Labour shortage in the fields drives farmers to tractors4 min read . Updated: 06 Dec 2010, 09:50 PM IST
Labour shortage in the fields drives farmers to tractors
Labour shortage in the fields drives farmers to tractors
Mumbai: Pawan Goenka noticed something unusual last year—tractor sales were climbing even though India had its worst monsoon in more than three decades and farm output dropped 2.8% in the three months to December last fiscal. The umbilical cord that tied rainfall patterns and tractor sales seemed to have been ruptured.
The president of auto and tractor maker Mahindra and Mahindra Ltd offers an interesting explanation to this puzzle: growing labour shortages in rural India are encouraging farmers to mechanize operations. “The traditional model of predicting growth in the tractor market was only linked to the monsoon and didn’t factor in labour shortages," says Goenka.
Also See Ploughing Ahead (PDF)
Rajesh Shukla, director at research outfit National Council of Applied Economic Research (NCAER), recounts the findings of recent field visits by NCAER researchers. They found that states such as Kerala, Punjab and Tamil Nadu are facing acute labour shortages as migrant workers from Bihar and other laggard states have chosen to stay back home to work on projects under the Mahatma Gandhi Rural Employment Guarantee Scheme, the flagship social security scheme that offers up to 100 days of employment to every rural family on demand.
The rural jobs scheme has provided millions of impoverished family opportunities to work on public works such as rural road and irrigation projects. It has also pushed up wages for farm labour in many states that no longer attract seasonal migrants. Brokerage firm Edelweiss Securities Ltd estimates that average wages paid to farm workers have more than doubled in the past two years, from ₹ 50 a day to ₹ 120 a day.
Farmers have responded to climbing wage costs by buying more machines to do the work. Tractor manufacturers have reaped the benefits.
A surge in sales of tractors over the last five years highlights the growing preference of machines over men in rural India.
Tractor sales have more than doubled, from 227,637 units in 2004-05 to 402,608 units in fiscal 2010, according to Tractor Manufacturers Association (TMA), a lobby group.
That’s a compounded annual growth rate of 12% over a period when farm output grew by 2.65%. In other words, tractor sales have outpaced agricultural growth.
Brics Securities Ltd expects tractor sales to reach 527,000 units in fiscal 2012. According to Rohtash Mal, president of TMA and chief executive, agri-machinery group, Escorts Ltd, close to 400,000 tractors were sold in the country in fiscal 2010. Sales are estimated to expand 15% to 460,000 units by the end of fiscal 2011, he said.
If costs have been one factor driving strong tractor sales, higher prices of farm produce thanks to better support prices and double-digit food inflation have made tractors more affordable to farmers with marketable surplus produce.
Goenka says an increase in the minimum support price (MSP) offered by the government for crops have further boosted tractor sales.
MSP has led to an increase in the farm income. Farmers are better placed to afford mechanization, said Goenka. And added: “No one wants the drudgery of hard toil."
MSP for agri-commodities such as wheat, pulses, cotton and sugarcane have grown 5% to 15% a year from 2000 to 2010, according to data from the ministry of agriculture.
A report by brokerage Edelweiss Securities points out that the rise in MSP has been more than the rise in tractor prices over the past five years, making tractors more affordable.
To cash in on strong demand, tractor firms have lined up aggressive capital expenditure and expansion plans. M&M, for instance, plans to invest ₹ 800 crore to ₹ 1,000 crore over the next three years in its farm equipment business.
Goenka says this is the company’s biggest capital outlay plan in the last 15 years. The money will be spent on setting up a greenfield manufacturing unit in Chennai to roll out 100,000 tractors a year, and developing new tractor models for India and the overseas markets.
The Chennai factory will also offer M&M a foothold in the southern region, which accounts for 17% of total tractor sales in the country. It is the second largest regional tractor market in India, after the North, which accounts for one out of every two tractors sold in the country.
The southern region so far has been the stronghold of rival Tractor and Farm Equipment Ltd, or Tafe. M&M’s existing tractor making units are currently running at optimal capacity.
Goenka says had it not been for capacity constraints, the company could have produced at least a couple of thousands of more units.
A similar predicament faces Mallika Srinivisan, director at Tafe, whose firm—the largest Indian exporter of tractors—sells in 40 countries. Tafe has been grappling with inflationary pressures and supply chain limitations.
Srinivasan says growth in the auto sector, another major consumer of parts, has put pressure on the supply chain for components.
“The challenge is to meet demand," says Srinivasan. She attributes her problems to the component makers having cut back investments last year after auto sales sputtered in the second half of 2008 following the global economic slowdown.
However, with confidence restored and investments back on track, the situation should ease soon.
Meanwhile, Escorts Ltd, the country’s third largest producer of tractors by sales, is also in the process of removing bottlenecks and increasing capacity.
Mal, chief executive officer of the firm, says the company plans to invest ₹ 150 crore to ₹ 200 crore in the next 12 to 18 months.
The expansion will increase Escorts’ tractor capacity from 80,000 tractors per year to 100,000.
“Thirteen months ago, we had failed monsoons. However, tractor sales started climbing instead of declining," said Mal. “The drier the earth, the higher is the mechanical power required to till the land."
Graphic by Yogesh Kumar/Mint