Factors affecting tractor demand

Factors affecting tractor demand

Demand for tractors is mainly driven by the farmer's ability to purchase a tractor, and is affected both directly and indirectly by:

·         Irrigation intensity and monsoons

Irrigation plays a vital role in determining tractor demand. A farmer will normally prefer to invest in costlier capital assets like tractors when he is sure of the essentials for farming like water supply. Irrigation intensity continues to be lower in India, and hence, the dependence on monsoon for farming is relatively higher. Besides, continuous deficient monsoons also impacts reservoir levels, which in turn, affects irrigation intensity.

·         Landholding pattern

The average landholding size in India is a mere 1.4 hectares. This has been a deterrent for tractor demand. Moreover, the average landholding size has been declining due to socio-economic factors such as the break up of joint families and the division of ancestral land into smaller portions. This has both a positive and negative impact on tractor demand. With the division of larger landholdings into smaller holdings, the number of tractors required is expected to rise. However, due to a reduction in farm size (as a result of the sub-division of already small landholdings), the purchase of a tractor would become uneconomical for small farmers. But with the proportion of landholdings below 2 hectares being very high, consolidation of landholdings will drive demand in the long run.

·         Availability of credit

Commercial banks, NBFCs, regional rural banks and land development banks finance 85-90 per cent of tractors bought. The government's thrust on agri-financing has been supplementing tractor demand. For example, the minimum landholding taken as mortgage for financing a tractor has come down to 5-6 acres in 2007-08 from 8 acres. This, in turn, has increased the affordability of the farmers.

The steps taken by the government to increase agri-credit from 2004-05 onwards boosted tractor demand, as financing norms of major players were relaxed. However, since 2008, the majority of commercial banks are going slow on approving tractor financing [on the back of higher non-performing assets (NPAs)], and making their norms more stringent. This has translated to lower sales.

·         Minimum support prices of food grains

The procurement prices announced by the government are based on the cost of agricultural inputs such as fertilisers, power, irrigation and seeds. The procurement prices affect the market prices of food grains, as these prices are used as a base for calculating the market prices of food grains. A change in the procurement prices of food grains directly affects the income of the farmer, thereby influencing his ability to repay the principal amount and interest on the loan taken for the purchase of a tractor, and also indirectly affects farm income.

·         Cropping pattern

Farmers are being encouraged and educated by state governments in improving the productivity of their farms and consequently increasing their incomes. In order to improve farm productivity, the farmers are extensively practicing multiple cropping. The use of tractors will help the farmer complete operations quickly, whereby he can move on to the second crop. Hence, the growing trend towards multiple cropping will promote tractor demand.

·         Increase in cash crop production

Extensive cultivation of cash crops has resulted in higher incomes for farmers. This, in turn, has translated into the increase in demand for tractors. Over the years, the cultivation of cash crops has been increasing in terms of the land area and share of output.