Tractors: Waiting for volumes

Tractors sales are trailing their historic lows. In FY20, total sales recorded were shy of 33,000 units which is lower than the lowest recorded volumes during FY14, with a substantial differential of about 37 percent from the 15- year average volumetric sales of 52,000 units. This is despite the fact that tractor manufacturing continued during the last few months of the year amidst country-wide lockdowns as the government had permitted tractor manufacturers to keep plants open. In Jul-20, tractor sales dropped 17 percent year on year, even though expectations were higher and perceived demand in the sector was forward looking.

As part of its large relief package following the devastation caused by the coronavirus, the government had allocated Rs50 billion subsidy for farmers in the agriculture sector, of which Rs2.5 billion was earmarked as a sales tax subsidy on locally manufactured tractors. Historically, sales tax reduction on tractors has demonstrably led to higher volumes as farmers tend to be highly sensitive to price changes given their limited purchasing power. A fall in price typically has a quick response in demand and vice versa.

But despite a growing demand in agriculture and augmented farmers’ incomes—with federal government’s push coming in the form of cheaper farm loans and pesticide subsidy—tractors sales have remained subdued. Farmers have been waiting with baited breath for the sales tax subsidy to kick in which would result in a subsequent reduction in prices which will ultimately determine where volumes will fall. Since only about 5-10 percent of farmers buy tractors on purchase, the price reduction is critical as ability to absorb the full price is limited. However, with interest rates now much lower, more farmers may opt for tractor loans than before which may provide some flexibility.

As soon as the final announcement for subsidy comes through, tractor demand is expected to grow and begin to converge to the 15-year average at the least. However, if tractor companies raise prices to combat their rising costs, volumes may remain lacklustre as decision to spend on farm machinery may delay.