Three government small arms manufacturing companies have together suffered losses of ₹366 crore over five years from 2015 on selling 12 different category of guns to armed forces, central armed police force (CAPFs), state police and civilians at prices lower than cost of production due to the strange policy and high cost overheads.
As per the pricing policy of the Ordnance Factory Board, the price of guns was fixed mainly on the basis of the actual cost of production for the past three years, issue price of for the previous year and latest estimated cost as per the trend of material, labour and overhead costs for the current year.
Annual price
The annual price increase was limited at 8 per cent over the previous year by the Ministry of Defence in case of selling the arms to armed forces, with directions that the prices have to be cheapest for them.
For the Ministry of Home Affairs, which bought arms and ammunitions for CAPFs such as BSF, CRPF, ITBP and CISF, the prices were eight per cent expensive of the offer made to armed forces in that year.
For civilians, OFB is empowered to charge minimum price as per the stipulated norms and maximum price as per the current market price. Price fixing is done early each year.
The auditors analysed indentor-wise loss and came to the conclusion that major loss out of the total figure was ₹251 crore which factories incurred due to selling their products to MHA followed by ₹47 crore to armed forces, ₹36 crore to state police and ₹32 crore to civilians over five years, from 2015 to 2020.
Ordinance Factor, Trichy, Small Arms Rifle, Kanpur, and Rifle Factory Ishapore are three defence PSUs that were at the receiving end. The worst hit due to quesitonable pricing mechanism was RFI that saw its losses climbing from ₹9 crore in 2015-16 to ₹83 croe in 2018-19 and ₹90 crore in 2019-20.
Similarly in SAF, on an average, the loss was around ₹26 crore in three years from 2015-16, 2016-17 and 2019-20 which increased to ₹36 crore and ₹33 crore in remaining years of 2017-18 and 2018-19. In OFT, profit of ₹3 crore earned in 2015-16 was reversed into loss of ₹1 crore in 2019-20 in case of two small arms.
“Analysis of losses revealed that the RFI and SAF incurred huge losses due to fact that there was a wide gap between the unit of Cost of Production (CoP) and unit price of them,” CAG revealed.
According to 2019-20 figures, a .315” sporting rifle was sold at ₹66,000 but the cost of production was nearly the double at ₹1,27,296. Same yawning mismatch is also noticed in case of five other guns, such as 12 bore pump action gun, it’s seeling price was ₹53,000 though cost of production was ₹1,12,508.
It was observed that the reason behind the wide gap between unit cost of production and unit issue price was fixing of the issue price at lower margins despite the unit cost of production of the previous years’ being on the higher side,” the CAG flagged.
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The audit report stated that replies of AWEIL and Directorate of Ordnance confirm the fact that small factories failed to control the unit cost of production due to high overhead costs incurred since main customer Army has stopped buying weapons from them. Overheads at RFI, SAF and OFT are as high as between 52 per cent to 72 per cent of the cost of production.
A miffed CAG wants the government factories to improve production efficiency, revisit pricing policy and compete in the market post corporatisation of OFBs.