Budget ignores tractor industry

By Ramnath Subbu

MUMBAI, MARCH 3. The tractor industry, already hit by a host of factors, has been ignored by the latest Budget. While other sectors of the automotive sector have received reliefs by way of increase in customs duties for imported second-hand and other vehicles or a cut in excise rates, the tractor industry has not been so fortunate.

In fact, with the removal of 10 per cent surcharge on customs duty, the effective customs duty on tractors has come down to 62.8 per cent from the earlier 67 per cent leaving it open to more competition from imports. However, the industry can take solace from the announcement of sops for the agriculture sector. Also, the lowering of NABARD's lending rate could prove beneficial for tractor sales. As it is, the industry has been facing rough weather. The drought situation in Gujarat, Madhya Pradesh and Rajasthan is largely responsible for the poor offtake of tractors. While 2.1 lakh tractors were sold in the nine month period April-December 1999, it was down to 1.9 lakhs for the same period in 2000.

A demand problem arose due to a crash in farm prices following the large releases of foodgrains by the Food Corporation of India (FCI) in the open market. This led to poor demand particularly in the main markets such as Uttar Pradesh, Haryana, Tamil Nadu and Andhra Pradesh.

The industry is in a situation of oversupply with many manufacturers having flooded the market. There are estimates that retail inventory with dealers is up to three months of industry demand. In fact, against the annual demand of close to 2.60 lakh tractors, industry capacity today stands close to four lakh tractors.

Earlier a differential excise of eight per cent for tractors below 30 hp (horse power) and 16 per cent for those above 30 hp existed. But last year, this was rationalised to a flat 16 per cent duty. Indian companies such as Eicher, Punjab Tractors and Mahindra & Mahindra have a large part of their products in the below 30 hp category and so their costs have been up.

The lower horse power tractors are used by the small farmers and the hike in excise was passed on to them. In a depressed market scenario, this led to postponement of purchases and consequently, the lower hp tractors have exhibited poor growth rates.

The industry has witnessed sluggish growth of about two per cent per annum largely in the past two years while there was more than 15 per cent growth in the 21-30 hp category thanks to the excise benefits. There was a sharp decline in volumes in the 31-40 hp and 41-50 hp segments over the two years.

The increase in capacities and slackening offtake have led to intense competition and price pressures. Inventory pile-ups and working capital requirements are taking their toll.

Another area of concern for the industry is the removal of quantitative restrictions in April. The customs duty for imported tractors is 40 per cent. Second-hand tractors from China could come in at low prices and there is a real threat to the industry from this.

There is reason for optimism. The Finance Minister has increased rural credit to Rs. 64,000 crores from Rs. 51,500 crores this year. Also, the decrease in lending rates by NABARD is expected to fuel demand.

Besides, following on the National Agriculture Policy, a task force on farm mechanisation has been set up whose recommendations are to be announced soon. It is expected that there would be concrete measures to help de-fragmentation of land holdings and with the consolidation of land holdings, mechanisation will soon follow. This would certainly boost the fortunes of tractor manufacturers.

Among the players, Mahindra & Mahindra (M&M), the market leader, has been increasing its market share. In the first eight months of the current fiscal, its market share went up to around 35 per cent from 28 per cent. It launched the first of its series of new generation Horizon tractors, the Mahindra `Arjun 605 DI' (60 hp tractor). The company has also consolidated its presence in the 35 hp segment with the launch of another new tractor.

M&M has been aggressively marketing its products and has made financing easier for farmers extending its scheme to a four year financing instead of the earlier three.

Punjab Tractors (PTL) has been trying to correct the geographical bias in its reach by targeting newer and growing markets. With a considerable presence in M.P, Punjab, U.P. and Gujarat, the company has been targeting emerging markets of Bihar, Andhra Pradesh, Tamil Nadu where tractor density is low. It garnered a 20 per cent market share in the first eight months of the current fiscal. Its recently introduced Swaraj 744 has gained market share in all its markets signalling its entry into the 40-50 hp range. PTL has managed to gain export orders from the U.S. and is now tapping the Australian market.

Escorts plans to introduce three to four models every year. It is a leading player in the higher hp segment and by introducing new products in the lower hp category, it plans to increase its market share. Escorts has set an export target of 3,500 units for the next year. For the first eight months of the current year, it had a market share of 18 per cent; losing about 1.5 per cent market share over last fiscal.

Escorts entered in to a joint venture with POL-MOT of Poland to form POL-MOT Escorts Spokia Zoo wherein POL-MOT will assemble and market tractors in Poland. It plans to export around 500 tractors to Poland in the current year. The company launched a new range to cater to the South Indian States of AP, Tamil Nadu and Karnataka where the hard soil requires higher hp. Three of its Powertrack brands with straight axles are targeted at these areas of wetland cultivation.

Eicher has a strong presence in the 25 hp segment in the key areas of U.P. and Haryana. It is introducing new products in the 31-40 hp category with a likely shift in demand. Eicher has also tied up with Valtra for manufacture of 50 hp tractors.

Bajaj Tempo is setting up a plant for the 35-55 hp range with a capacity of 20,000 units per annum. Among multinationals, New Holland has entered the above 50 hp segment and the 35 hp segment. L&T plans to move into the 40 hp segment and sell 35,000 tractors in a year and John Deere set up a unit near Pune with a capacity of 8,000-10,000 tractors per annum. HMT Tractors with a factory near Bangalore, has a capacity of 19,000 Tractors is moving into a higher hp range.

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