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by some manufacturers such as Mahindra & Mahindra (M&M) and Escorts. The only company to show a positive year-on-year growth is Mahindra & Mahindra (M&M). This is because of: a wide product range aggressive marketing of products increased duration for finance schemes from three to four years increased price discounts Although these measures may bring respite in the near term, they are likely to have an adverse impact in the long run. The Change Factors New Companies in the Market The last three years have witnessed four international companies entering the market either solo or through ventures with existing companies. They are John Deere of USA (through a joint venture with Larsen & Toubro, in 1999), Same Deutz-Fahr of Italy (with Greaves Ltd., in 1999), New Holland Tractors (through a wholly-owned subsidiary in 1999), and Renault Agriculture (with International Tractors, in 2000). Entry of these companies has intensified the market competition. Shift in Demand Across Regions Traditionally, tractor sales have been concentrated in the northern states owing to the high levels of irrigation and advanced farming practices observed in these regions. However, over the last two years, the central and western states have shown significant expansion in the area under irrigation. For instance, in the state of Gujarat, the gross irrigated area (as a percentage of the gross sown area) has increased from 27 percent in 1989-90 to 33 percent in 1996-97. Similarly, the gains in irrigation in the states of Rajasthan and Madhya Pradesh are 75 percent and 51 percent respectively. The comparative market share of the regions is given in Chart 2. The implementation of major irrigation projects in the central and southern states are also likely to boost the demand for tractors in the future. Shift in Demand for Tractor Power Due to the development in the western and central parts of the country, the demand is now improving for models in the above 50 HP segment, owing to the harder soil conditions prevalent there. This is reflected in the increase in this segment's contribution from about 3 percent in 1994 to 4.4 percent in 2000. International companies who have entered the Indian tractor market have first introduced products in this segment, while simultaneously developing products for the other market segments. For instance, New Holland Tractors first introduced a 50HP and a 70HP tractor, while L&T-John Deere also launched a 55HP tractor. The demand for the less than 30 HP market has slowed down marginally owing to the increase in excise duty, from 8 percent to 16 percent, for these tractors. The segment, however, contributes to 26.1 percent (1999-00) share in the market, as a result, market participants cannot afford to ignore this segment. Opening of Import Market for Second Hand Tractors From April 1, 2001, due to WTO obligations, the quantitative restrictions on imports have been removed. To protect the domestic industry and the huge investments made by multi-national companies, the Indian government has effectively raised the tariff barriers against imported old cars, motorcycles, scooters, and multi-utility vehicles (MUVs). However, the import duty on second-hand tractors has not been increased. In addition, the 10 percent surcharge has been waived, resulting in the effective customs duty coming down to 62.8 percent from 67 percent. The opening of this market can attract import tractors from markets such as China and Europe. Tractors are often scrapped after just two years of use in Europe. Such tractors can attract very competitive prices as compared to local products in the same segment. The Future Although the government has announced measures to boost the agriculture sector and the demand for tractors, the industry is not likely to achieve its erstwhile growth rates in the near future. Some factors that are likely to contribute to a negative growth in the short term are: Agricultural production is expected to grow by only about 0.5 percent owing to the vagaries of the monsoons. The offloading of excess stock of food grain by Food Corporation of India (FCI) at low prices will affect the procurement prices and hence income of farmers.
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The market flooding by some of the key companies is likely to worsen the impact of the genuine drop in tractor demand. In addition to the sluggish demand, domestic manufacturers are going to face a belt-tightening exercise. With the entry of international competitors and expansion plans by existing manufacturers, the production capacity has bloated to over 400,000 tractors as compared to a demand for only around 250,000 tractors per annum. The current scenario indicates that the industry is headed for a major shakeout. HMT, which was up for sale two years ago (but no suitors were found) has lost a lot of ground. Others including TAFE, Eicher, and Escorts, have lost major shares of their markets to M&M, PTL, and some smaller competitors. The companies are today focussing on developing new products in the above 31 to 50 HP and above 51 HP markets. The manufacturers who are likely to maintain a stronghold in the market are Mahindra & Mahindra and Punjab Tractors owing to faster new product introductions across HP segments at competitive prices. In the long run, the industry is likely to settle down at an annual growth rate of 8 percent, with the market shares more evenly distributed. In all, the clear winner is the farmer, who today has a variety of high quality products to choose from, improved after-sales service, minimal lead-times, and favorable financing schemes that do not hurt their already-strained pockets.
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