`Rural demand-drivers the key' -- Mr K. J. Davasia, President and ED, Farm Equipment Sector, M&M

S. Muralidhar

MARKET leader Mahindra & Mahindra's (M&M) performance has been hit by the decline in sales in the tractor industry over the last two years. But the company is confident of its performance improving over the next few months. Mr K. J. Davasia, President and Executive Director, Farm Equipment Sector, M&M, spoke to Business Line about the tractor industry's prospects and the company's performance.

Excerpts from the interview:

What are the reasons behind the 16 per cent fall in industry volumes this fiscal?

The drop in wholesales (sales) in the tractor industry in the first half is on account of the following factors:

Farm incomes in the country have been affected either due to adverse terms of trade or due to lower produce on account of deficient or untimely monsoons in some major States in previous years. This has led to a reluctance among farmers to invest in a tractor especially during the pre-monsoon period.

The monsoon, though normal in most States, was not timely in the Andhra Pradesh and Karnataka and some parts of Maharashtra, resulting in the delay of one season. Also, the failure of the foodgrains management system to cope with bumper harvests in the last two years has resulted in huge stocks accumulation further affecting procurement. Lower Public Distribution System (PDS) offtake and abundant foodgrains availability led to lower open market prices and consequently lower farm incomes.

Further, in the last two fiscals, the tractor industry wholesale demand exceeded retail demand, resulting in unsold inventories with dealers. Some of the tractor manufacturers took a correction in their inventories in the first half of this fiscal, which resulted in a drop in wholesale demand.

What is the total sales that the industry is likely to post for this financial year? Are there any indications that the remaining months might see a revival?

This year we expect the industry to continue dropping at 15-16 per cent. Though a revival in the second half is not expected, demand could pick up in some States compared to very low sales of the last financial year.

For an industry desperately looking for growth drivers to rural demand, there is going to be a long waiting period. Apart from the time lag, post-harvest, which happens after October every year, there is the crucial issue of whether production growth alone can translate into increased rural incomes. The paradoxical over-supply situation would cause market prices to drift downwards. Thus, while a recovery in agriculture is most desirable for the economy, it does not necessarily promise healthy demand conditions for farm mechanisation in the near future.

On the whole, we expect the tractor industry to sell around 2.1-2.15 lakh units this financial year.

The monsoon has generally been good this year. Will this have a rub-off effect on tractor sales next year?

The monsoon, though declared normal throughout the country by the India Meteorological Department, has not been timely especially in the Southern States of Andhra Pradesh, Karnataka and some parts of Maharashtra. However, with the monsoons being good in some other major States such as Gujarat, MP and Rajasthan, we certainly expect the sentiments of the farmer to improve as compared to what they would have been in the pre monsoon period. But the tractor demand will pick up only if there is an increase in real income of the farmer which implies that the prices for the produce which the farmer gets should be good and the farmer should get the price for the produce on time.

How has the offtake been in the States affected by drought last year?

There is a pick up in demand for tractors, especially in Gujarat and Madhya Pradesh, which have been affected by drought in the last few years. In MP the last phase of the monsoon, however, was not good and this is likely to have an adverse impact on the tractor industry this quarter. Hence, it is too early to say, as it is only in the last few months that the tractor industry has shown some growth in these States. Another point to be noted is that the growth in the last few months has been on a base, perhaps the lowest in the last five-six years.

What is the credit availability situation like for tractors? Have there been changes this year that have affected the availability of cheap credit for tractor purchases?

Credit availability was not a constraint for tractor financing. The farmer prefers to take credit from Land Development Banks (LDBs) and District Co-operative Banks (DCBs) as the terms of credit are better and the network of these banks is good. However, there is a concern over the availability of funds and delays in processing time in the case of these banks. Except for the LDBs and DCBs, which perhaps need to be re-energised, the availability of credit was not a concern this financial year.

Why has the sale of higher horsepower tractors not gone up as much as originally projected?

It is still premature to conclude that the demand for high horsepower tractors will or will not grow. This class will be driven almost entirely by replacement sales. This class will, thus, see a lot of upgrades from farmers who have 35-40 HP tractors. However, with consolidation of small land holdings not happening and agricultural incomes being low, there is little scope for a major increase in demand for higher HP tractors in the near future.

Apart from the established domestic players in the tractor industry, there seems to be a tussle between MNCs and unorganised tractor manufacturers, such as Sonalika, to corner market share. What are the likely changes in market shares among the various players and between the organised and unorganised sectors?

We would classify the total tractor industry into TMA (Tractor Manufacturer's Association) members and non-TMA members rather than organised and unorganised sector. Two-three years ago, the TMA members constituted 97-98 per cent of the total tractor industry. Last year it was around 90 per cent of the industry. However, this year both John Deere and Ford New Holland, which were not TMA members, have also become members.

Why has the use of farm implements not picked up?

The Indian farmer has been using primary implements for land levelling and tilling. The use of sophisticated implements has not been visible perhaps because of farmers being more accustomed to such crops as paddy and wheat, with hardly any shift in cropping pattern being noticed across States. Also, sophisticated implements, perhaps, are not economically viable for farmers who have small farms and comparatively lower incomes.

There seems to be an increasing acceptance of the Indian tractor in overseas markets. What has been your company's experience in the foreign markets this fiscal?

The experience has been mixed. The neighbouring markets of Nepal and Sri Lanka are not performing as per expectations because of the prevailing economic situation, while the US market is doing reasonably well.

Are there any outstanding issues that can be addressed by the Government to help the tractor industry generate more volumes?

Certain measures could be taken up that will make tractors affordable for the Indian farmer in the current situation, where agricultural incomes are not improving.

The bank rate, which was 10 per cent three years ago, has dropped to 7 per cent. However the Nabard refinance rate for farm mechanisation has remained constant at 12 per cent. To reduce the cost of tractor finance for the farmer, the refinance rate could be brought down to 8 per cent.

Sales tax on tractors could either be removed or lowered to two per cent on average and without any surcharge. Further, minimum land holding norms can be reduced to three acres from the existing six to ease farm credit norms. The maximum margin money should be standardised at 15 per cent as is the case with LDBs.

What are your views on corporatised agriculture? Are there any other means by which the Government could address the issue of fragmented land holdings?

The following are the key areas where State governments and the private sector can participate to make a major breakthrough in the agricultural market:

The State Governments should allot degraded land for reclamation and cultivation by private sector; encourage small and marginal farms to consolidate their holdings for collective and cooperative farming; amend the Land Ceiling Act to promote corporate farming; promote collective schemes for private investment in agriculture; give appropriate training to increase production while creating awareness of the importance of environmental protection with regard to soil and water management.

The private sector should evaluate the suitability of degraded land and grow crops for value addition, making commercial production internationally competitive.

For corporate farming, the State governments should legislate a law to make contracts in farming legally binding; induce banks to increase crop loans and insurance companies to develop crop insurance schemes for cash crops at a reasonable premium.

In this regard, the private sector should promote contract farming with technology support and assured buy-back, and aid the local community in improving its economy.

For marketing and storage, the governments should reduce excessive foodgrains loss by adopting modern storage methods; encourage investments from the private sector to set up silos, cold storage chains and modern storage facilities which can be operated commercially, reducing wastage of perishable crops.

What has M&M's performance been like in the first half of this fiscal? Are there specific reasons for this and will this continue during the remaining months of this fiscal?

Despite a drop in the sales in the tractor industry, M&M has tried to maintain its performance and has not suffered mainly because of our focus on cost re-engineering, introduction of new models and rationalisation of manpower. We expect our performance to improve in the second half.