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BEML Disinvestment: What about the other DPSUs and OFs?

Laxman Kumar Behera was Research Fellow at Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile.
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  • January 20, 2017

    The Cabinet Committee on Economic Affairs (CCEA) has taken a major decision to privatise some government-owned companies. One of the companies listed for privatisation is BEML (formerly named Bharat Earth Mover Ltd., which functions as one of the nine Defence Public Sector Undertakings (DPSUs) under the administrative control of the Department of Defence Production of the Ministry of Defence (MoD). As per the CCEA’s in-principle approval, 26 per cent of BEML’s equity shares would be sold to a strategic buyer, bringing down the government’s share in the company from 54.03 per cent currently to 28.03 per cent. The offloading of the government’s equity shares in BEML, which would simultaneously involve the transfer of management control from the government to the ultimate buyer, is likely to bring in an estimated Rs. 1,000 crore to the central exchequer. In the light of this unfolding development, two questions arise: What is the significance of BEML’s disinvestment? Is it a one-off affair or should the government disinvest in other production entities functioning under the MoD?

    The significance of the BEML’s strategic disinvestment lies in the fact that it would be the first time that the MoD will lose management control over one of its own companies. This is pertinent given that some perceive DPSUs to be too strategically important to be owned by the private sector. It may appear that the singling out of BEML for disinvestment could be due to the company’s dwindling exposure to the defence market post the controversy over the purchase of Tatra trucks. In 2015-16, the defence business (consisting primarily of sale of high-mobility vehicles) contributed a mere 11 per cent (as opposed to nearly 30 per cent a decade before) of BEML’s total gross revenue of Rs. 3426.02 crore. With such a low exposure to defence, the company’s rightful claim to be a defence company had come under question. The decision to privatise the company through the route of strategic sale instead of shifting it to another ministry, (as was done in case of loss-making Hindustan Shipyard Ltd., which was acquired by the MoD from another ministry), conveys the strong message that the government believes that it has no business in business.

    It is worthwhile to note that BEML’s privatisation is not related to its performance. Unlike some other DPSUs, BEML is a highly competitive company, with 88 per cent of its sales in 2015-16 coming through the open tendering process. Besides, the company has a good track record of generating profits; it has registered a profit in 15 of the last 16 years. Poor performance of commercial entities, which had been the main driver of disinvestment decisions in the past, is not the main criterion for the government’s decision to disinvest in BEML.

    Should the government now follow the BEML decision and move towards disinvesting in other defence production entities? The unambiguous answer is yes. DPSUs and Ordnance Factories (OFs) are the part of the larger set of Central Public Sector Enterprises (CPSEs) and other departmentally run production entities. These have outlived the utility of the Nehruvian model of industrialisation, under which the Government of India assumed the role of the largest industrialist in the country. But the running of businesses by the government has been accompanied by bureaucratic, administrative and decision-making inefficiency, manifested in the poor performance of these companies, including DPSUs and OFs. In fact, as suggested by the 1991 Statement on Industrial Policy, the CPSEs, given their inefficiency, have become a drag on the Indian economy.

    Measured in terms of innovation, productivity, exports and customer satisfaction, the performance of DPSUs and OFs has been anything but encouraging. Some statistics testify to this sorry state of affairs. The combined R&D expenditure of the DPSUs, an indicator of their innovation performance, is a mere five per cent of their turnover. In the case of OFs, it is less than one per cent. Compared to this, some global companies spend up to 20 per cent of their turnover on R&D. Given such a poor focus on R&D, it is not surprising that they have designed and developed very few products. The average labour productivity of DPSUs is less than one-fifth of that of major global defence companies. Exports, a measure of international competitiveness, accounts for a meagre five per cent of their sales, whereas many international companies generate over 70 per cent of their revenues from international customers. The 40-odd OFs, which employ more than 95,000 workers, do not meet even 50 per cent of the product target set for the Indian Army, leaving a big hole in the latter’s preparedness.

    More importantly, DPSUs and OFs have not succeeded in their primary mission of making the country self-reliant in defence procurement. Instead, they have become a conduit for large arms imports, albeit indirectly. This indirect arms import is made in the form of purchase of parts, components and raw materials from the international market and for which a large amount of foreign exchange is incurred. In just five years ending 2014-15, the nine DPSUs spent a whopping Rs. 78,740 crore on indirect imports, which amounts to nearly three-fifths of their total sales.

    The only way that these entities can be made to function better is by putting them under an efficient management. And that can be achieved only through privatisation. The BEML model of disinvestment needs to be applied to the rest of the DPSUs. For the privatisation of OFs, the first thing that needs to be taken is to convert them from their present avatar of being a departmentally run organisation to a corporate entity. Disinvestment in these entities will not only make them function efficiently and contribute to the country’s self-reliance efforts but also enable the government to generate resources for meeting the fiscal deficit target as well as fund the critical modernisation requirements of the armed forces.

    Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.