Aug 25 - 31, 2008

The 2008-09 federal budget has generally been termed as agriculture-incentive based budget. There is an allocation of Rs 20.30 billion for the development projects in the food, agriculture and livestock sectors. One of the key projects is the initiation of Agriculture Sector Development Loan with Rs 200 million.

Agriculture growth in 2008-09 is targeted as 3.50%, compared to actual growth of 2.50% in 2007-08. Pakistan has total farm area of 22 million hectares, whereas area under cultivation is 20 million hectare, which is planned to increase to 24.60 million hectares by the year 2010. These targets are seemingly difficult to achieve given the present conditions of high price increase in agricultural inputs including electricity and diesel.

Extensive farm mechanisation however can possibly bring in the desired results. Agricultural machinery, including tractors and farm equipment, is an important input contributing to higher production of agriculture sector. Unfortunately, the use of agricultural tractors though increased manifold in the last two decades or so, still remains limited in the country. In fact, tractor density, or penetration level, is very low compared to the world standards. According to the Agricultural Machinery Census, there were 157,310 tractors in 1984, number increasing to 252,861 in 1994. Likewise, tractors' population in 2004 registered to 401,663. The present population is estimated around 500,000 tractors.

The domestic tractor industry has shown a steady growth over the years, and has assembled and manufactured tractors of international quality meeting national demands. It has achieved over 80% deletion level through a robust vendor industry. There are two industrial units, namely Al-Ghazi Tractors Ltd (FIAT/New Holland tractors) and Millat Tractors Ltd (MF/AGCO tractors), producing a wide range of 55 HP to 85 HP tractors, with an annual installed capacity of 30,000 Nos. at each plant. Initially, five companies were licensed to undertake local assembly and progressive manufacturing. The other three companies, assembling Belarus, Ford and IMT tractors, could not finally establish the manufacturing facilities and thus do not operate any more.

Nonetheless, due to continuous surge in demand the existing production capacity has become inadequate, and for many years the two companies are unable to deliver tractors in required quantities. For example, during 2006-07, a total of 49,500 tractors were delivered against demand of 77,261 units; Al-Ghazi having delivered 26,364 Nos. and Millat another 23,136 Nos. tractors. Obviously, these companies enjoy monopoly in the market, as these are always overbooked with the orders that are finalised on their own terms and prices.

To bridge the demand-supply gap the government had allowed last year the duty-free import of tractors, but, again, the two companies have emerged as major importers too, thus earning windfall profits year-on-year, without implementing any plans for capacity expansion. Responding to the potential large market, a few investors did show interest in setting up assembly-cum-manufacturing plants but failed in seeking government's approval due to resourcefulness of the cartel of the existing tractor manufacturers who would not like to create competitors.

The revival of Green, or Awami, Tractor Scheme is on cards, which will lead to higher demand of tractors in near future. The Government of Punjab has already announced to provide 10,000 tractors to the farmers in a year, extending two-lac rupees subsidy on each unit. Understandably, small and medium farmers are main focus of the government efforts, since they hold 65% of total cultivated area. The tractors available in domestic market however are large, powerful and costly for small farmers with about 12-acre land holding, in particular. Thus there exists a potentially large market for affordable small tractors, projected to be of the size of 10,000 to 15,000 units per year, initially, and to grow fast.

The farmers world-over employ small agricultural tractors of 25-35 HP, and a large number of multinationals are currently engaged in manufacturing of the small-power tractor and its compatible accessories and attachments, in many countries including Japan, China and India. Two versions of these modern diesel engine operated tractors are available-2-wheel drive and 4-wheel drive--with a wide gear range. These are suitably employed for all farming operations, from mowing, grading, tilling and ploughing to loading, digging, lifting and transportation. In India, 51% of total market is captured by tractors falling in the range of 31-40 HP, with a sales volume of 148,000 units recorded in 2006.

Likewise, tractors of 20-35 HP are very popular in China. In the early 1990s, the Chinese were interested to introduce here the 20-HP tractor with plans to manufacture locally in collaboration with public sector, having prepared a sound marketing feasibility study. Tests and trials of demonstration models were carried out in Sindh province for some time and the then Agricultural Development Bank of Pakistan had also consented to the proposal. This however did not materialise. On economic comparison, price of a 25-HP tractor in international market is 66% of the 45-HP tractor, whereas operational cost is relatively higher.

Though the government's declared policy was for undertaking the indigenous manufacturing of tractors in the range of 45-65 HP, the monopolistic tractor companies have developed over a period of years, a market for big tractors up to 85 HP. Many of the big size models are being imported either as CBU or in SKD condition for local assembly. They have simply remained indifferent to the demand of small farmers, whereas product range of their foreign collaborators includes models of 25-35 HP too. The current Trade Policy has also allowed duty-free import of tractors, straining further the huge import bill, but is devoid of providing any incentives to the local engineering industry.

The government needs to seriously consider devising a prudent policy and preparing a medium-term plan for the rapid promotion of tractor industry, with focus on manufacturing of 25-35 HP standardised tractors, allowing new entrants in the sector a level-playing field.

(Engr Hussain Ahmad Siddiqui is former Chairman of the State Engineering Corporation of the Ministry of Industries and Production)