Government’s apathy is pushing HAL to the brink

Saturday, June 17, 1961, is no ordinary day in the history of Bengaluru and Indian aeronautics. The day has gone down in the annals of history as the day when Asia’s first jet fighter -- HAL HF-24 Marut – conducted its maiden flight.

The supersonic jet fighter, that gained prominence during 1971 Bangladesh War due to its extensive usage especially in desert combat, was developed by Bengaluru-based Hindustan Aeronautics Limited (HAL) under the leadership of lead German engineer, Kurt Waldemar Tank.

The preparations for the jet fighter, which could carry 1,800 kg of bombs, 100 rockets (68 mm) and four 30 mm cannons, started way back in 1956, as part of India’s first Prime Minister Jawaharlal Nehru’s ambitious project of having Asia’s first combat aircraft built in India.

So, it came as no surprise that exactly a year later, on June 17, 1962, while replying to the address presented by the Bangalore Municipal Corporation at Vidhana Soudha, Nehru had made a prophetic statement about the city which is now known as the innovation hub of India.

He had said: “Bangalore (now Bengaluru), in many ways, is unlike the other great cities of India. Most of the other cities in India remind one certainly of the present, certainly of the future but essentially of the past. But Bangalore, as I said, more than any other great city of India is a picture of the future.”

Current conundrum

Fast forward to 2019, the Bengaluru-based Navratna PSU is back in the news – albeit for wrong reasons. On the one hand, the company’s finances are in shambles, while, on the another hand, Defence Minister Nirmala Sitharaman, in defense of controversial Rafale Deal, is questioning the credibility of the prestigious PSU, that supplied over 6,000 aircraft to Indian armed forces.

“Dassault could not progress in the negotiations with HAL because if the aircraft were to be produced in India, a guarantee for the product to be produced was to be given. It is a big ticket item and the IAF would want the guarantee for the jets. HAL was in no position to give the guarantee,” Nirmala said on September 14, 2018.

Founded in 1940 by Walchand Hirachand, with support from Maharaja of Mysore, the company became public in 1942. The move was aimed at supporting B-17 aircraft of US Airforce, in its campaign against Japan in China during the World War-II.

On the other hand, despite the inefficiencies in its organisational structure, HAL has produced, upgraded and overhauled thousands of aircraft – combat, training, transport aircraft and helicopters. Among the aircraft developed by HAL are: 90 GNATs of British origin, 900 MIGs of Russian origin, 125 Jaguars of British-French origin, 250 Su-30 Ki of Russian origin, 250 Hawks of British origin, 125 Dorniers of German origin, 90 AVROs of British origin, 90 Alouettes of French origin, 275 Lamas of French origin, besides many other indigenous aircraft like light combat aircraft – Tejas.

The company has designed and developed 16 types of aircraft till now, while 16 others have been manufactured under license manufacturing.

“The company has made aircraft when probably India couldn’t even make sewing machines,” said a former chairman of the defence PSU, stating example of HAL Dhruv and how it was far above the expectations of the armed forces.

As HAL is becoming a rallying point in the alleged Rafale scam, DH spoke to various people associated with India’s defence aeronautics – Indian Air Force (IAF) officials, HAL officials (former chairmen, both retired and serving employees) and military pilots – to comprehend the real nature of the issue.

Many IAF pilots, who have flown combat aircraft, vouch for the capabilities of HAL. A former IAF Test Pilot is aghast at Nirmala’s defense on Rafale deal. “This government is basing their facts on mathematical manipulation. HAL is quite capable of doing a project like Rafale. If they can deliver us 250 Su-30 MKis, what is the problem in delivering other aircraft,” he told DH.

Su-30 MKi and Dassault Rafale are both fourth generation combat aircraft. Fourth-generation designs are heavily influenced by lessons learned from the previous generation of combat aircraft. Long-range air-to-air missiles, originally thought to make dogfighting obsolete, proved less influential than expected, precipitating a renewed emphasis on manoeuvrability.

Meanwhile, the growing costs of military aircraft in general and the demonstrated success of aircraft such as the F-4 Phantom II gave rise to the popularity of multirole combat aircraft in parallel with the advances marking the so-called fourth generation.

HAL has worked on many of the fourth generation combat aircraft like Su-30 MKi and Mirage 2000s. In fact, for Mirage 2000, Bengaluru-based PSU is the long-standing overhaul partner for the French Dassault. The IAF has currently three squadrons of Mirage 2000 (54 aircraft), plus four war wastage reserve aircraft, which have been slated for mid-life upgradation.

The IAF, which has been unhappy with HAL’s delivery schedule on Light Combat Aircraft (LCA) Tejas, wants an IAF officer to head the project. However, many in the IAF think that the delays are caused in the designs that are provided by the Aeronautical Development Agency (ADA). “The IAF doesn’t want ADA to be part of the new Advanced Medium Combat Aircraft (AMCA) projects,” said one of the top IAF officials, wishing not to be named.

Financial woes

Despite all this controversy over its brand, HAL, for now, is more concerned about its financial woes. As on date, the company is running its day-to-day operations on credit from banks. The defence PSU has till now borrowed Rs 1,000 crore just to pay the salaries of its employees.

The company’s trade receivables are 13.57 times that of the company’s cash reserves, at the end of September 30, 2018. While the cash reserves of the company have depleted to Rs 725.3 crore at the end of the first half of the current financial year, its trade receivables have bulged to Rs 9,845.07 crore at the same time.

Just one-and-a-half years ago, since the day officials within the company say that armed forces stopped payments, the company’s trade receivables were just 0.38 times its cash balance. In the past one-and-a-half years, the company has bled 93.5% of its cash reserves to sustain itself, while its receivables have jumped by 133.8%.

According to company sources, the Indian armed forces, which constitute 90% of the HAL’s revenues, owe it a whopping Rs 15,700 crore! So what led to armed forces not making payments to HAL? The budgetary allocation for the defence sector has two components – revenue and capital outlay. While day-to-day running costs, salaries, and aircraft maintenance are under revenue outlay, the capital outlay is meant for the acquisition of new weapon systems and modernisation.

An analysis of defence budget outlays reveals that, unfortunately, annual defence budgets have shown a discernible trend of declining modernisation outlays for new projects, with almost 80% of the outlays earmarked for ‘committed liabilities’ (instalments for arms deals inked in earlier years) and skewed revenue to capital expenditure ratio. In 2012, the revenue outlay comprised 60% of the budget allocation to defence sector, while capital outlay was 40%. The number has gradually changed to 66% and 34% respectively in 2018-19 budget estimates – at a time when the country is trying to modernise the armed forces.

Out of Rs 2,95,511.41 crore allocated for the financial year 2018-19, Rs 1,95,947.55 crore has been allocated for revenue expenditure and Rs 99,563.86 crore for capital expenditure. Out of the total capital outlay, the Indian Army has been allocated Rs 26,688.42 crore, the Navy has been allocated Rs 20,848.16 crore, while the IAF has received Rs 35,755.62 crore. Across all divisions of armed forces, the total capital outlay on aircraft and aero-engines has been earmarked at Rs 28,421 crore, 3.2% lower than Rs 29,350.45 crore in 2017-18.

Insufficient funds

The budgetary allocations don’t seem to be sufficient for the growing needs of India’s armed forces. “Even to have a marginal increase in the modernisation, we need this number to be at least around 2.5% of GDP,” a former vice chief of the army said, calling the budgetary allocations to the modernisation of defence as peanuts.

The capital outlay is indeed small when the country is paying Rs 58,891 crore for the purchase of 36 Rafale fighter jets from Dassault and Rs 40, 000 crore over the purchase of S-400 missile defence systems from Russia. S-400 is one of the most sophisticated surface-to-air defence systems in the world. With five layers of defence, it has a range of 400km and can shoot down up to 80 targets simultaneously, aiming two missiles at each one.

But there is more to HAL’s financial woes. In an earlier era, if there was any amount unspent by the armed forces from the earmarked capital outlay, it used to be deposited with the HAL to set off for dues. But, over the past two years, according to insiders within the company, the strategic defence PSU has not received this amount. What is more, the company has not been receiving the advance payments from the armed forces, which they earlier used to as part of the mutual agreements.

Even as the defence minister, in her meeting with the company’s Chairman R Madhavan and armed forces chiefs, has assured the HAL of payment, yet the road to stability seems tough for now, according to analysts tracking the defence industry.

And what is more, HAL employees, who have been of late pushed in the political one-upmanship, take a strong message from it. As one of the senior HAL staffers, disgruntled with the government, says: “There seems to be political signalling in all this. Earlier governments were seen as pro-HAL. But this government doesn’t seem to care about us.”

However, a former HAL chairman opined that the company has to reach out to the government for the budgetary support. “In my time, I dealt with three defence ministers, all of them were very supportive of HAL,” he said.

Till now, HAL had a triangular relationship with the Ministry of Defence and the IAF. However, the Rafale Deal clearly highlights that this three-way relationship is dying out. There is a need for a serious course correction from all the stakeholders before the public sector jewel loses its sheen.