(Weekly Organ of the Communist Party of India (Marxist)
September 25, 2011
HAL Disinvestment: Thin End of The Wedge
IN a move with far reaching consequences, the Defence Acquisition Council of the ministry of defence (MoD) last week gave in-principle approval to divestment of 10 per cent stake in Hindustan Aeronautics Limited (HAL), currently a 100 per cent state-owned defence public sector undertaking (PSU). HAL will be the third out of nine defence PSUs in which the state has off-loaded shares. The state has already divested 25 per cent stake in Bharat Electronics Limited (BEL) and 34 per cent in Bharat Earth Movers Limited (BEML).
For several reasons, the
disinvestment has greater significance. HAL with annual sales of over
billion or Rs13,000 crores ($3 billion) is much larger than either BEL
BEL makes radars, other defence-related avionics and instruments, while
manufactures a range of four-wheeled vehicles, transporters including
missile carriers, railway coaches and earth-moving machines, but
neither is the
sole manufacturer of such items even within
Proposals for disinvestment of HAL have been doing the rounds for a long time, having first been mooted as far back as the ‘80s, but were always and quickly shelved precisely because of the sensitivity of such divestment in the defence aviation PSU. But clearly there has been greater readiness to embrace the idea in the new climate of privatisation especially under UPA-II. Disinvestment of profit-making PSUs is now virtually mandatory. The government divestment policies have also been tweaked to permit PSUs to retain substantial proportion of divestment proceeds for reinvestment in infrastructure, capacity enhancement and technology upgradation, rather than handing over the proceeds to the treasury for meeting social sector expenditures. Whatever be one’s views about disinvestment of PSUs in general, surely defence PSUs require to be regarded differently, and other strategic considerations must come into play.
Given the strategic importance of HAL and therefore the significance of the move to off-load some government stake, the rationale behind this decision has not been made clear at any level.
cited “lessening of the government burden” for HAL’s ambitious yet
modernisation programme as the prime motivator. HAL expects to invest
about Rs 200
billion or Rs 20,000 crore over the next decade in upgrading its
These modernisation plans are necessitated, not only by the
much of HAL’s several decades-old facilities, but especially by the
license-manufacturing or sub-contract tasks in connection with the many
military aircraft that
In years gone by, HAL could only have approached government for these funds. But this is no longer the case. Navratnas including HAL now have greater autonomy. HAL has huge cash reserves, reportedly over Rs 9 billion or Rs 900 crores, and excellent credit rating. With the new and forthcoming acquisitions, HAL’s order books have swollen and in 2010 are Rs 85 billion (Rs 8500 crores) more that last year! HAL is already manufacturing the Sukhoi Su-30 MkIs and Hawk Advanced Jet Trainers, and will soon start work on the over $10 billion (Rs 45,000 crores) Medium Multi-Role Combat Aircraft (MMRCA) and later on the Russo-Indian Fifth Generation Fighter Aircraft (FGFA) expected to be worth over $30 billion (Rs135,000 crores) in all. HAL will start serial production of the “indigenous” Tejas Light Combat Aircraft in a few years. HAL will also be undertaking offset work for several other smaller but financially significant recent or forthcoming acquisitions, such as the Boeing P8i reconnaissance aircraft, Eurocopter and the carrier-based MiG 29s expected to come with the Admiral Gorshkov, and will also participate in upgrade contracts for the Jaguar, Mirage 2000 and so on. HAL will remain one of the most profitable PSUs, having registered a profit of around Rs 20 billion or 2,000 crores in 2009-10, because of its privileged cost-plus pricing structure. With all this going for it, HAL can easily raise the funds it needs from financial institutions.
So why should HAL go in for divestment? Some commentators have opined that “going public” would help improve corporate governance. This is hardly credible. The modalities of divestment are not yet decided upon, and there is considerable doubt if it will take the form of an IPO for retail investors. Past experience also shows that 10 per cent stock here or there makes no difference to how a company is run.
If improving HAL performance were really a goal, there are many measures government or the department of defence production (DoDP) could take. Greater autonomy for HAL, professionalisation of its management and proper oversight has long been required but never seriously addressed. The government, MoD, DoDP and HAL, have always hidden behind the “secret” veneer of defence and other strategic establishments, and a cloistered cost-plus pricing policy reaping profits without accountability. Greater functional autonomy for the different divisions of HAL has also long been called for. And, contrary to government’s apparent desire to reserve HAL for military aviation, increasing the civilian aviation component in HAL’s portfolio would increase efficiency, capabilities and culture of user-responsiveness.
Of course all this can be discussed, but rationale for divestment of HAL appears not to lie in these considerations but in an ideology of privatisation and, perhaps more important, in the on-going efforts by vested interests to pry open India’s defence manufacturing sector and gradually hand it over to corporate houses both Indian and foreign.
Strenuous and determined
being made to open up defence production in
As if all this were not
enough, the department
of industrial policy and promotion (DIPP) put out a formal discussion
May 2010 calling for raising the ceiling of FDI from 26 per cent to 74
per cent! The ostensible rationale was that if foreign manufacturers
were to be
compelled to transfer technology through the offsets provision, they
part with state-of-art technology and risk its leakage unless they had
control. In other words, if for instance Boeing were to sell F18s to
part with related technologies, they would do so only if they were
open a dominantly Boeing-owned entity in India which would then
offset manufacturing. DIPP further argues that this would also promote
of military hardware from
We have already seen that HAL is likely to be a major beneficiary over the next few decades through license manufacturing or offsets contracts, since a considerable proportion of big-ticket Indian defence acquisitions are likely to be in the aviation sector. It may therefore well be that the divestment of HAL is a first step, but a very important one at that, the thin end of the wedge if you like, to prise open Indian defence aviation industry to the Indian and foreign corporate sectors.
There are already several significant pointers to this. The trend of Indian corporate majors such as Tatas, Mahindras, L&T and so on setting up substantial infrastructure for military hardware production is by now well known. Pipavav is set to emerge as a major partner of the state-sector Mazagon Shipyards, if not overtake it, as regards warship and even submarine production.
Former chairmen, other
HAL executives and numerous defence and industry commentators have
raising a chorus of calls for stepping up the privatisation of the
defence aviation sector. It is argued that 10 per cent divestment in
HAL is too
small, and that bringing in retail investors will not serve the
purpose, so efforts
should be made to attract corporate investors including foreign
that may already be the government thinking, as revealed by a source
off-the-record to some business dailies. The Society
of Indian Aerospace Technologies and Industries (SIATI), with over 300
corporate members, has called for converting HAL into a public limited
with private partners. Even otherwise well-meaning Air Force spokesmen,
bemoaning that the Indian private sector has a poor record in R&D
unknown capabilities when it comes to defence hardware, argue that
defence PSUs including HAL are over-burdened and stretched to the
that private sector involvement could help. But defence PSUs
work to private sector players is a very different proposition to
private defence manufacturers in
The saving grace is that the HAL divestment is not a done deal yet. It now needs to get clearances from the finance ministry, cabinet committee of economic affairs and go through different levels of government. Can this dangerous move be stopped?