12 min readBefore you make it, you gotta shake it

Art: Shruti Pushkarna

Art: Shruti Pushkarna

A secretary from the Ministry of Defence was on the verge of revealing the defining milestone achieved by the OFB (Ordnance Factory Board) in raising the game on Make In India.

He was working up to this mesmerizing disclosure after having spent the previous 20 minutes swatting away all questions thrown at him from Indian MSME (Medium, Small and Micro Enterprise) representatives as being irrelevant to the discussion. The venue was the Make In India Week held in Mumbai last month. The organizers had patched together the usual suspects from the DPSUs (Defence Public Sector Units) to lecture the gathered MSME industrialists, with a smattering of big boys thrown in.

“We are really taking giant strides. OFB is full committed to outsourcing to vendors. Did you know, OFB has outsourced the entire production of uppers for shoes and only makes soles!” the secretary declaimed triumphantly, pausing for dramatic effect, possibly expecting thundering applause.

What he got was collective gagging and the sounds of people choking.

Over 200 MSME representatives had gathered to hear how the government was going to change the way in which they were going to do business with them. Most had invested in making products, sub-components or complex equipment. A smattering of foreign faces denoted the presence of intrigued foreign vendors.

And, there they sat, hit by a thunderbolt. Even a halfway successful implementation in defence production would decide if the Make In India initiative would work out. Here were people critical to Make In India in the defence sector, preening over the gigantic accomplishment of having outsourced uppers for shoes.

The farce had started a bit earlier. In the discussion, the HAL (Hindustan Aeronautics Limited) top man had struck a rather strident note which basically laid down the law, the sum and substance of which, when interpreted and brought down to brass-tacks, meant: ‘Do business with us and my way… there is a list on the HAL site of what we need… we have 144 vendors…mostly Tier 3.. a handful in Tier 2 and even less in Tier 1. Few in Tier 1 are even connecting with us…’

The OFB had delivered a similar message:

“We are doing plenty to outsource, so just get on with figuring out what you can bring to the table…”

The problem, however, was a seasoned MSME industry audience that cut through the bullshit with questions that came from painful experience.

It is worth recounting some of those questions for the simple reason that it points to the mess on the ground. And it is worth recording the responses as it points to the challenge that Prime Minister Modi and Defence Minister Parrikar face, having to work with a shuffle of bureaucrats who don’t know any other way of life.

First off the block was this gentleman who wanted to know why a particular DPSU had failed to lift a product that was ordered and made to spec. The second wanted to know the sanity of a 49 percent FDI (Foreign Direct Investment) permission that was effectively countermanded by an RBI (Reserve Bank of India) directive that said any FDI above 24 percent meant that the firm would lose its SSI (Small Scale Industry) status.

The third wanted to know how the government intended to bridge the gap between RFIs (Requests for Information) and RFPs (Requests for Proposal). Essentially, as soon as an RFI was out, Indian SMEs started building capacity so they could respond to the RFP. Yet, in a majority of instances, the RFP never did come about. How long, asked the gent, would it take the orders to actually happen?

Another gent asked why did a company have to keep registering itself with every PSU as a vendor – why was there no single national directory of approved vendors?

The responses by the cornered secretary were less than illuminating. Like Geoffrey Boycott on a seaming wicket with a dour and severely unhappy countenance, he repeatedly went with the straight bat defence:

“This isn’t the place to discuss these things.”

After a bit, the fuming industry representatives were shaking in mirth every time a question was asked and the hapless secretary started with “This isn’t…”

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That very sad spectacle was layered with promises of a new DPP fixing some of the issues and some which were typically imperial:

“We have noted your point”.

In that little, short-lived face-off between Indian MSMEs and the babudom was the big story of the challenges that await Make In India in the business of defence. And what the government has to fix if it has any hope of defence delivering an economic spillover that would energize the economy in a manner similar to the way the automobile and telecom industry once did.

If Make In India simply means involvement of the Indian private sector, it isn’t really a new concept. Over the years, this has been effected through a measure of indigenization or import substitution. There are plenty of vendors in the defence sector living a very stifled life and dependent on the whims, fancies and extortion of not only DPSUs but also often inspectors from the user.

One esteemed Indian corporate house had confessed that they got out of the defence business, simply frustrated with the petty extortion of inspectors that came to approve perfectly machined ammunition boxes.

Revising the questions asked, that was one that stood out as a plea against such whimsy.

HAL and OFB had conveniently interpreted Make In India to mean, in their world view, getting a trope of parts suppliers who would deliver bits and pieces for their gigantic endeavours.

Where the Prime Minister was speaking of designing and developing front-ranking technologies in India, the babus were ploughing a furrow of “make the uppers for shoes”. Third, the senior bureaucrat seemed to have little or no clue as to how to deal with policy challenges that ranged from the simple (have a common roster for empaneling all eligible enterprises) to fixing the mismatch between FDI policy and RBI guidelines.

And the reason is astonishingly simple – the MoD is as capable of setting up a defence industry as the Telecom babus and the Oil and Gas babus were in freeing their sectors.

If you hark back, one sees the long and bitter battles that were waged in aviation, telecom, steel and oil & gas by the ministries to protect the turf of MTNL, BSNL, Oil PSUs, GAIL, SAIL and Air India. It took huge political will and plenty of energy from the private sector to ensure that, bit by bit, the PSUs went from being God-ordained monopolists to just-other players that had to put a competitive product on the market.

Unfortunately, that lesson seems to have been missed by the DPSUs and MoD mandarins. For Make In India to truly happen in the defence sector, it is critical to move the process of industry creation out of MoD and hand it over to a ministry that is better equipped.

The current dispensation and power structure in the Ministry of Defence, advised by their DPSU wards, will vehemently oppose sops, tax breaks, enabling duty structures – sometimes in the name of job losses, sometimes in the name of national interest, sometimes in the name of lack of viability. And of course, national security.

Clearly, the DPSUs and their guardians in the MoD are thinking of a very different Make In India than the one the prime minister and defence minister envision.

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For those fond of the sanctity of defence research as a closely guarded, highly secretive national mission, do take a look at the list of products being ‘designed’ by DRDO and manufactured by OFB.

There is a whole bunch of ‘strategic’ items that OFB churns out – terry wool suit (jacket & trousers); coat and trousers parka, white lined leather gloves, socks woollen lycra, boots, waterproof covers, jerry cans, belts.

While there maybe justifiable reasons for the OFB to have started manufacturing these, there is equally good reason to audit these to check whether these products have kept up with the times in terms of material used, cost of manufacturing and quality of production. Make In India does not mean give all to the private sector but it does mean that the PSUs should not go unchallenged when they make products that they may be less than competently manufacturing today.

A cursory reading of the tenders put up on the websites of OFB, DRDO and HAL shows a medley that stretches imagination.

Tenders for jerry cans sit cheek by jowl with those for long range chaff rockets; for snake catchers with those for complex electronic parts. It is interesting to see that HAL, under its Make In India classification, lists, on the one hand, Weapons guidance, Avionics Autopilot, Sensor Fusion and Head and Head Up Display and, on the other hand, it calls for fire extinguisher with cartridges, back plate, exhaust cone and oil tank.

There seems to be a giant puddle of requirements – one that would be unfair to comment upon without adequate knowledge of how these organizations have devised their production framework.

What, however, can be said reasonably, on the basis of other manufacturing contexts, is that these entities seem to be straddling a vast stretch and depth of manufacturing that has now become an outmoded form of production. Typically, most defence manufacturers (indeed almost all kinds of equipment and systems manufacturers – from automobiles to aircraft) across the world are no more than systems integrators who design, develop and then integrate.

The HAL chief’s admission at the Make In India seminar and a quick reading of the procurement requirements makes it abundantly clear that the critical base of Tier 1 suppliers has failed to come up. More importantly, it probably points to a 1950s production mentality where manufacturing happens under one roof.

There seem to be huge inefficiencies which most manufacturing firms have moved out of: working capital tied up in raw material stocks, protracted procurement procedures, multiple levels of integration and false record keeping to show performance.

Lest this seem to be someone’s figment of imagination, a reading of CAG (Comptroller and Auditor General) reports on defence production would suffice.

Here are some gems:

  • The Factories resorted to the malpractice of advance issue vouchers where items though not physically issued were shown as issued, and thereby projected an inflated achievement of targets and carried a risk of distortion of accounts: “It was observed that 4221 Kg of Copper Nickel Alloy Tube valued at `55.5 lakh was reported as issued by Ordnance Factory Katni in 2013-14 although by the Factory’s own admission, the item was not manufactured due to problems in the billet heater/extrusion press.” In effect, the guardians of our borders were paying out for products that they never received and our defence factories were achieving ‘targets’ without producing a damn thing. (Press Release on and CAG Report 44 of 2015)
  • “Our audit on inventory management: 2010-13 had showed that 95 per cent of the Store In Hand (SIH) in the nine Factories exceeded the prescribed limits and that one-fifth of the SIH had become non-active i.e. not consumed at all during the current year.” (As above)
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  • Integrated Headquarters of Ministry of Defence (Army) procured Image Intensifier (II) Sights valuing Rs. 22.12 crore between February 2011 and June 2013 for Commander of Tank T-55 whereas the tank was declared obsolescent in December 2011. 180 II sights were issued to command units June 2013 and November 2013 and 252 II sights worth Rs. 12.90 crore were still held in stock as of April 2014.
  • “The Factories (FGK, RFI & SAF) attributed the delays to insufficient number of vendors, time taken for price negotiation, shortage of manpower, frequent change in targets, dropping of tenders due to receipt of “freakish” rates quoted, lack of awareness of the vendors about e-procurement system, delay in capacity verification of the vendors etc. But the data on delays in placing orders even after the selection of the vendor is a strong indication of inefficiencies in the Factories that they will be served to recognise and correct.”
  • (CAG Audit Report on Army, Ordnance Factories & Defence PSUs, PAC & COPU Presented December 2015)

    While one can go on listing such outcomes from the CAG reports, the problem is much deeper: These reflect the outmoded forms of production, organizational structure and lack of application of business processes. Most important, it appears that none of the DPSUs have progressed into the modern era of production. SIH (Store In Hand) is a good element to pick up. The Japanese and European firms brought in JIT (Just In Time) and Lean Production methodologies almost three decades ago which cut down inventory holding and yet did not disrupt production due to seamless engagement between the various suppliers and the product assembly line.

    Clearly, our defence PSUs have learned nothing from them. It is quite possible that there are some very cobwebbed philosophies of hoarding stocks in the national interest to beat shortages when war breaks out.

    What is a bit astounding is how little there is in term of investigation, research or reports on defence production processes. Even CAG reports are focussed on accounting and financial aspects and don’t dive deep into the whole question of how modern is the approach to manufacturing. Here we are not simply talking about modernization that entails replacement of machinery or new machinery but the whole issue of how production is organized.

    A simple cross-reference to modern automotive manufacturing would suffice – all car companies simply assemble a car inside a shell that is dye-pressed and cut on their floor. Much of the rest comes in the form of replaceable components. Each of these units are made by an ancillary company.

    And that is how Make In India happens – a plethora of companies come up, as in the case of the automotive world, to create components that simply dock into their designated space on the assembly line. While this is indeed a simplistic view of the process, for the sake of the enunciation of this argument, it is a good place to begin.

    Both the prime minister and the defence minister are probably well aware of the need to shake up the defence production system before we start making defence products here. This is probably the reason why they have been insistent on new orders moving to the private sector.

    The government may well need to take the wrecking ball taken to their own PSUs to turn them into powerhouses of efficient production. The alternative is the tried and tested format of turning the sector to private industry and letting the PSU gently decay to irrelevance as has already happened in many a sector.

      6 comments for “12 min readBefore you make it, you gotta shake it

    1. SurinderKumarJoshi
      March 11, 2016 at 3:33 pm

      Excellent article. Very informative.

    2. aveeksen
      March 7, 2016 at 3:50 pm

      CestMoiz how is this for implement ion? https://twitter.com/aveeksen/status/703097428258353153
      Sorry don’t remember if pitched this earlier to you avarakai s_navroop

    3. mallik1979
      March 7, 2016 at 1:51 pm

      StratPost SaurabhJoshi wondering if anyone holding breath on this one either…

    4. avinashk1975
      March 7, 2016 at 11:08 am

      BahadurManmohan There are no records in the Archives of Indian Rlys as to how many pounds he ate! 2/2 nitingokhale manoharparrikar

    5. avinashk1975
      March 7, 2016 at 11:07 am

      BahadurManmohan One Brit Engr had said he would eat every pound of Steel rail produced by the Tatas 1/2 nitingokhale manoharparrikar

    6. BahadurManmohan
      March 7, 2016 at 10:40 am

      nitingokhale manoharparrikar PMOIndia ‘Did you know, OFB has outsourced production of uppers for shoes n only makes soles!” the secy said

    So what do you think?