October marked another month of lower tractor sales and its starting to look like the issue isn't just with the tractor industry, its with Pakistan's agro economy - for the five months ended FY16, tractor sales are lower by 38 percent year-on-year, while production is down by 40 percent. All this is despite a 7 percent lower sales tax compared to last year. Something isn't right.
Well start by quickly addressing the provincial subsidies - the Punjab and Sindh tractor subsidy schemes, announced in their respective FY16 budgets, seem to be having a rather detrimental effect on tractor sales rather than a beneficial one. Since their announcement all those months ago, neither policy has seen implemented. As such, potential buyers are probably lying in wait and holding off their purchases.
The major issue however is at the grassroots - Pakistan's agro economy. For starters, lower commodity prices have resulted in farmers income falling drastically. Add to that the high cost of business in the form of fertilizers and it becomes clear why tractor sales are plummeting: the farmers purchasing power is downtrodden. In a prior conversation with BR Research, PAAPAM Chairman Mumshad Ali said that a difference of as little as Rs15,000-20,000 is enough to deter farmers, whose buying power is very limited as it is.
The rural economy is suppressed. Farmers are having trouble in selling wheat as PASSCO is still holding on to last year's stock. Across the board, Pakistan's agricultural exports have been sluggish - rice, sugar, wheat, cotton. Moreover, the cotton crop this year took a huge hit this season owing to untimely rains, with production lower by some 30 percent year-on-year.
The demand for tractors reflects the state of the rural economy, and this is also supported by the lower bike sales as of late. Last week, this column wrote about the link between motorcycle sales and the rural economy (Read "Are the wheels coming off for motorcycle manufacturers?" Published on December 17, 2015). The argument so goes that Honda started losing market share to cheaper manufactured bikes, and the assumption is that these bikes are most in demand in rural areas. When commodities started heading south, so did overall bike sales in Pakistan, while Honda's market share began improving again.
Business Recorder reported last week that the tractor industry has urged the government to take a number of remedial steps such as removing regulatory and excise duties on tractor parts to bring down the price of tractors, implementing the tractor schemes, and increasing the funding of Zarai Taraqiati Bank for tractor loans. But until the core issues aren't solved, cosmetic measures such as these might not bring about the desired results.
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