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Market sidelines tractor industry

THE current state of tractor industry represents a dilemma for policymakers. The manufacturers claim that their industry is sinking, citing dropping sales and resulting layoffs. It is making a compelling case for official intervention to put it back on its feet.

The farmers, however, think that the industry is manufacturing and exaggerating its plight to build a case for fresh subsidy package on tractors. The growers think that such subsidies benefit the industry exclusively at their cost.

Quoting the previous experiences of subsidy cases, when the manufacturers hiked the price correspondingly, they fear it would again be gobbled up — at least major portion of it — by the industry. The shares’ performance of major manufacturers and their profits belie their claim; both are soaring at a healthy pace, the growers say.

The farmers’ fears may be justified, but only up to a point. The industry’ says its sales have dropped by almost 80pc, as farmers have lost money on almost all major crops over the last three years. Their purchasing power has slashed substantially — directly affecting the tractors’ sale.

Instead of making suitable machines to cater to the small farmers, the industry persisted with producing big tractors — restricting its clientele and growth — and asked the government to subsidise them

In addition, the sale is now sailing near the saturation point, at least in Punjab. With over 500,000 machines in operation for 30m acres in the province, even their shortage (1-50 acre ratio) is not as compelling as of other implements. That is why, this year Punjab announced Rs1.1bn package for other implements.

The industry itself contributed to the current mess by refusing to diversify beyond two, three large machines. In total disregard to changing market realities, where lands fragmented and growers grew poor, it refused to introduce new models. Instead of making smaller machines to cater to the small farmers, it persisted with producing big machines, — restricting its clientele and growth — and asked the government to subsidise them.

In addition to official subsidies, it took equally disastrous route of regular price escalation. The prices of tractors were increased assuming farmers are now making money on some crops and can afford costlier machines. This led to almost 60pc of price escalation over the last three years alone. Critics say more profits were made with compromises on the metallurgy of machines.

Countries with much smaller agriculture base, like South Korea, have tractors ranging from 20 horse power (HP) to 200HP, with over 50 appendices attached to them. In Pakistan, the industry refused to diversify as long as official handouts made up for lost sales and profits. That luxury seems to be in serious jeopardy now.

The industry had been warning the government of the impending crisis, but it did not prepare itself to face market challenges.

The government would only do a disfavor to the industry and the farmers if it takes the beaten route to subsidies. At best, it would only delay the inevitable for a few more years. Instead, it should now look for other options, like altering farming model, which creates space for technology and asks the industry to refine itself accordingly. The world has found solution to such crises in vigorously promoting service providing centres..

Parallel to this effort could be the encouragement for the cooperatives and contract farming to create market for these centres. Pakistan’s agricultural lands are facing the problem in inheritance laws that keep dividing lands, leading to further fragmentation where purchase and individual use of expensive technology — like tractors and other implements — become unaffordable. Even now, over 93pc farmers own less than 12.50 acres, where tractors, leave alone other gadgets, simply do not make commercial or economic sense.

Tinkering with farming model (consolidation of lands) would create market for machines, which would transform farming and social realities in the country side. The government has successfully helped transform technology for cotton ginners, oil spellers and textile millers through a set of policy incentives. On the same pattern, it could encourage technology up-gradation for farming and help create space for entire spectrum of technologies required for sound development of agriculture as well as industry.

Published in Dawn, Business & Finance weekly, January 11th, 2016