Why did the military contract impact Indian in a negatieve way?
Because they expanded to much during the war and afterwards had too high overhead costs. The Domestic market wasn't large enough to make up the difference.
To elaborate: When the US entered the Great War in 1917 it was expected the war, and production contracts would last into 1919 or even 1920. Indian, like many US companies tooled up for two years worth of production, stocking materials (often at premium prices) hiring extra skilled labor at premium wages, and advanced parts production. The contracts were sloppy and often done in a patriotic fever.
When the Germans collapsed in late 1918 there was a enormous pressure from Congress to cancel the wartime contracts instantly. Fiscal conservatives, and anti military groups wanted the military expendentures ended instantly. The US government simply stopped paying & the contracts were effectively terminated. This left US business holding a huge inventory of material they could not rapidly sell for any profit. They were also often indebted for start up costs they had expected to pay for out of the full two year production run. There was also a surplus of labor on the factory floors.
It is correct some of the material, production capacity, and labor could be redirected to civilian oriented production. But, this takes time, there was additional cost in redirection, & not all the material or labor fit. That reduced the value/price of the redirected items. All this contributed to a waste in US capitol investment postwar, that dragged on deep into the 1920s.
A long term effect came when the US begain rearmament in 1939-41. Many businesses were headed by boards & managers who remembered the contract terminations of 1919. Some simply refused to consider US government contracts, others in 1939-40 took on the much more favorable British and French contracts, those who took on US government contracts held out for large advance payments to pay up front for set up costs, and gave high estimates for final prices. The War Dept refused to budge on Army purchasing policy of the previous two decades. Between the two rearmament of the US Army was further bollixed as contracts took endless months to negotiate & manufactors acted only when they had the cash in hand. It took a whole series of catastrophes from the collapse of France to Japans surprise attack to change the attitudes.
Indian Motorcyle suffered from the 1919 contract terminations, the speculative fevor of the 1920s, the Depression, & the 1939-41 rearmament problems like everyone else. Its poor management aggravated those problems.