Tractors enter slow lane after having a field day

Hemal Thakkar, Senior Practice Leader and Director and Anviksha Patel, Manager, Transport, Logistics and Mobility, Consulting, CRISIL Market Intelligence and Analytics, bring you a roundup of the tractor segment 2023.

By Hemal Thakkar and Anviksha Patel, CRISIL calendar 09 Jan 2024 Views icon1091 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp
Tractors enter slow lane after having a field day

Tractors are fast supplanting traditional bullock carts and manual labour, as renting a tractor or owning a low-horsepower (hp) model is cost-effective. Moreover, they generate rental income and help increase cropping intensity, allowing for the cultivation of multiple crops on the same parcel of land.

Tractor penetration in India stood at an estimated 1.5 hp/hectare (ha) in fiscal 2022. In developed countries, this figure is estimated at 3-4 hp/ha, resulting in superior crop yields compared to India. Notably, even China, with an average landholding size of 0.6 ha, boasts tractor penetration of 4.1 hp/ha.

Lower employment in agriculture and greater gross domestic product (GDP) per capita serve as indicators for countries with higher hp/ha. Hence, there exists a substantial opportunity in this space in India, given the relatively low levels of mechanisation.

Next fiscal, domestic tractor demand is expected to rise one to four percent year-on-year, assuming a normal and well-spread rainfall. The favourable outlook for the Rabi season is expected to drive tractor demand at the start of the fiscal, coupled with the expected rise in commercial demand, rising demand for lower-hp tractors from small and marginal farmers, and increased government focus on infrastructure.

This fiscal, the domestic tractor market is projected to decline two to five percent year-on-year on a high base, considering all the factors impacting tractor demand. Though demandfor tractors has experienced both peaks and troughs across different months, it has outperformed expectations.

Last fiscal, domestic tractor sales surged 12.2 percent year-on-year to an unprecedented 9,45,000 units approximately, propelled by buoyant farm sentiments amid favourable agricultural conditions, robust crop prices, abundant reservoir levels from an above-normal monsoon, announcement of an augmented minimum support price (MSP), and expanded Rabi acreage.

Despite a ban on sand mining activities dampening commercial demand in specific regions, strong festive demand, fuelled by promotional schemes and discounts, bolstered retail growth. Replacement demand remained a key driver, with regional variations influenced by tractor penetration and farmer incomes.

In fiscal 2022, the domestic tractor market declined 6.4 percent year-on-year, contrasting with the robust growth of 26.6 percent in the preceding fiscal. This downturn was attributable to rising tractor prices, exacerbated by price hikes from original equipment manufacturers, increased dealer inventories, reduced commercial demand, negative farmer sentiment amid escalating cultivation costs, limited availability of fertilisers, and higher non-agricultural expenses.

A significant portion of domestic sales stems from replacement demand. Typically, the ownership lifespan of a tractor ranges from six to nine years, with most tractors in the country replaced within seven to eight years. In fact, replacement demand accounts for 50-60 percent of overall sales.

In states with high tractor penetration, such as Punjab and Haryana, the share of replacement demand is a higher at 70-80 percent. States with lower farmer incomes than Punjab and Haryana have a longer replacement cycle (higher-age tractors) than the industry average.

Between fiscals 2018 and 2023, the 41-50 hp tractor segment sustained its market dominance, driven by versatile applications in agriculture and haulage, alongside compatibility with a majority of implements. Conversely, the preference for 51 hp and above tractors diminished due to their limited multipurpose functionality and a significant price gap of approximately Rs 1,00,000.

In fiscal 2021, there was a spike in demand for higher-hp tractors, owing to the rise in implement usage, enhanced affordability from government support, and limited investment alternatives amid the Covid-19 pandemic. Tractors with less than 20 hp gained favour for specific applications such as orchard farming, particularly among farmers with land holdings of 0.8-2.0 ha, driven by economic and functional considerations.

This fiscal, demand for tractors has been on a positive trajectory across most regions in the country, as the southwest monsoon season concluded with a rainfall deficit of only 5.6 percent from the normal levels despite the looming El Niño.

Region-wise, 73 percent of India's 36 meteorological sub-divisions received normal rainfall, while 18 percent experienced below-normal levels.

At the beginning of the kharif season, farm sentiments were hit by the delayed onset of the monsoon in various parts of the country.

The monsoon progressed during the latter half of the southwest monsoon season, resulting in an upswing in agricultural activities in the northern and western regions. Additionally, adequate crop prices and government support contributed to a favourable agricultural season for these regions.

That said, the agricultural season was not so favourable in the southern and eastern regions, as a rainfall deficit adversely impacted the condition of standing crops. Furthermore, the ban on commercial activities in the eastern region led to a slowdown in tractor demand.

The above graph depicts a three to four percent increase in farm income in the last fiscal, supported by a marginal uptick in production. The kharif crop outlook for this fiscal reflects a positive trend, with rice acreage surpassing the previous fiscal by two lakh, resulting in improved production.

Production of coarse cereals is estimated to be slightly higher at 351.37 lakh metric tonne (LMT). Sugarcane production is estimated at 4,347.93 LMT, exceeding the average. However, production of kharif pulses is estimated to be lower at 71.18 LMT due to climatic conditions.

In addition to improved farm sentiment, festivities from September to November has instilled a noteworthy sense of optimism. The delayed Kharif harvest across states aligned well with major festivals such as Navratri and Diwali. As a result, the nationwide outlook for the Rabi season is optimistic, aided by improved reservoir levels. '

This interview was first published in Autocar Professional's December 15, 2023 issue.

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