May 11, 2002|
Tractors: Structural constraints
That India is number one in terms of irrigated land area, second in arable land and seventh in total area may not be startling for everyone, but what worries most of economist is the slower pace in productivity. Indian agricultural output could become uncompetitive in the long run if we fail to improve yield and quality of output. One way to improve productivity is to increase the level of mechanisation, which is of abysmally low level currently. In this article, we look at the growth prospects of the tractor industry and how it is closely co-related with the Indian agricultural sector.
Consider the size of the tractor industry. The tractor market has more than doubled in the current decade. But this was marked by two stages of growth. The first half of the decade was characterized by aggregate volume growth of more than 14% per annum. But the industry hit the brakes in the second half of the decade due to slowdown in the economy and natural calamities in select regions of the country. Over-production and unremunerative pricing strategy followed by some of the lead players also affected the overall growth of the sector. Industry volumes grew at a rate of 6% during this period (notably starting from FY98). Monsoons in FY99 and FY00 were below average and uneven resulting in drought conditions in states like Gujarat, Madhya Pradesh and Rajasthan.
A global comparison…
* 1998 data
However, the Indian tractor industry is now the second largest in the world in terms of volumes. In terms of number of tractors sold, average volumes are around 250,000 units per annum. But in terms of penetration, we are way behind world average. The total arable land in India is 1.7 m hectares with tractor density of 10 nos/1000 hectares. This is significantly lower when one compared with the world average of 50-60 tractors per 1,000 hectares. Though there are more than 12 players in the sector, six players viz. M&M (including Gujarat Tractors), Eicher, Escorts, Punjab Tractors, TAFE and HMT account of 98% of industry sales.
Fragmented holding pattern…
|(% of all holdings)
||% of land holdings
|Marginal (< than 1 hectares)
|Small ( 1-2 hectares)
|Semi-medium (2-4 hectares)
|Medium (4-10 hectares)
|Large (> 10 hectares)
But it is important to understand the state of the Indian agricultural sector. Though we have a large portion of our land irrigated, machanisation is virtually non-existence. This is because of the fragmented nature of land holdings in India and the unavailability of organised credit facility. Land holding of less than 1 hectare to 4 hectares accounted for as high as 56% of total land holdings in India. Large-scale holding of more than 10 hectares accounted for just 10% of total land holdings. Average productivity per hectare has remained stagnant and arable land has been on the decline due to increasing urbanisation. Yield per hectare grew at a CAGR of just 2% between FY90 to FY99.
Besides, farmers do not have proper irrigation and storage facilities, as a result of which their income is highly dependent on monsoons. Since a typical farmer earns his annual income in just five critical months, he is cautious and price sensitive. Illiteracy, lack of organised credit facilities and market also has been detrimental factors. The government does not seem to be making matters easier. Mounts of food stock with the government have been depressing farm prices. For instance, in FY02, while agricultural production is estimated to have increased by more than 7%, farm output was lower on account of lower prices. This is clearly reflected in the current year’s tractor sales, which dipped sharply by 16%.
If one were to segregate the tractor sales on a broader scale, the small (< 25 HP), medium (<45 HP) and large (>45 HP) account of 22%, 60% and 18% of aggregate tractor sales in India. Most of the tractor majors are aggressively focusing on the medium powered tractor segment where we expect higher growth in the future. Though the slowdown in the economy and lack of attention towards the farm sector in government policies continue to pose a big challenge for the industry, there are some positives as well.
|(% of sales)
| Punjab & Haryana
|UP and MP
|Bihar, WB & Orissa
|Raj, Guj & Mah
|AP, Kar, TN, Kerala
If one were to compare states within the Indian subcontinent, tractor penetration is higher in regions like Haryana and Punjab (at 90 per 1,000 hectares). This indicates the huge potential for increase in sale of tractors in other states. In fact, most of the manufacturers are of the view that future growth would primarily be led by volumes from Eastern and Central region like UP, MP, Bihar, Maharashtra, Andhra Pradesh and other southern states. This is precisely the reason why industry leaders like Punjab Tractors are enhancing their presence in these regions. Besides, keeping in mind the existing land holding pattern as per government statistics, land holdings of greater than 4 hectares accounted for 44% of total land holdings in the country. Even if half of them go for mechanisation, industry volumes could double in the long run. Off late, corporate farming has also gained momentum and if they manage to pool in land-holdings even on a smaller scale, growth prospects for the sector is highly encouraging.
On the structural front, literacy rate has significantly gone up in the last decade and is a very critical aspect as well. If the rural population understands that credit is available through co-operatives and commercial banks for mechanisation as well as employing high yielding variety crops, tractor industry is set for an accelerated growth period. The success of Kisan Credit Cards and other rural credit promotion schemes undertaken by financial majors like NABARD are a step in the right direction.
But it does not stop here. A unified market for the farmer’s produce and suitable infrastructure is highly important and it is the government’s responsibility to make it available for the rural population, which has been deprived till now. This would shift growth into a higher trajectory.
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