Ramesh Manikandan owns a medium-sized farm in the Kanchipuram district of Tamil Nadu. He was recently in Chennai, which is some 60 km from his holding, to visit two showrooms and choose a new tractor. A common enough occurence, but one with a telling nugget of information buried in it: of the two tractors in his shortlist, one has its origins in Thailand. And, Manikandan, it might be the better deal.
In a market that hasn’t seen significant growth in the last year and is expected to perform the same, if not worse, this fiscal, imports of tractors from India’s Free Trade Agreement partner Thailand and, to a less extent, Japan, have been rising at a meteoric rate. All on the back of a nearly 12 per cent cost advantage that the FTA gives them. Little wonder that India’s tractor manufacturers are jittery.
“There is a big duty disparity between these two countries. And this needs to be reconsidered for the benefit of Indian tractor manufacturers,” stressed Mukul Varshney, vice-president at John Deere India, one of the biggest tractor manufacturers here.
Why this is an issue that needs to be addressed can best be seen from the Ministry of Commerce figures. Thailand signed an FTA with India in 2003 and the agreement went into implementation in 2004. But it wasn’t until 2013 that Basic Customs Duty/Import duty on tractors was brought down to 0 per cent. The Ministry of Commerce records show that 2013 marks the beginning of the exponential growth in tractor imports from Thailand. The country exported 110 tractors to India in 2011-12 and 20 the next year.
But from January 2013, with basic customs duty being removed, imports exploded. India imported 2,330 tractors from Thailand in 2013-14, which amounts to a 116.5-fold increase over the previous year. The first half of the current fiscal has already seen 2,320 tractors landing on Indian shores, and no indications of any slowdown in the second half.
While these numbers may be miniscule when compared with the overall size of the Indian domestic market, which stood at 6.20 lakh units last year, it is the growth rate in a sluggish market that is startling.
Karvy Stock Broking Limited’s latest report termed the growth in volumes in the first half of this year as flat at best. According to Karvy, volumes in October actually fell by 12.3 per cent. Karvy also stated that the forecast for the rest of the year was no better. “We lower our forecast on tractor industry from the previous 2-3 per cent YoY growth to a decline of 4 per cent YoY in FY15,” it said.
This mismatch in performance, allege Indian manufacturers, is primarily due to the unfair cost advantage that the FTA gives importers. Because while excise duty on completed tractors is nil, inputs attract duties of 10-12 per cent. “Excise duty on completed tractors in India might be nil. But there are duties on almost all components that go into it. From the engine and electrical units to pumps, there are duties to the tune of 10-12 per cent,” pointed out Chandramohan, president and Group CFO of Tractors and Farm Equipment (TAFE). His company, along with Mahindra, Sonalika and John Deere, is among the top producers of tractors in the country.
According to Chandramohan, the excise duty exemption for tractors was executed with the aim of making them cheaper for farmers. But there are no such exemptions on input, with companies bearing the lion’s share of the costs. Current excise regulations peg raw material duties at 10.3 per cent for engines, electricals and hydraulic pumps. All the rest attract duties of 12 per cent.
“For companies that operate purely on imported tractors, and ones that import them through manufacturing bases in Thailand at 0 per cent duty, and from Japan at 5 per cent, the situation is extremely advantageous,” adds Chandramohan.
International trade norms have a solution to such a problem. The Customs Act of India allows a Counter Vailing Duty, equal to the excise duty levied on a product, to be imposed on all imports of the particular item. But in the case of finished tractors, the excise duty exemption has resulted in CVD also standing at 0 per cent. For tractor manufacturers, this is unacceptable. “When you allow free import of tractors, you should also do away with the excise duty on input for local manufacturers,” said AS Mittal, vice-chairman of Sonalika Group.
Varshney said John Deere has already nudged the government in this regard. “We have requested the GoI to reconsider some clauses in the agreement as these do not support the Make in India policy of the current government,” he explained. The government can do a simple thing to resolve this issue, say the manufacturers. “They can impose an additional customs duty for tractors imported under FTA. Section 3 of the Customs Act specifically allows the government to do such a thing to protect domestic interests,” stated Chandramohan.
Such a measure from the government, according to manufacturers, would go a long way to allay apprehensions, especially taking into consideration the widespread concern in the industry that a similar FTA might be inked next year with China. Imagine what those subsidised machines could do to the Indian tractor industry.