 Hello and welcome to NewsClick. Today we are going to discuss the HAL issue that is now blown up, particularly after Debra Sitaraman, the defense minister claiming that 100,000 crores orders are being given to HAL. There should be no crisis in HAL and the fact that CMD had already declared that they have a problem, they cannot pay their workers. They have taken a thousand crores worth of loan just to make the salary payments for the next few months. To discuss this with us we have D. Raghunandan who has been covering this issue for quite some time with us. Today the CMD, Mr. Madhavan and the finance director met the defense minister Debra Sitaraman and three of the armed forces chiefs. Do you think at least this controversy would have helped HAL tied over its immediate crisis of cash? Well, we can hope so that despite all the flak HAL has been receiving from the government and unfortunately from the Air Force as well, maybe at the instigation of the government. From the defense minister. Exactly, from the defense minister herself. I hope that at least this controversy would see that some of the fairly large payments due to HAL finally do get released so that HAL does not face this situation of not having sufficient funds to pay for wages or in a month or two to undertake regular and routine activities like servicing and overhaul of equipment and procurement of equipment for that purpose for the Air Force. You know why has this crisis come about is also a question. Yes. HAL is a company which has been giving dividend every year to the government. That is right. It has been a cash rich company. Yes. It has had reserves. Yes. This is the mystery. Yes. And suddenly HAL needing to borrow money from the banks therefore incurring essentially interest charges, extra interest charges. Yes. What is not about this crisis? There is a short term and a longer term issue involved. The short term issue which has precipitated this move by HAL to go seek loans to be able to pay salaries has been the fact that HAL has been paying regular dividends running into 7 to 800, 900 crores per annum. But it has also been paying back to government in the last three years I think around 11,000 crores as buy back of equity shares plus the dividends put together is about 11,000 crores over the last three years because HAL is now supposed to be an autonomous corporation and government has required HAL to buy back equity from the government into the company and has actually received cash from HAL for that. Now having paid out 11,000 crores over the past three years, government during this financial year already owes about 15,000 crores to HAL for various products and services that HAL has already delivered. Sir, let me get this straight for our listeners. 11,000 crores has been taken out of essentially the cash reserves of HAL which would normally suffice to pay salaries. That is right and meet recurring expenses. Yes, recurring expenditure and capital investments. Yes. For the period it does not get back the money. That is right. In terms of you know what the come the air force. Right. Air force. So now it has on the one hand paid out from its cash reserves. Roughly 11,000 crores over three years and it has yet to receive about 15,000 crores for products and services already delivered. So 15,000 crores outstanding. That is right. In terms of the cash reserves if you put both of this into account. Yes. It would have been something like 20, 20,000 crores. Plus if no fresh funds are received from the government for products and services already delivered, this amount of money now about 15,000 crores which HAL is short is expected to go up to about 20,000 crores by the end of the financial year. So what this is what you are talking is a short term. This is the short term. The longer term problem which is where the Rafale deal comes in is the fact that HAL in its order books is beginning to run short of orders. The Rafale and the MMRCA deal was expected to be one of the large future orders coming to HAL apart from the Tejas, the light combat aircraft and some of the existing orders which are being executed now. If the Rafale deal or its equivalent is not coming through then HAL will face a problem of future orders as well. So the defence minister Dribblah Sitaraman says that 100,000 crores worth of orders are being given to HAL which would seem to indicate they have either been awarded or in the pipeline. So how much is in the pipeline and how much has been actually placed? About 26,000 crores of orders have actually been placed and funds transferred to HAL over 2016-17 and partly this year. But 73,000 crores which Raksha Mantri spoke about in parliament as being in the pipeline it all depends on how you define a pipeline and how long this pipeline is that is right which then didn't rectify and many of the future deals likely orders likely to come to HAL are in the negotiation phase for commercial price negotiations. So we don't know what the amount is so the amounts that Raksha Mantri spoke of in parliament are notional numbers. They could be diverted to Adani or Ambani as well. One of the large orders are for the helicopters about 200 odd helicopters which are going to be made in India but what Raksha Mantri did not tell parliament is for the purpose of manufacture of these helicopters a joint venture company has been floated in which HAL has only 51% share the remaining 49% share being owned by Ross Boron export and another smaller company in Russia. So the money is not going to come into the HAL books the money will go into the joint venture books from where a dividend or profit sharing will come into HAL. So it is going to be nowhere near the amount of 20000 odd crores that Raksha Mantri was speaking of even the LCA Tejas contract has not yet been signed price negotiations are still going on with the Air Force haggling is taking place over there. So that amount is also right now up in the air if you will pardon the expression. So much of this 73000 crores as I said is notional are not finalized figures and I do not think HAL is going to see the money actually flowing in over the next over the next 2 to 3 years HAL will only see part of this money flowing in in trickles. What is the annual shall we say output of HAL in money terms? Roughly about 20000 crores. So you get to say 9 months of output is already now due for payment. That is right. Because you can finance 3 to 4 months. Exactly. But you cannot really finance 9 months of. Plus HAL is also taking up several developmental activities design and development which is capital cost which will not see recovery until the projects mature and get come converted into commercial ventures for the Air Force or for other ventures plus they are doing capital investments for expansion of capacity or modernization tooling etc. So this is where the 7 to 8000 crores money is just taken out in terms of the payment of our shares. Yes. Now this is buy back as you said. That's right. This is where the really the capital. That's right. The money has been as it were. That's right. Taken out from HAL. That's right. That makes it also difficult for all. Exactly. So in fact I want to emphasize that Raksha Mantri started this entire discussion in parliament in order to justify what she called the support being extended by the government to HAL. And she said we are giving orders worth 100,000 crores. Firstly, commercial orders should not be taken as support. If they are to be taken as support then HAL is supporting that's all in France or supporting Boeing in the U.S. Government. Government is supporting that's all in France or Boeing in the U.S. Under commercial orders, the government of India and the Air Force are not supporting HAL or doing HAL a big favor. This is part of the national endeavour for bolstering India's national security and defence. HAL, the government and the Air Force are partners in this venture. Geostrategic autonomy. That's right. So they don't become the defence forces. So in fact my argument for long has been that government should in fact support HAL in retooling, in modernizing its equipment so that the productivity of HAL can go up. Today as you know during the Rafale controversy it was revealed that HAL's manpower costs time taken are about two and a half times those in that's all. Now why is that? It's not because of inefficiency of HAL. It's because of the lack of modernization of tooling and assembly lines which HAL has not been able to do because it has lacked the investment ability. So if the government really wants to assist HAL, it should provide upfront capital for modernization and seek to recover the costs later from buyback arrangements or whatever. Buyback. That's right. So what you are saying instead of cash infusion, what it has done is drained out of cash. Exactly. That's the longer term fact. Exactly. Apart from the fact the defence policy is now bearing around as per the latest defence procurement procedure, the basically which now is talking about favouring private public partnership. Absolutely. Absolutely. Call it public private partnership but we know it's really foreground. Absolutely. And explicitly saying that this is the policy of the Rafale. Whereas in fact HAL, Bharat Dynamics, Bharat Electronics, the Atomic Energy Agency, ISRO, many government agencies engaged in defence or related areas have long been developing vendors in the private sector particularly in the small and medium sector in order to diversify the manufacturing industry in these respective sectors. HAL today in fact has more than 2000 private sector SMEs in its vendor list who are all going to be hit by HAL not having received funds. There is a gradual process of involving the private sector which is the way it should be done, not by suddenly bringing in some crony capitalist who does not have any experience in manufacturing, who is himself in financial trouble. The way to do it is to develop tier one and tier two vendors of the main integrator like HAL and then build up the expertise downstream. In fact that's been the autonomous part of development. That's always been the way developed. Absolutely. And particularly in defence. Absolutely. Can you not be dependent outside suppliers? Exactly. Makes a normal sense. Exactly. I don't think there is any major geo-strategic player in the world who does not have an autonomous defence industry based in their country and owned by them. Precisely. This is really the issue. Precisely. I don't think the Americans would let the Chinese buy, for instance the Boeing or the DeSauce. The United States in fact has a prohibition against the US armed services buying foreign made equipment. Thank you for clarifying for us what the HAL controversy really means and how much Rafale is affecting the rest of the shall we say defence industries, not just one aircraft. Right. But we really talk about a much larger impact. This is all the time we have for Newsclick today. Do keep watching Newsclick and also follow us on these and other issues.