Rural economy indicators: The paradox of robust tractor and dwindling two-wheeler sales

Nikunj Sanghi, former president of the Federation of Automobile Dealers Associations, estimates entry-level motorcycles (with 100-110 cc engine and costing Rs 65,000-70,000 ex-showroom) to make up 75% of all two-wheeler sales in India. Out of that 75%, around 70% would be in rural areas, which he defines as “any place outside (say 10 km from) a district headquarters”.

In other words, the market for two-wheelers is predominantly in the hinterland. There are four key drivers of rural demand.

The first is the virtual absence of mass public transport in villages or even mofussil and semi-urban pockets. The second is the building of all-weather roads over the last two decades — especially under the Pradhan Mantri Gram Sadak Yojana — that has helped spur ownership of personal vehicles beyond bullock carts and bicycles. The third is increased incomes. The fourth is the availability of finance for the purchase of a vehicle.

Going into negative

Against this background, there have been concerns over falling two-wheeler sales — from the all-time-high 21.2 million of 2018-19 to a 10-year-low of 13.5 million in 2021-22 (which the Finance Ministry’s latest Economic Survey also flagged). While sales may recover to 15.9 million in the fiscal ending March 31, 2023, that will still be just about the level of 2014-15 (see table).

Table on domestic two-wheeler and tractor sales. (Source: Society of Indian Automobile Manufacturers & Tractor and Mechanization Association)

To what extent is the decline in sales a reflection of rural incomes being under stress?

This is apparently reinforced by other indicators too, such as the sales of fast-moving consumer goods (FMCG). The analytics firm NielsenIQ’s FMCG Snapshot for October-December 2022 shows volume growth (the number of units bought, as opposed to the value of purchases) over the same quarter of 2021 at 1.6% in urban India and minus 2.8% in rural India.

The rural market has, therefore, seemingly contracted both for FMCG and two-wheelers. In the latter case, this could be due to stress on incomes (entry-level models have registered the highest de-growth) as well as the fourth driver (drying up of credit, particularly from non-banking financial companies following the collapse of Infrastructure Leasing & Financial Services Ltd in September 2018).

Tractors defy trend

The table, however, reveals an opposite trend when it comes to tractors.

Sales of tractors, unlike two-wheelers, actually fell during the first three years of the Narendra Modi government from 2014-15 to 2016-17. This was largely due to two consecutive bad monsoon years (2014 and 2015), a crash in global agri-commodity prices after 2014, and low increases in the government’s minimum support prices (MSP). The MSP of wheat, for instance, rose by an average of only Rs 75 per quintal per year between 2013-14 and 2016-17, and by Rs 53/quintal for paddy.

But in the subsequent period, tractor sales, again in contrast to two-wheelers, zoomed, peaking at 8.99 lakh units in the pandemic-lockdowns year of 2020-21. Hemant Sikka, president (farm equipment sector) of India’s largest tractor manufacturer Mahindra & Mahindra Ltd, expects sales to cross 9.3 lakh in 2022-23. “This will be our best year with a 10% growth over 2021-22,” he said.

Drivers of sales

Sikka attributed the buoyant sales primarily to four good monsoons in a row from 2019 to 2022: “God has been very kind.” The record agricultural output during these years has been accompanied by prices, too, holding up well. The average annual MSP hike from 2016-17 to 2022-23 was also higher, at Rs 83/quintal in wheat and Rs 95/quintal for paddy. Overall, it has translated into increased farm incomes.

In the two pandemic years of 2020-21 and 2021-22, farmers had few avenues for discretionary expenditure. Some of the monies not spent on marriages and other social functions likely went towards the purchase of tractors.

“Buying a tractor is like getting an earning member in the family. The tractor does not sit idle. When not working on one’s own farm, it is rented out to other farmers or used for transporting crops, bricks, and even people for up to 50-100 km. And tractors don’t need to be fed and bathed daily like bullocks that cannot also be left alone at home,” Sikka noted.

He estimated the non-farm use of tractors — the time that they aren’t working the fields and, instead, hauling sand, construction material or people — at 35-40%.

Sikka ascribed the industry’s good run also to supportive policies. The government had originally planned to introduce new Bharat Stage TREM IV emission standards for tractors with above 50 horsepower engines from October 1, 2020. That would have entailed replacing mechanical pumps for fuel injection with semiconductor-based common rail direct injection (CRDI) engines.

But following representations from tractor makers, the implementation of the revised emission norms was deferred and made effective from January 1, 2023. Companies were also given six months’ additional time to sell their existing stock of tractors based on TREM III A standards.

“The Ministries of Agriculture and Road Transport & Highways were both helpful. They didn’t insist on immediate implementation of the TREM IV norms, keeping in view the unprecedented global shortage of semiconductor chips as well as our national food security concerns,” Sikka said.

Agri versus non-agri

All of this still begs the question: What explains the divergence between robust tractors and dwindling two-wheeler sales?

One reason is that tractors are a relatively niche product, with their buyers mostly restricted to farmers, as against the ubiquitous and mass-consumed two-wheelers. Even if tractor sales cross a million, it would be a fraction of the 20-million-plus scaled by two-wheelers in 2017-18 and 2018-19. Also, a basic 35-40 horsepower tractor costs upwards of Rs 5.5 lakh on the road today, almost 10 times the price of an entry-level motorbike.

Another explanation — from Tanvee Gupta Jain, chief economist at UBS Securities India Pvt. Ltd — may have to do with the non-agriculture segment of the rural economy not faring too well. While agriculture is all rural, rural isn’t entirely agriculture. One indicator of this is rural wages (see chart). “The pick-up in wages for agriculture has been better than for non-agriculture,” Jain said.

Chart on rural wage growth from September 2020 to November 2022. (Source: Labour Bureau and UBS Research)

And that could probably also account for tractor sales not being the best gauge of the overall health of Bharat now.