HAL lessons for PM Modi: What other PSUs can learn from govt’s Rafael defence

Since the government’s defence in Rafale case was that HAL wasn’t good enough, there is a lesson here for other PSUs.

Most of those who watched defence minister Nirmala Sitharaman’s reply in Parliament on the Rafale issue concede that she did a superb job of debunking most of the arguments made by Congress leaders such as party chief Rahul Gandhi. A large part of the debate, in keeping with the Gandhi’s chowkidaar-chor-hai accusation, centred around the government having replaced the public sector HAL with an Anil Ambani group firm for the offsets.

No proof is required in such arguments, it is automatically assumed that the PSU is the good guy and the private firm is corrupt. So it is to Sitharaman’s credit that she asked why, if HAL was so efficient, the UPA didn’t conclude the Rafale deal with it as the principal Indian vendor when it was in power; even though Rafale chooses the vendors, the UPA could have indicated that it would like HAL to be the primary vendor.

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While finance minister Arun Jaitley had earlier pointed out that the figures cited by Gandhi as the gains to Ambani were far greater than even the value of the Rafale contract, Sitharaman argued that the reason why the HAL agreement had not been concluded was that it would have cost more to produce Rafale in India as compared to producing it in France as HAL was not as efficient; also, she said, the manufacturers of Rafale were not willing to guarantee the quality of aircraft produced by HAL.

And then, the masterstroke, at least in terms of talking points in a debate, she quoted from the report of the Public Accounts Committee headed by Mallikarjun Kharge, the leader of the Congress in the Lok Sabha. While discussing the long delays in the Light Combat Aircraft (LCA), the PAC said “even after more than twenty five years after the Government of India shifted the focus on maximising the indigenous development, only a few fully indigenised components/systems could be developed”. At another place, it said, “the HAL, ADA and its work stations are miserably failing in its R&D to have the much needed technology in the aviation sector” and added, “since HAL could not augment its capacity in line with the demand of the IAF, the IAF will have to depend on imported aircraft for a longer time, given its dwindling squadron strength”.

Given how complicated and sophisticated fighter aircraft manufacture is, the criticism of HAL may be excessive, especially since there is no well-established vendor base in the country to source parts from. But that is precisely the point that needs to be appreciated—as long as only HAL is to be considered as a suitable vendor, how is such a vendor base to be developed? And, in the absence of competition, how is HAL expected to become more efficient?

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In this case, prime minister Narendra Modi’s government is making the right point: that, apart from the fact that Rafale chooses the vendors and not the government, is it in the national interest to award a contract to a firm just because it is a PSU and not worry about costs and the ability to deliver on time? After all, whether a HAL makes parts or a Tata Advanced Systems does, the value is still created in India, as is the employment and technology absorption. The Kharge report details just how many decades the LCA project has been delayed by. Things would have been different had leading private manufacturers been involved.

Even while it is true that HAL alone is not responsible for the delays, there are several reasons for why it—and this applies to most PSUs—has not been able to perform as well as hoped. Most PSUs are hobbled by bloated and inefficient workforces and they don’t get the best talent since they pay the least at senior management level—despite this, MTNL’s wage bill is 99% of its turnover and BSNL’s 55% versus 4-5% for a Bharti Airtel. And the structure of control is such, since PSUs are considered an ‘instrumentality of state’, their decision-making is slow since everything, even a consulting contract, has to be bid out and, more than quality, it is the lowest price that is accorded priority; deviations from this rule are possible, but need to be justified to the CAG, the CVC, etc. Slow decision-making is the norm in most PSUs, though there are exceptions.

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At a function organised by the CAG last year, finance minister Arun Jaitley flagged this issue (, but fixing this requires either a Constitution bench of the Supreme Court to give a ruling on the issue of ‘instrumentality of state’ (SC has ruled on this in different ways in the past) or for Parliament to amend Article 12 of the Constitution to ensure that, at least in areas where there is private competition, PSUs are free to act like private-sector fims and not be considered an ‘instrumentality of state’.

But since Modi has not been able to convince either the Supreme Court or Parliament to fix this, PSUs remain hobbled. In which case, as he did in the case of HAL, Modi needs to point out that PSUs aren’t necessarily the good guys, that supporting a Tata Steel is as good for the country as supporting a SAIL, or an RJio as good as an MTNL or a BSNL. And you have to consider the huge losses of PSUs that the taxpayer has to fund each year; in just the case of banks, taxpayers have funded Rs 1,96,662 crore of recapitalisation in just the period since the government has come to power and the Centre has proposed to infuse another Rs 54,467 crore in the remaining months of this fiscal.

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With Modi unable to free PSUs, this has meant they continue to underperform versus the private sector. As a result, while private sector valuation—market capitalisation—has soared, that of PSUs hasn’t; in relative terms, this means PSUs have lost Rs 12.8 lakh crore in valuation since Modi came to power. Put another way, even if Modi is averse to privatising PSUs—not one sale has taken place since he came to power—he will get that much less money from even selling PSU shares, money that could be used to build hospitals, toilets, etc. There can’t be one standard to judge PSUs in the case of Rafale and another the rest of the time.
Twitter @thesuniljain

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