation (OFO) is the largest departmentally run production organisation in the country engaged primarily in the manufacture of Arms, Ammunitions and Equipment for Defence Services. There are 39 OFs and the 40th factory is coming up at Nalanda, Bihar. These factories are geographically distributed over the country in 24 different locations and are grouped into five broad areas based on the type of armaments they produce. These are:-

(a) Ammunition and Explosives

(b) Weapons

(c) Vehicles and Equipment

(d) Armoured Vehicles

(e) Ordnance Equipment.

Founded in 1801, the Indian Ordnance Factories Organisation completed 200 years of their existence on March 18, 2002. The Organisation is a blend of the old and the state-of-the-art factories with the first Ordnance Factory established in 1801 at Cossipore, near Kolkata and the 40th coming up with state-of-the-art technology at Nalanda, Bihar for production of Bi-modular Charges. Apart from supplying armaments to Armed Forces, the OFs also fulfill the requirements of Paramilitary & Police Forces, Ministry of Home Affairs (MHA) for Arms, Ammunition and Clothing etc.

Product Range

The countrywide network of the Ordnance Factories has a wide range of technologies and product mix. The factories manufacture a variety of products which can be broadly classified into ammunition and weapon items, armoured vehicles and their variants, military vehicles, clothing and other equipment. Besides, the organisation has production expertise in special-purpose machines, optical and opto-electronic devices and cable and fibre optics.


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OFO caters to the requirements of Indian Army, Air Force, Navy, Para-Military and Police Forces of Central and State Governments. There is no proposal for privatisation of Ordnance Factories under consideration by the Government.

OFs produce a large variety of chemicals, a wide range of textiles, leather goods and sporting arms and ammunition for the civil sector. The sales towards civil trade during 2003-04 were Rs. 278 crores as compared to Rs. 266 crores in the preceding year, which represents a growth of only 4.5%18. Arms & Ammunition, Weapon Spares, Chemicals & Explosives, Leather and Clothing items have been exported by OFs to thirty countries including Nepal, Thailand, Malaysia, Algeria, Turkey, Botswana and have also booked orders from USA, Swaziland, New Zealand etc.


The OFB has formulated a perspective plan for modernising infrastructure to develop state-of-the-art products and production technology needed for manufacturing new equipment for induction in the Armed Forces at a short notice. During the IXth Plan, Rs 1,062 crore was invested on modernisation. An investment of Rs 1,786 crore has been earmarked during the ongoing Xth Plan (2002-07).


The factories commissioned before Independence had capacities created not only for production of finished stores required by the Armed Forces, but also had backward integrated in-house facilities for supply of basic and intermediate materials for which indigenous civil infrastructure was inadequate. In respect of the factories set up after Independence and with gradual emergence and development of civil industrial infrastructure with public and private sector, the concept of backward integration was progressively given up and the emphasis shifted from production of basic intermediate inputs to production of finished stores by drawing upon supplies from the civil sector for raw materials, components, semi-finished goods to the extent practicable.

the Indian Ordnance Factories have their own in-house R&D through which they have been carrying out product and process improvements.

Of late, the OFB has redefined its role and is in the process of strengthening R & D infrastructure to develop new products, if required, by synergy with technologically advanced weapon manufacturing industries around the globe. The aim is to provide state-of-the-art products, hitherto being imported to the Armed Forces and to increase the share in the overseas market.


The production value in ordnance has risen from Rs 15 crore in 1947 to more than Rs 6,500 crore by now.

The organisation contributes approximately 44 per cent of the total annual turnover of all the defence production units including eight defence public sector undertakings.

It also has 70 per cent share of revenue budget (ordnance) of the Indian Army on an average. since 1999-2000, the Ordnance Factories have started generating surplus.

The value of production aggregated to Rs. 7086.49 crore in 1999-2000 from Rs. 5441.12 crore achieved during 1998-99 thereby registering a growth of 30.24 per cent.

The Ordnance Factories also improved capacity utilisation and the total turn over; and as such generated a net budget surplus of Rs. 830.16 crore during 1999-2000.

The growth in turnover in the non-defence sector in the period 2001-2004 was 75 per cent. During the same period, the value of exports also increased to Rs 63 crore from Rs 4.83 crores in 1999-2000.

The sales of Ordnance Factories to defence and non defence customers have been steadily growing over the years. A record total sale of Rs. 6641 crore was achieved during 2003-2004. In 2004-05, the sales were expected to fetch Rs. 6800 crores.19

Futuristic plan


The capability of Indian Ordnance Factories was proved once again during Kargil conflict. It emerged as the most reliable source of defence equipment to the Armed Forces. The Ordnance Factories continuously strive for product upgradation.

The Ordnance Factories are quite experienced in assimilating transfer of technology from abroad for indigenisation. The Vijayanta and T 72 tanks and related ammunition, infantry combat vehicles along with their arms and ammunition, 155-mm ammunition and 84-mm rocket launcher and ammunition are some of the notable examples.

The Mine Proof Vehicles (MPV) developed by in-house R&D was one of the notable products to be exported. The OFB showcased the indigenously developed 155-mm gun system at an exposition in Abu Dhabi in 2002. The gun has been widely acclaimed. Enquiries have come from many quarters for its purchase.

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There was an overall reduction in various types of inventory held viz. stock holdings of input materials, work in progress and finished stock. However, production of 69 items out of 364 items for which demand existed and target were fixed was behind schedule. The short fall in production was mainly due to non-finalisation of design or non-availability of bulk production clearance etc. In financial terms, the value of the short fall items was less than 10 per cent of the total turn over. Audit have also pointed out some cases of accounting lapses. Necessary action is being taken by Ordnance Factory Organisation to avoid recurrence of such lapses in consultation with their Associate Finance.


However, Ordnance Factories have always been an enigma. A look at the products of OFs clearly brings out a fact that a large number of items can be efficiently produced by private industries and in a much less time frame. A number of committees and consultants have been appointed from time to time to study and recommend improvements for enhancing efficiency, utilization of idle capacities, etc. One of the Committee, which went into the running of the OFs in great detail, could not unravel the mystery of how the actual expenditure during the years 1963 to 1967 was more than the value of issues. It eventually recommended the appointment of yet another committee. This is a continuing process. The annual reports to Parliament show increasing value of production from year to year, without taking into account inflation. OFs products are also costlier than they should be and are not delivered on schedule. A binocular from OFs, for example costs Rs. 7400 compared to Rs. 3400 from BEL. It was stated in Parliament that although certain components for vehicles had been developed for production in civil sector, orders were not released, as the workers in the Government factories will be deprived.20

Ordnance Factories: It has to be noted that defence production is declining, inspite of increase in capital outlay at the cost of defence budget. To compensate, the production of items for civil sector has been increasing. Unless the products for civil sector are being supplied at production costs plus overheads, this is not helping in preventing a drain on the Army budget. Thus, under-utilization of production capacities, holding large inventories, large overheads, over-costing and gap in technologies, delayed deliveries are issues that certainly stretch the goal of efficient self-reliance a bit too far.

Defence Public Sector Undertakings (DPSUs)

There are eight publicy-owned DPSUs established on the lines of corporate model primarily to attain greater flexibility in working and provide for quicker decision making.21 The DPSUs produce a range of defence equipment consisting of aircrafts, helicopters, state of the art electronics, radars, sonars, communication equipment, earth-movers, tank transportation trailers, warships, submarines, missile boats, destroyers, frigates, corvettes, fast attack craft, guided missiles, super alloys, etc. The eight DPSUs are:

(a) Hindustan Aeronautics Limited (HAL)

(b) Bharat Electronics Limited (BEL)

(c) Bharat Earth Movers Limited (BEML)

(d) Mazagon Dock Ltd (MDL)

(e) Goa Shipyard Limited (GSL)

(f) Garden Reach Shipbuilders and Engineers Limited (GRSE)

(g) Bharat Dynamics Limited (BDL)

(h) Mishra Dhatu Nigam Limited (MIDHANI)

These DPSUs also provide overhaul and maintenance facilities. They have been successful in license production of equipment from varying sources. However, they have not been able to progress much beyond the license production. Lack of adequate design culture, resulted in no meaningful reverse engineering being taken up which affected the design of indigenous systems. The ship building industry, however, had graduated in early years to indigenous designed ships. In recent years, Hindustan Aeronautics Limited (HAL) has undertaken several projects, such as, series production of Advanced Light Helicopter (ALH), licensed production of SU-30MK1 apart from several upgrade programmes of MiG-21BIS, MiG- 27M, Jaguar and HS-748. HAL achieved exports of Rs 215.21 crores in 2003-0422. The combined value of the products of Ordnance Factories and Defence PSUs during 2003-2004 has been approximately Rs. 16000 crores as against approximately Rs. 1800 crores on import of stores, excluding capital equipment23.


The performance of the DPSU's has been far from satisfactory as they suffer from the same ills as any other PSU either in India or abroad - excessive bureaucratic control, over manning, low productive level and slow in adapting to technology. In addition, the DPSUs enjoys a sheltered market, the owner i.e. Government and consumer being the sane leading to inefficiencies, resulting in time and cost overruns. There is inadequate stress on R&D leading to dependency on DRDO Labs for transfer of technology.

The DPSUs have more than adequate infrastructure and manpower to make India self-reliant in production of military hardware/software. What it lacks is the competitive spirit, training facilities for absorbing changing technologies. The DPSUs appear to be satisfied with the 'As Is' status and are not pushing hard enough for becoming exportoriented defence industry as also for utilization of excess capacities for synergizing the resources in to civil sector. DPSUs have inbuilt inefficiencies being a public enterprise and monopolistic attitude in the absence of competition from the private sector at system level.


The indigenisation of defence equipment is an ongoing process and is achieved by transfer of technology and indigenous research. Indigenisation of spares of defence equipment has been undertaken in aircraft, warships, armament, tanks, vehicles and electronic as well as engineering equipment.

Private Sector Industries

While the Ordnance Factories and Defence Public Sector Units (DPSUs) are manufacturing a wide range of products for the defence forces, the private sector has been involved in the supply of raw material, semifinished products, parts and components of defence equipment. It is only recently that certain reforms have been initiated to make them partner in manufacture of complete defence equipment/systems.

The Government has recently allowed private sector participation in the defence industry upto 100% and with foreign direct investment permissible upto 26%, for manufacture of all types of defence equipment within the country. This is expected to add to the investment already made in the public sector. The exports of manufactured items would be subject to policy and guidelines as applicable to OFs and DPSUs. The objective of the policy is to attract more investment in the Defence Sector and not to change the ownership of the OFs and DPSUs.

Union Defence Minister Mr Pranab Mukherjee stressed during the first annual lecture of the Mumbai Chapter of Observer Research Foundation (ORF), on March 12, 2005 that there is a need for the corporate sector to adopt a greater role in India's defence sector24. He informed that of the total purchases of Rs. 5,500 crores made by DPSUs, approximately Rs. 1,200 crores is obtained from the private sector. The minister said the government in May 2001 decided to open the defence industry for private sector participation. As of date 20 Letters of Intent (LOI) have already been issued to the private sector companies. (The major manufacturers who have obtained licenses and LOIs are M/s L&T Ltd., M/s Mahindra & Mahindra, M/s Ashok Leyland, M/s Tata Motors, M/s Bharat Forge Ltd., etc.) Unfortunately the progress witnessed in this area has not been very satisfying. The Minister hoped that with the Kelkar Committee submitting its report the private sector will increase its participation the in the defence sector.

Opinion of the Specialists

On the performance of Defence Industry, the specialists in response to the questionnaire placed at Appendix 'B', have opined following:

(a) In answering the query related to off-loading of development work to Defence PSUs and private industry, as has been the practice in most of the developed countries, nearly 95% agree with the proposition of outsourcing normal development work to industry.

(b) As regards the massive infrastructure created by DRDO and OFs, nearly 60% of the respondents suggested that the public or private industries could utilize these assets under a Memorandum of Understanding (MOU) on cost basis. There is generally a unanimous agreement that the infrastructure including the test facilities can be gainfully made use of by the industry. One of the proposals was to hand over the selected facilities to private industry at a very marginal cost.

(c) To a query that should the DRDO shoulder the responsibility of undertaking limited series production of certain major equipment, 70% of the respondents opined that all production activities, including the development work should be undertaken by the industry. It was felt that DRDO does not have the experience of Management of the Production. However, they can participate in reviewing and monitoring the progress.

(d) As regards the massive infrastructure created by DRDO, DPSUs and OFs, nearly 60% of the respondents suggested that the public or private industries could utilize these assets under a Memorandum of Understanding (MOU) on cost basis. There is generally a unanimous agreement that the infrastructure including the test facilities can be gainfully made use of by the industry. One of the proposals was to hand over the selected facilities to private industry at a very marginal cost.

(e) To a query that should the DRDO shoulder the responsibility of undertaking limited series production of certain major equipment, 70% of the respondents opined that all production activities, including the development work should be undertaken by the industry. It was felt that DRDO does not have the experience of Management of the Production. However, they can participate in reviewing and monitoring the progress.

(f) Nearly 90% of the respondents felt that the big private industrial houses such as L&T, Tatas, Walchandnagar Industries, HCL etc are technically capable of undertaking the development and productionisation of defence equipment that have unique features of stringent environmental specifications, small order quantities, and varying user requirements etc. It was also felt by a few respondents that permitting exports of defence equipment by the private industry is important to lure the big private players to enter into the defence sector.

Private Industry: Based on the recommendations of 'Group of Ministers Report', the government has set a stage where greater private sector participation in defence production is anticipated. CII and FICCI will assume a significant role in achievement of this objective to attain a greater degree of self-reliance in defence sector. Hence modalities need to be worked out expeditiously to encourage private sector participation in defence production and create a competitive co-existence between private and public players.