Policy flip-flop

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A demonstration by an Army tank ahead of the DefExpo 2018 in Thiruvidanthai in Kancheepuram district of Tamil Nadu on April 8. Photo: B. Velankanni Raj

The shift in the Narendra Modi government’s defence procurement policy pertaining to core and non-core sectors and the abrupt cancellation and subsequent restoration of supplies from MSME units cause uncertainty in ordnance factories’ purchases.

THE Federation of Micro, Small and Medium Enterprise (MSME) Vendors of Defence and Aerospace complained at a press conference in New Delhi in early June about the Centre’s abrupt cancellation of supply orders worth thousands of crores to ordnance factories. 

In May, the Department of Defence Production, Ministry of Defence, issued letters to MSME vendors directing them to stop their supply to ordnance factories although supply orders had been issued well in advance. There are some 6,000 MSMEs in the defence industry manufacturing sector, with nearly 80 per cent of them manufacturing subparts and complex assemblies. 

On the face of it, the government has been claiming to be encouraging the MSME sector, but it is doing the opposite. The cancellation, withdrawal and short closing of supply orders were done in the second week of May through the Ordnance Factory Board (OFB) and the managements of ordnance factories. It was unclear why it was done although there was speculation that the government was relying on imports and larger private domestic suppliers under the new policy shifts. 

One source said on condition of anonymity that the government was considering privatisation of “stores” (ammunition) in addition to import of military equipment worth Rs.28,000 crore. One of the reasons cited, unofficially, for the cancellation of supply orders was the reduction in the budget allocation for the OFB by the Army. On June 26, the OFB stated in a letter to the federation that the budget was restored to the levels sanctioned in the Union Budget Estimates of 2018-19 after almost a month of uncertainty. Interestingly, the OFB Chairman said in the letter that the reduction of its target in 2017-18 at the level of finalisation of the Revised Estimates in January 2018 (according to the Ministry of Defence) was mainly “on account of non-achievement of pro rata targets for issue as well as expenditure”. 

OFB's letter

The OFB’s letter addressed to managers of ordnance and ordnance equipment factories mentioned that “though further details of targets/workload are awaited, it is required now to resurrect production activities in order to ensure achievement of targets in the short period of the balance nine months available at our disposal”. It instructed all senior general managers to “ensure uninterrupted supplies from the vendors and to ensure sufficiency of material to carry out all production activities in an efficient manner”. 

Although the OFB’s letter has come as a reprieve to MSME vendors, uncertainty prevailed in the absence of any written communication from the OFB to ordnance factories regarding the purchase of inventories piled up since March-April. There are around 40 ordnance factories and the majority of them are small-scale industries (SSIs). The MSMEs and SSIs in defence production are mainly engaged in ammunition hardware. 

It is more than a month since the supply order was cancelled, but MSME vendors are yet to hear from the Ministry of Defence, even as every additional day means piling of losses due to the inventory already in stock for orders placed in December 2017-January 2018. One of them, Imperial Engineering Company, a third-generation MSME involved in defence production and based in Yamunanagar, Haryana, wrote to the Ordnance Factory at Bhusawal (Jalgaon district, Maharashtra) pointing out that it had been doing business exclusively with ordnance factories and 70 per cent of its business since 2010 was with the Bhusawal ordnance factory. The factory conveyed by email to Imperial Engineering Company in March its decision to stop supply orders against the orders that had a “valid and live delivery period”. 

The MSME stated in its mail: “We draw to your kind notice that we have already taken up the production of material and being a MSME unit, we cannot sustain such types of losses so we do not agree with the contents mentioned in your email… the supply order is irrevocable contract which binds us to make the supplies and binds you to accept the supplies.” 

Copies of the letter dated May 19 were sent to OFB functionaries; Secretary, Defence Production; and the Federation of MSME Vendors of Defence and Aerospace. The federation was also a member of the committee for monitoring and review of public procurement policy for defence supplies in the Ministry of MSME. 

This move, apart from causing huge financial losses to and a potential loss of jobs in MSMEs in the defence sector, was contrary to the Make in India mantra chanted by the National Democratic Alliance (NDA) government. In April, the Ministry of Defence announced the creation of a dedicated defence and aerospace small and medium enterprises fund. In the Defence Procurement Procedure, 2016, the Ministry announced steps emphasising the use of indigenous design and increasing the export ratio in weaponry to enhance the role of MSMEs. 

The federation pointed out at the press conference that the move to short close or cancel orders would send the units to the brink of closure and render nearly three lakh workers jobless, of whom 1,80,000 were associated with ordnance factories and an equal number employed with MSME units. The procedure was: the Army would allocate the budget to the OFB, which would place orders with the ordnance factories. 

Neeraj Mehra, federation secretary, told Frontline that while it welcomed the OFB’s June 26 letter, nothing was certain until specific letters resuming purchase of the material from the suppliers were issued. “We placed the orders through the OFB as always. We did not know why the budget cuts had taken place but we hope that things will resume now,” he said, adding that there were other concerns as well given the shift in the defence procurement policy pertaining to core and non-core sectors. 

Anil Ghai of Lakshmi Ishwar Industries, an MSME based in Bhiwadi industrial area, Rajasthan, said he was shocked to receive the email in May from the general manager of the ordnance factory at Bhusawal. It was only in April that the ordnance factory had placed 16 supply orders whereupon he had planned accordingly to procure raw materials in order to initiate production. The ordnance factory had even asked for the supply schedule. Ghai went on to procure the raw materials after getting the go-ahead. Just when he was to dispatch the materials, he received an email directing him “not to dispatch any material without pre approval from the OFBH [ordnance factory Bhusawal] as the requirement of certain items had been reduced drastically” and “no material would be received at OFBH without proper delivery period extension”. 

He said that when he did not hear from the OFBH for six days, he dispatched the materials to the factory on May 20 paying a “detention amount” of Rs.2,500 a day for the vehicle which carried the materials. Ghai wrote to the senior manager at the Bhusawal ordnance factory that in order to effect the “timely supply of the stores”, he had enhanced the production capacity and spent a huge amount on the procurement of raw material and on National Accreditation Board for Testing and Calibration Laboratories (NABL) testing. 

Financial burden

Ghai wrote: “Ours is a small-scale industry solely dedicated towards serving the Indian Ordnance Factories, including your esteemed factory. Having no other business, it would be a huge loss to us and our factory will completely be finished if the instruction of your email dated 14.05.2018 is not withdrawn.” He ended the letter with a request to consider the issue sympathetically so that “our SSI unit is saved from unnecessary financial burden for no fault of ours”. 

He said that whatever may have been the reason for the drastic decision, it should have been carried out in stages. This was a desperate plea echoed by several SSIs in the defence manufacturing sector. 

The Jabalpur-based MSME, Agarwal Engineering Works, which also supplied to the ordnance factory at Bhusawal, faced a similar predicament. On May 24, the owner of Agarwal Engineering Works wrote to Neeraj Raizada, the president of the MSME federation, requesting the federation’s intervention following the order to stop supplies. Gaurav Agarwal, general manager of the SSI, told Frontline that his family had been in the business for three generations and this was the first time that supplies were stopped after orders were placed and production was completed. 

“We manufactured everything as per the specification given by the factory in the supply order. The material cannot be put to any other use nor can it be supplied to any other party. In case the factory does not take delivery of the material, it will lead to crippling losses, which we can ill afford. Our workers are not going to be paid,” he said, adding that substantial investment had been made and financial commitments honoured, including payments to raw material suppliers and labour, payments against goods and services tax and liability to banks against limits. 

“It was in April that we were asked by the ordnance factory at Bhusawal to confirm our delivery schedule for all the supply orders and asked to ensure that the supplies were made in time. In several cases, we have been asked to supply before the scheduled delivery period as it was urgently required by the factory,” he said. 

His unit manufactured exclusively for ordnance factories. The stoppage of orders would lead to the closure of the unit and retrenchment of workers. This, he said, was against the government’s stated policy regarding SSI units and the Make in India campaign. The MSME federation has received a dozen applications seeking urgent intervention. 

But there were other issues as well. On March 15, the All India Federation of Defence Employees called a strike demanding the fulfilment of a 17-point charter of demands. India is the largest importer of military equipment. The federation of defence employees has been resisting the pressure to create a “level playing field” for private manufacturers and to relax foreign direct investment norms. The budgetary cut to the OFB was a move in this direction. 

There are legitimate concerns that the government is moving from a largely public sector-driven military production framework, with the private sector playing a supplementary role to a scenario dominated by foreign Original Equipment Manufacturer-led privatisation for the sector. The categorisation of core and non-core items and reserving 25 per cent for the OFB and defence public sector undertakings for procurement is being interpreted as opening the field to the private sector and foreign players. Earlier, the government was committed to procuring everything produced by the ordnance factories. 

Said Neeraj Mehra: “At the end of the day, the Army is going to procure from somewhere. All our vendors are L 1 category vendors. None of the big players are so far in ammunition making but once this core and non-core differentiation is made, the private sector will enter the field. We hope the government will consult us and take us into confidence. In a real life ‘war’ situation, all kinds of imports are banned. How will the Indian Army manage? They call ordnance factories white elephants but they do not know that the private parties will go to any government that offers a higher price. Indigenous ordnance factories can be run for 24 hours if need be as the product is made from public funds; will any private manufacturer be compelled to do that?”

According to Bijan Bihari Guhathakurta, a member of the Centre of Indian Trade Unions and an office-bearer of the All India Defence Employees Federation, the Defence Procurement Manual mandated the requirement of a no objection certificate (NOC) from the OFB for procurement of items from trade by Indian defence forces, if the items were in the production range of the OFB. 

In April 2017, 143 items manufactured by ordnance factories were categorised as non-core items, which meant that no NOC was required from the OFB, and the Army could float tenders in which the OFB could also participate. In November 2017, 93 troop comfort items of the Indian Air Force and the Indian Navy were categorised as non-core items. On January 16, another office order categorised 39 items manufactured by ordnance factories to be included in the list of non-core items.

The present crisis may have blown over with the restoration of the budget cut. But MSMEs in the defence sector have begun to view catchwords such as Make in India and Skill India as empty rhetoric in the light of the National Democratic Alliance government’s policies.

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