Last month, the government announced the Kamyab Kisan Program which will provide tractors to young farmers across the country at cheap rates. This is expected to bolster the industry as manufacturing had waxed and waned during FY19 and FY20. But growth is once again returning, for a number of reasons. In Jan-21, volumes are suddenly demonstrating growth (up 135% against Jan-20). In 7MFY21, they cumulatively grew by 55 percent.
Tractor manufacturing in Pakistan has an average market size of 52,000 annually—though volumes have remained volatile from year to year. That size is considerably behind the curve. The industry is dominated by two players—Al-Ghazi and Millat—that divide market shares between them leaving little for any other brands. Mechanization of farm lands meanwhile has remained largely underwhelming in the country; with only 0.9 Horse Power (HP) currently operational per acre against the FAO-recommended 1.4 HP per acre that represents adequate mechanization.
The country has achieved limited mechanization despite several government support schemes over the years. Benazir Tractor Scheme for instance subsidized 20,000 farmers on tractor purchase. Cheaper loan financing rates for a range of farm machinery including solar tubewells, sprinklers and tractors, together with reduction of sales tax on tractors every few years to bring prices down have all yielded tempered results. It does seem though that volumes only sustain to the point where the sales tax regime is functional. Evidently, farmers appetite to purchase tractors is highly sensitive to prices.
The current growth therefore also comes with the new sales tax regime which will last till Jun-21 for tractor purchase that has brought down tractor prices between Rs40,000 to Rs100,000 (this regime only extends to three local assemblers: Millat, Al-Ghazi and Orient which has no volumes to speak of) which reinforces market dominance of the two players giving them and legitimizing their price setting power.
Currently low interest rates, higher wheat support price, and declining urea prices together with the sales tax reduction will mainly drive tractor volumes. But these are short-term scenarios that may drive growth over the next year or so. The problems with farm mechanization are more deep-seated and may require policy solutions beyond fiscal incentives. Most small farmers today use rented tractors or none at all as they don’t have the purchasing power to acquire ownership of farm machinery which in turn limits their avenues for growth and higher yield. Besides, mechanization for small farm holdings which constitute 85 percent of all agri land holdings is not possible due to lack of scale (farm land consolidation is direly needed). As a result, investment cannot flow in the direction at all. It is for these reasons why even subsidized government loans have not diverted focus of farm borrowing toward yield improving tools and machinery. On the other hand, many landlords prefer minimum mechanization so they are able to employ more farm hands which go on to build their existing vote banks.
Mechanization needs to be done across the growing process—from land preparation to planting, sowing, irrigating, thrashing, and so on in order to optimize input use and grow yields. As the sales tax regime dawdle on and fiscal support comes and goes, the government needs to provide a strong policy directive to purposefully mechanize the agriculture economy which is a painstaking task but a surely a worthy one.
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