Modi govt's BIG reform, approves proposal to restructure nearly 200-year-old Ordnance Factory Board

In a major reform initiative, the government on Wednesday approved a long-pending proposal to restructure the nearly 200-year-old Ordnance Factory Board that operates 41 ammunition and military equipment production facilities into seven state-owned corporate entities to improve its accountability, efficiency and competitiveness.

The decision to corporatise the OFB on the lines of defence public sector undertakings was taken at a meeting of the union cabinet chaired by Prime Minister Narendra Modi, nearly two decades after the reform measure was first mooted to bring professionalism and significantly enhance its productivity, officials said.

Will boost India's defence manufacturing sector: Rajnath Singh

Describing it as a "historic decision", Defence Minister Rajnath Singh said there will be no change in service conditions of nearly 70,000 employees of the organisation and that the decision is driven by efforts to boost India's defence manufacturing sector.

No change in service conditions of employees

"It is a big decision that complements India's national security requirements. It will help in achieving our targets for defence production. There will be no change in service conditions of the employees," he told a small group of journalists.

Entities to take shape by end of year: Govt 

Officials said the seven entities are likely to take shape by the year's end and they will be operated by professional management with a larger goal of enhancing the product range, increase competitiveness and improve cost-efficiency.

"This restructuring is aimed at transforming the ordnance factories into productive and profitable assets, deepening specialisation in the product range, enhancing competitiveness and improving quality and cost-efficiency," said one of the officials.

What will new entities produce?

The new entities will produce ammunition and explosives, weapons and equipment, vehicles, troop comfort items, optoelectronics equipment, parachutes and ancillary products, the officials said, adding the reform process is being rolled out as part of the prime minister's vision for self-reliance in the defence sector.

All employees of OFB belonging to production units would be transferred to corporate entities

"All employees of OFB (Group A, B and C) belonging to the production units would be transferred to the corporate entities on deemed deputation initially for a period of two years without altering their service conditions as central government employees," said another official.

The pension liabilities of the retired and existing employees will continue to be borne by the government, according to the Cabinet decision.

At present, the OFB functions under the department of defence production of the Ministry of Defence.

The seven entities will include an ammunition and explosives group, vehicles group, weapons and equipment group, 'troop comfort items group', ancillary group, optoelectronics group and parachute group, the officials said.

The ammunition and explosives group would be mainly engaged in the production of ammunition of various calibre and explosives and its focus would be to exploit the huge potential to grow exponentially including for the export market.

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The vehicles group would mainly engage in the production of defence mobility and combat vehicles such as tanks, BMPs (infantry fighting vehicle) and mine protected vehicles. The focus of the group would be to increase its share in the domestic market through better capacity utilisation and also to explore new export markets.

The weapons and equipment group would be mainly engaged in the production of small arms, medium and large-calibre guns, and other weapon systems and is expected to increase its share in the domestic market through meeting domestic demand as well as product diversification, the officials said.

New structure to overcome various shortcomings

"The new structure would help in overcoming various shortcomings in the existing system of OFB by eliminating inefficient supply chains and provide these companies incentive to become competitive and exploring new opportunities in the market including exports," said the second official.

"Today's decision would allow these companies autonomy, as well as help improve accountability and efficiency in the functioning of the 41 factories under the new companies," he said.

The government has also decided to delegate the authority of the cabinet to an empowered Group of Ministers headed by Rajnath Singh to decide on matters related to the restructuring of the OFB.

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Besides Singh, the empowered group comprises Home Minister Amit Shah, Finance Minister Nirmala Sitharaman, Law Minister Ravi Shankar Prasad and Labour Minister Santosh Kumar Gangwar.

At present, the government has to shell out around Rs 5,000 crore annually to pay the salaries of the OFB employees. Additionally, it gives around Rs 3,000 crore to OFB as an operational cost.

Ordnance factories facing performance issues for long time

The ordnance factories were set up as "captive centres" to serve the needs of the armed forces, but they have been facing performance-related issues for a long time. In the last couple of years, the government has unveiled a series of reform measures and initiatives to make India a hub of defence manufacturing.

Last August, Defence Minister Rajnath Singh announced that India will stop the import of 101 weapons and military platforms like transport aircraft, light combat helicopters, conventional submarines, cruise missiles and sonar systems by 2024.

A second negative list, putting import restrictions on 108 military weapons and systems such as next-generation corvettes, airborne early warning systems, tank engines and radars, was issued recently.

In May last year, the government announced increasing the FDI limit from 49 percent to 74 percent under the automatic route in the defence sector.

India one of largest importers of arms

India is one of the largest importers of arms globally. According to estimates, the Indian armed forces are projected to spend around USD 130 billion in capital procurement in the next five years.

The government now wants to reduce dependence on imported military platforms and has decided to support domestic defence manufacturing.

The defence ministry has set a goal of a turnover of USD 25 billion (Rs 1.75 lakh crore) in defence manufacturing in the next five years that includes an export target of USD 5 billion (Rs 35,000 crore) worth of military hardware.

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