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Tractors: Potentially big - Views on News from Equitymaster
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  • Aug 30, 2001

    Tractors: Potentially big

    After sustaining a robust growth of around 14% in the early half of the 1990s, the Indian tractor industry has slowed down in the last three years. Unfavorable monsoon and a consequent fall in agricultural output has resulted in a slow down in demand for tractors. But given the size of the economy and the resources we have, the long term potential is promising.

    Before going any further, we have compared the Indian agricultural sector with the world economy. In terms of total area and land area, we are ranked seventh after countries like China, Australia, Russia, Brazil, USA and Canada. But in terms of arable land and land where water supply is adequate, we are far ahead of other major economies. 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. Though things have improved considerably thanks to the co-operative movement, a large portion of the rural population are yet to benefit from such initiatives.

    A global comparisonů
    (m hectares) India World % share Rank*
    Total area 329 13,387 2.5% Seventh
    Land area 297 13,048 2.3% Seventh
    Arable land 162 1,379 11.7% Second
    Irrigated land 57 268 21.3% First
    Crop production 212 2,100 10.1% Third
    Tractors (m) 2.4 32.0 7.5% Fourth
    Source: FAO
    * 1998 data

    In terms of number of tractors sold, we are ranked one of the highest in the world. But in terms of penetration, we are way behind world average. The average density is around 10 tractors per thousand hectares compared to the world average of around 50-60 (approximate) per thousand hectares. If one were to segregate the tractor sales, the small (< 25 HP), medium (<45 HP) and large (>45 HP) account of 20%, 60% and 20% of aggregate tractor sales in India. Most of the tractor majors are aggressively focusing on the medium powered tractor segment and multinationals like Holland Tractors have recently entered into this segment. Apart from farming, tractors are also used as a source of power and transportation, which provides additional income for the rural population.

    Though the fall in tractor sales, off late, could be attributed to the drought condition in some states, we do not have proper irrigational facilities to store water to counter such unexpected scenarios. The need to educate and induce the rural population for adoption of mechanisation is critical for not only the tractor industry but also for the Indian economy as well. Average productivity per hectare has remained stagnant and arable land has been on the decline due to increasing urbanisation. If India has to achieve its target of 310 MT of agricultural output by FY10, productivity and mechanisation has to show positive trend. Investments in agriculture by the government, both structural as well as social, are very low and successive governments have failed to understand the need to increase spending.

    So, the fortunes of the tractor industry depends not on monsoons but also on structural reforms from the government. The absence of this has been clearly felt and is reflected in the GDP growth trend of the economy. Tractor sales were at the highest during the mid 1990s, when the economy clocked almost 7% growth in GDP backed by a sharp rise in investments as well as agricultural output.

    The government, off late, has shown keen interest in stepping up reforms in the agricultural sector, which could augur well for the industry. 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, tractor industry is set for an accelerated growth period.

    In the short-term, though tractor sales were weak in FY01, prospects for the second half of the current financial year as well as FY03 is promising in light of an expected 9% rise in agricultural output.



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