The Hindu Business Line : `Our challenge is to mechanise small farms'

At a time when tractor manufacturers should be celebrating, they are looking up to the skies. The handsome growth in sales in the first quarter of this year — nearly 48 per cent — was followed by a slump post-Budget. The Budget itself is one reason for this. It raised expectations because it removed the 16 per cent excise on tractors and laid emphasis on the rural sector. Farmers who expected a Rs 35,000-40,000 cut in prices found prices going down by only Rs 4,500 to Rs 7,000. There is a gap between farmers' expectations and what manufacturers are able to deliver, says Ms Mallika Srinivasan, Director, Tractors and Farm Equipment Ltd (TAFE). The gap is because excise on inputs still remains and the net benefit of the cut announced in the Budget is only 4 per cent, which the manufacturers have passed on. In this interview, the articulate, Wharton-educated Ms Mallika Srinivasan speaks in detail about the industry.

Excerpts from the interview:

How has the first quarter of this year been? And, how has the Budget helped the industry?

The industry was showing fairly good signs of recovery in the first quarter compared to last year. Meanwhile, two things have happened. One, of course, is the delay in the monsoon. Clearly there are signs of slowing down. The second is post-Budget expectations of farmers of a price cut were in the range of Rs 35,000-40,000. But duties on inputs still remained. All manufacturers have announced price cuts in the range of Rs 4,500 to Rs 7,000. What is happening is that farmers are waiting and watching. They are saying that this is not right; 16 per cent is much higher. Expectations have been raised and we are not able to deliver.

But this reduction neutralises the price increase in April...

Even after that (the price increase) the first quarter was good. That was absorbed by the market. This reduction does not match up between expectation and actual. If the intention is to open up the market, our plea will be to exempt input duty also through what was called Chapter 10 procedure that was prevalent in the pre-Modvat days.

If we go back to that procedure for this product, it will genuinely bring down prices in the market. It will give a lot of relief to the farmers — Rs 35,000-40,000. This reduction will come about with input duties being removed. When input duty is removed, and there is genuinely zero duty on the product, it will really help.

Our challenge is that we have large number of farms in the small HP (tractor) — less than two acres, less than four acres. First-time mechanising farmers will all start picking up products. At the lowest end, a product could cost less than Rs 2.5 lakh now. It could come to sub-Rs 2 lakh. If it comes to sub-Rs 2 lakh, there would be really a surge. If this can be considered then the benefit will be significant.

How was the first quarter of this year?

The industry growth was something like 47.4 per cent; last year first quarter was a negative of 15-16 per cent. We (TAFE) would have grown something like 52-53 per cent. In the first quarter the industry was 57,488 units against 38,896 last year and we did 8,245 units against 5,396.

The market was responding. Unfortunately, we are now back to fighting...

Last year, it was the second half that helped the industry grow, against a decline of 20 per cent in the first half. What is that due to?

Monsoon. It was the monsoon and cheap finance from banks and institutions. Interest rates came down - from 14-15 per cent to 10.5 per cent to 11 per cent - and banks started looking at tailor-made packages for farmers. Both these factors helped. The whole package — longer tenor, softer terms and reduction in margin money — helped. The whole thing got properly packaged with interest rate being the key. We are working on what further we can do open up the segment.

How did the package happen? Was it industry led?

Industry has been saying, but I think to some extent it was this pressure from the rural areas. The farmers' voice, the government also at that point realised that this should be done.

So there was some pressure from government, and I think the banks themselves had feedback from their rural base.

What else needs to be done?

A few things need to be done. Interest rates can come down further. Loans for tractors are available at 9.75 per cent to 10.5 per cent, whereas housing loans are 7.75 per cent. Tractor loans are still high and we are saying it can come down. Margin money is 10 per cent and it varies from bank to bank. Can we ask for margin money reduction to 5 per cent uniformly?

On small farms, the extent of land holding that will be financed by banks varies — four acres, six acres and eight acres. Can you bring it down to three acres?

We want more support for second-hand tractors. Nabard (National Bank for Agriculture and Rural Development) issued guidelines recently for financing second-hand tractors and we would like to work with them to see how it can be implemented better. It hasn't caught on. Banks are not really financing second-hand tractors. We would like to see under the leadership of Nabard and IBA (Indian Banks' Association) whether this can be given a thrust. Whatever conditions they are laying — reasonable age and reasonable residual life — is acceptable to us. We think it will help to mechanise less than two-acre farms.

But how often do used tractors come into the market?

In States like Punjab and Haryana, the level of mechanisation is higher and some of the farmers want to trade-in their old tractors and take a new one. Not so in other areas. In other areas, they prefer to go in for a new tractor. Some markets have come with this concept. If we trade-in a tractor and if we are able to get financing for this tractor, it can be picked up. Usually, the life of a tractor is 10-12 years.

In short, what we are saying is that give a complete package and it will really help. And, if we get the price to sub-Rs 2 lakh, it will help. The sentiment is slightly dampened now. The monsoon has been a real disappointment. If only the monsoon gets revived, with this package, the industry will definitely pick up.

One good monsoon and a good banking package, made the industry recover to the extent of 45 per cent compared to last year. The Budget sort of perked up everybody in agriculture, but the monsoon let us down. The budget has really hyped up agriculture.

Apart from improved sales last year, exports have also picked up. How competitive is the industry and what are its strengths?

There is good potential for Indian manufacturers. I am upbeat. We are a mature industry, the supplier base is really strong and good engineering talent is available. We have also some scale.

All those go into advantages. I don't think we are lacking in manufacturing expertise in any way.

Have TAFE and the industry looked at China?

Not yet. I don't think we are ready to look at China. First of all I would like to look at potential in other markets before I go to China. The manufacturers there have too much subsidy; intellectual property right is a problem in China. We are not looking for just a low-cost manufacturing base. If we go into China, we will have to look at marketing, problems on distribution, intellectual property rights and other issues.

There are many new players coming into the market? Is there space for all of them?

Every competitor is important. New entrants offer new business models, in terms of the way they structure their business and the way they go about their marketing. They can become potentially big players. I don't think one should write them off. If we can look and learn, we will be the healthier for it.

We must prepare ourselves for new products. If you can do the stuff that the Finance Minister has talked of and do it fully, that will definitely make it possible for Indian companies to make products that are affordable.

If you remove the element of taxation, then the products become so much more affordable, because you build scale, as you are entering the smaller HP segment.

And when you build scale, you get even more cost benefits. This zero per cent duty is a great idea. Then if VAT also comes, that is the best government can do in order to strengthen us to face competition. Then we have to act, which we will do.

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