The Punjab and Sindh governments have once again announced generous subsidies on tractors - a decision widely hailed by the business and farmer community, alike. The subsidies (Punjabs Rs5 billion for distribution of 25,000 tractors and Sindhs Rs200,000-300,000 per unit on 29,000 tractors) will make tractors more affordable, and will also mean a jump in the top lines of Millat and Al-Ghazi - the national duopoly. Although it appears to be a positive, theres actually a lot more to this than meets the eye.
First, lets have a look at the scheme itself: the subsidy is allotted on a regional basis and is given to the farmer directly, via a lucky draw. The tractor will be sold to the winner at a discount, of said amount. The manufacturer will then reclaim the subsidy from the government, which is usually paid more or less on time. This all seems fine, but its far from ideal.
The problems that are associated with these schemes, as one would imagine, are a lack of transparency and corruption. Particularly in Sindh, the scheme is largely politically motivated, with a whole lot of tractors being set aside to the names of a select few. Moreover, tractors are purchased after availing the subsidy and then sold off at a price lower than the market price, with the black marketer pocketing the profit. Furthermore, imported tractors are also included in this scheme. This disturbs the local players, not to mention the whole value chain attached to them.
BR Research spoke to PAAPAM Senior Vice Chairman Mumshad Ali, who said that the scheme, while a welcome initiative, does nothing to help the industry in the long term. He said that these programs are put into place one year and not the next. As such, there is no fixed long-term support to the tractor industry or the farmer. Moreover, he lamented that the schemes are often indecisive, with the figures for both the subsidy amount and the number of tractors change frequently.
Putting a scheme in place for a limited amount of time might actually does more harm than good for the manufacturers; think of all the investments and arrangements that are made to cater to booming demand, only to witness a slump in the next year.
Apart from these schemes, the erratic cycle of boom and bust is further perpetuated by changes in the GST. The historical trend reveals how the number of tractors sold has varied immensely from FY11 to FY15, with FY14 indicating an absolute bust. GST on tractors was changed around five times over this period, ranging between five and 17 percent. Mumshad Ali said that a 17 percent GST resulted in the price of certain tractors increasing by as much as Rs100,000. He contended that a difference of, as little as Rs15,000-20,000, is enough to deter a farmers decision to purchase a tractor.
So, while the scheme looks great for promoting mechanization in the economy and helping the tractor industry, it fails in the long run. There needs to be a long-term policy on making tractors affordable while maintaining a fixed GST rather than changing it whimsically.
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