Riding on the back of a bountiful monsoon and resultant return of demand from rural India, the tractor industry in India is set to witness its highest sales in FY2017-18. According to ratings agency ICRA, the industry is expected to record growth of 12-13 percent in 2018, and 8-9 percent over the long term.
The ICRA report states that augmented cash flows of farm community, which was aided by favourable crop cycles over the past two years coupled with increased income from non-agriculture sources, has been largely driving demand. A combination of other factors such as government support programmes, adequate financing availability and a revival in replacement demand in select regions have also provided an impetus to tractor demand.
Consequently, the domestic tractor industry has recorded robust growth in volumes of 15.7 percent in April-November FY2018, with industry continuing to grow at a healthy double-digit pace on a month-on-month basis, barring a minor blip that can be attributed to GST implementation.
Subrata Ray, senior VP and group head - Corporate Ratings, ICRA, said, “Even as the overall spatial and temporal distribution of rainfall in the southwest monsoon was uneven thereby impacting yields and in turn resulting in estimates indicating a decline in kharif production, the farmer community sentiments have been aided by various government farmer welfare programmes. In addition to a continued increase in agricultural credit, there has been a gradual progress in implementation of various farmer welfare programs, aimed at reducing the vulnerability of agri cash flows to the vagaries of monsoon.”
“Further, to prevent a reoccurrence of a significant decline in crop prices in case of a robust crop output, the government has imposed/hiked import duties on specific crops and announced MSP (minimum support price) hikes that are better than previous two fiscals, besides state specific schemes also being announced to support crop realizations. All of these augur well for the tractor industry,” he added.
Overall, along with increased allocations for various farmer welfare schemes, enhanced focus of the government on creating rural infrastructure through increased allocation to irrigation, roads among others, bodes well for an improvement in the rural economy and in turn the tractor segment over the medium to long term.
The report states that the fears of an adverse impact of a below-normal post-monsoon rainfall that results in a weaker reservoir levels on rabi crop yields, even as rabi sowing levels are slightly better than previous year levels, remains a concern. Nonetheless, an expectation of improvement in non-farm income, supported by the government’s thrust on rural spending, infrastructure creation and irrigation spending, is expected to continue to support the demand for tractors at a pan India level.
“ICRA expects the domestic tractor industry to record a volume growth of 12-13 percent during FY2018 with positive growth momentum also to spill over in the next fiscal. Over the long term, ICRA continues to maintain a long-term CAGR estimate of 8-9 percent for the industry, with the long term industry drivers for the industry continuing to remain intact."
"The government of India remains committed towards rural development and agri-mechanisation, a critical component in improving the state of agriculture in the country. This, coupled with other factors such as increasing rural wages and scarcity of farm labour, is likely to aid growth in industry volumes over the long term,” concluded Ray.