Will India’s defence industrial base catch a cold if DPSUs sneeze?
1st June 2018
Defence Public Sector Undertakings (DPSUs), once considered the back bone of India’s defence industrial base, have not been efficient. Even though the routine running and year on year contracts from the Government indicate their stability, a close examination of financial data suggests otherwise.
The data released in DPSUs’ Annual Reports (ARs) shows that sales areoften not much greater thanvalue of production (VoP).In fact,there are several years when sales are less than VoP. For example Hindustan Aeronautics Limited (HAL) produced goods worth INR 16,288 crores and INR 17,152 crores in 2015 and 2016 respectively (refer Fig 1).However, corresponding value of sales for those years were INR 15,621 crores and INR 16,559 crores. In the financial year 2016-17, sales exceeded the VoP by only INR 501 crores, which is not a substantial profit, given that the figure will reduce after taxes are deducted. Similar trends are seen in the data released by other DPSUs like Bharat Electronics Limited (BEL) and Bharat Dynamics Limited (BDL). This essentially means that public sector companies are making losses giventheir current business models.
Fig 1: Comparison of HAL’sVoP to Sales(in INR crores)
They continue to run hassle free, because of income from other sources. Their deposits in banks have varied but their other income has significantly been contributing to annual earnings. Looking at the difference between the values of income from other sources and the profits made reduces the profits nearly by half for most of the DPSUs. In case of HAL, the Profit After Tax (PAT) has not surpassed the income from other sources (refer Fig 2).
Interestingly, the other income consists largely ofinterest earned on deposits in bank accounts.These deposits form a large part of current and non-current assets, and earnings are used for operations and provisioning for other expenses to be met by the companies.
Further in this evaluation, one cannot miss the source of these funds deposited in the banks. These amounts are the advances paid by the customer to the companies. There is no conclusive evidence that products are assembled and/or delivered in the given time frame. The justifications often given for delays in product delivery are the changing requirements and technological modifications in product specifications. However, it is important to note that these delays are helping the DPSUs stay afloat. This is true across all the DPSUs. Except for irregular small profits, the companies do not have any other performance indicator showing a positive trend. Over the last seven decades of them being set up (during the industrialization phase under Nehru’smodel of self-reliance) which would reduce the dependence on imports ofweapon systems and otherplatforms.
Inefficiency and lack of performance in the core competencies of the DPSUs reallyslows India in its race to attain technological edge in the defence sector. Private sector participation and incorporation of DPSUs in the Strategic Partnership model is the possible way forward.
Fig. 2: Comparison of HAL’s Other Income and PAT (in INR crores)