India's agrarian economy benefits tractor sales - Views on News from Equitymaster

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India's agrarian economy benefits tractor sales

Apr 17, 2000

The agriculture sector continues to be the mainstay of India's gross domestic product. Agriculture growth reported a robust growth of 7.6% in FY99. This has resulted in good crop and higher rural incomes. The tractor industry as a result continues to enjoy buoyant demand on the back of the growth in the agriculture sector. A slow down in agriculture does not mean significant drop in tractor volumes as easy credit is available for the purchase of tractors. India is the largest tractor market in the world with volumes at 0.26 m per annum. The total arable land in India is 1.68 m hectares with tractor density of 10 nos/1,000 hectares. The average density in Punjab and Haryana, the two mature markets for tractors are higher at 95 nos per 1,000 hectares. The tractor market continues to be concentrated in the North (contributes to 55% of total tractor sales in the country) due to better irrigation facilities.

Tractor demand is highest in the 31-40 HP segment and this accounted for 58% of total demand in FY99. The 21-30 HP segment continues to grow steadily and this accounted for 23% of total tractor demand in FY99. This segment is likely to grow very fast due to the fiscal concessions provided by the government.

Composition wise tractor demand
  FY95 FY96 FY97 FY98 FY99
Upto 20 HP 1% 0% 0% 0% 0%
21-30 HP 29% 22% 17% 19% 23%
31-40 HP 51% 56% 61% 61% 58%
41-50 HP 16% 19% 19% 17% 16%
51 and above HP 3% 3% 4% 4% 4%

The tractor industry had faced a slowdown in demand over the last two years and grew by only 2%, as compared to a 15% growth during FY95-FY98. This is showing signs of a pick up and grew by 3% during the first eleven months of FY2000. The long term potential for tractors continues to be bright as the agricultural sector is expected to continue to grow at 5%-6% per annum.

Given the low tractor density, the Indian tractor industry has huge potential to grow as it will benefit from improved irrigation levels, higher usage of fertilisers and credit given by banks. The agricultural industry continues to get priority lending from banks and hence availability of credit to this sector is not difficult. Infact 80% of tractor sales in India are on credit from banks and financial institutions.

Another factor in India which affects the demand for tractors is the procurement prices offered by the government and market price of farm products. This affects the ability of the farmers to buy tractors. Currently as the prices of agricultural commodities are administered and are lower as compared to global prices the expected decontrol of prices will increase the potential demand of the tractor market due to higher rural incomes.

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