GS Paper: GS3

The Defence Ministry has issued an order for the dissolution of the Ordnance Factory Board (OFB) with effect from October 1.

Ordnance Factory Board (OFB)

• OFB consisting of the Indian Ordnance Factories is a government agency under the control of the department of defence production (DDP).
• It is engaged in research, development, production, testing, marketing and logistics of a product range in the areas of air, land and sea systems.
• OFB comprises 41 ordnance factories, nine training institutes, three regional marketing centres and four regional controllers of safety, which are spread all across the country.

Take a look at this timeline

1712 – Establishment of the Dutch Ostend Company’s Gun Powder Factory at Ichhapur

1775 – Establishment of the Board of Ordnance at Fort William, Kolkata.

1787 – Establishment of the Gun Powder Factory at Ishapore.

1935 – Indian Ordnance Service was introduced to administer the whole Defence Production Industry of India.

1954 – Indian Ordnance Service (IOS) renamed to Indian Ordnance Factories Service (IOFS).

1979 – Ordnance Factory Board is established on 2 April.

Why are OFBs significant?

• OFB is the world’s largest government-operated production organization and the oldest organization in India.
• It has a total workforce of about 80,000.
• It is often called the “Fourth Arm of Defence” and the “Force Behind the Armed Forces” of India.
• OFB is the 35th largest defence equipment manufacturer in the world, 2nd largest in Asia, and the largest in India.

Why corporatization?

• It is a major decision in terms of national security and also make the country self-sufficient in defence manufacturing as repeatedly emphasized by PM.
• This move would allow these companies autonomy and help improve accountability and efficiency.
• This restructuring is aimed at transforming the ordnance factories into productive and profitable assets, deepening specialization in the product range, enhancing competitiveness, improving quality and achieving cost efficiency.

What about employees?

• All employees of the OFB (Group A, B and C) belonging to the production units would be transferred to the corporate entities on deemed deputation.
• The pension liabilities of the retirees and existing employees would continue to be borne by the government.

Significance of the move

• With OFB dissolution, its assets, employees and management would be transferred to seven newly constituted defence public sector undertakings (DPSUs).
• This would mean the end of the OFB, the establishment of which was accepted by the British in 1775.

 

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Last week, the Competition Commission of India (CCI) has slapped a penalty on a cartel of beer companies for hiking the prices.

What is a Cartel?

• According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
• The International Competition Network, which is a global body dedicated to enforcing competition law, has a simpler definition.
• The three common components of a cartel are:

1. an agreement
2. between competitors
3. to restrict competition

What is Cartelization?

• Cartelization is when enterprises collude to fix prices, indulge in bid rigging, or share customers, etc.
• But when prices are controlled by the government under a law, that is not cartelization.
• The Competition Act contains strong provisions against cartels.
• It also has the leniency provision to incentivise a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency.
• This has proved a highly effective tool against cartels worldwide.
• Cartels almost invariably involve secret conspiracies.

How do they work?

• According to ICN, four categories of conduct are commonly identified across jurisdictions (countries). These are:

1. price-fixing
2. output restrictions
3. market allocation and
4. bid-rigging

• In sum, participants in hard-core cartels agree to insulate themselves from the rigours of a competitive marketplace, substituting cooperation for competition.

How do cartels hurt?

• While it may be difficult to accurately quantify the ill-effects of cartels, they not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
• A successful cartel raises the price above the competitive level and reduces output.
• Consumers choose either not to pay the higher price for some or all of the cartelised product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

In other words, by artificially holding back the supply or raising prices in a coordinated manner, companies either force some consumers out of the market by making the commodity (say, beer) more scarce or by earning profits that free competition would not have allowed.

Are there provisions in the Competition Act against monopolistic prices?

• There are provisions in the Competition Act against abuse of dominance.
• One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in purchase or sale of goods or services.
• Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as an abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
• However, it should be understood that where pricing is a result of normal supply and demand, the Competition Commission may have no role.

How might cartels be worse than monopolies?

• It is generally well understood that monopolies are bad for both individual consumer interest as well as the society at large.
• That’s because a monopolist completely dominates the concerned market and, more often than not, abuses this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.

How to stop the spread of cartelisation?

• Cartels are not easy to detect and identify.
• As such, experts often suggest providing a strong deterrence to those cartels that are found guilty of being one.
• Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel.
• However, it must also be pointed out that it is not always easy to ascertain the exact gains from cartelisation.
• In fact, the threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

Try this PYQ:

One of the implications of equality in society is the absence of:

(a) Privileges

(b) Restraints

(c) Competition

(d) Ideology

 

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Back2Basics: Competition Commission of India (CCI)

• The CCI is the chief national competition regulator in India.
• It is a statutory body within the Ministry of Corporate Affairs.
• It is responsible for enforcing The Competition Act, 2002 in order to promote competition and prevent activities that have an appreciable adverse effect on competition in India.

 

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