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Government neglect may force HAL to crash-land

Last Updated 21 August 2019, 04:36 IST

Bengaluru-based defence public sector undertaking Hindustan Aeronautics Limited (HAL) had become a rallying point in the national discourse in the build-up to the General Elections of 2019 – right from the row over the alleged Rafale scam and the financial woes in the company.

The HAL employees were caught in the political one-upmanship: while opposition Congress was using the downfall of the company to allege crony capitalism by Prime Minister Narendra Modi-led government, the then Defence Minister went to the extent of questioning the credibility of the prestigious PSU. However, as soon as the elections got over, the row over HAL subsided. The problems in HAL have only amplified.

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

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 Sukhoi Su-30 MKIs of Russian origin, 250 Hawks of British origin, 125 Dorniers of German origin, 90 AVROs of British origin, 90 Alouettes of French origin, and light combat aircraft Tejas among others.

The company has designed and developed 16 types of aircraft until now. “The company has made aircraft when probably India couldn’t even make sewing machines,” said a former chairman of the defence PSU.

Pending dues

The company, which has a lot of dues pending from its largest client, Indian Air Force (IAF), has been forced to borrow from the banks to pay to its employees, along with exhausting its cash reserves. The cash reserve of the company has declined by a whopping 98.3% to Rs 112 crore in just one year, while its short term borrowings have gone up by 5.98 times in the year ended March 2019 to over Rs 4,000 crore.

And all this is happening when the company’s revenues showed a healthy growth of 4.6% and profits grew by 14.8%. If there is any inference to be taken from this data, it is the fact that the company is doing operationally well, but is being muzzled somewhere. And yes, if you look at its trade receivables – a majority of which is contributed by the Indian armed forces – it has increased by an astounding 107%.

To put the things in perspective, the company’s trade receivables stood at a whopping 125.26 times its cash reserves, disproportionately growing from 13.57 times just six months ago. Its trade receivables have bulged to Rs 14,029 crore at the same time.

According to company sources, the Indian armed forces, which constitute 90% of HAL’s revenues, owe it a close to Rs 20,000 crore!

The then defence minister, in her meeting with the company’s Chairman R Madhavan seven months ago, had assured the HAL of payment. However, until now, defence ministry sources suggest that they are still working over it.

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’ (Installments for arms deals inked in earlier years) and skewed revenue to capital expenditure ratio.

The irony is that current finance minister Nirmala Sitharaman, despite knowing the woes of the sector well, continued with the old strategy. The percentage of capital outlay as part of the defence budget has come down yet again by 100 basis points – to 33.9%.

Not only has the company been facing government neglect, but it has also historically been following the wrong strategy. “The revenue of the Israel Aeronautics Industries (IAI) is three times that of HAL, despite both being formed at the same time,” a defence analyst said.

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(Published 21 August 2019, 03:44 IST)

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