psL n C DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

!NTEWD1TAT!ANAT DEVELOPMENT ASSOC!TIAT

Not For Public Use

Report No. 166-IN

SURVEY OF TRACTOR MANUFACTURING INDUSTY

INDIA

A Background Paper-in connection with theAppraisal of the Eighth Industrial Imports Credit

Mn- 16 10 173

Industrial Projects Department

This report was prepared for official use only by the Bank Group. It may not be published, quoted |I or cited without Bank Group authorization. The Bank Grou. doess not accept responsibility for Laccuracy or completeness of the report. .

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Currency Equivalents as at May 11,. 1973

1 US $ = Rs 7.61 Rupee = US $ 0.131 Million Rupees = US $ 132,000

* India has not yet declared a new par value following the devaluation of theUS dollar. The Rupee is officially valued at a fixed Pound Sterling rate;and, as the Pound is now floating relative to the US dollar, the US dollar-rupee exchange rate is subject to change. Conversion in this paper weremade at Rs 7.9 to US $ which was the prevailing rate at the time of pre-paration of this report.

Time Spans

The Indian Government financial year runs from April 1 to March 31.In this report the financial years are written as, for example,1972/73 designating the financial year from April 1, 1972 to March 31,1973.

Longer intervals of time are written as, e.g., 1970-72 (two yearinterval), 1970-1978 (eight year interval).

Abbreviations

AIC - Agro Industries CorporationsARC - Agricultural Refinance CorporationAU License - Actual Users Import License (issued to manufacturer on

established level of consumption, not transferable)CKD - Completely Knocked Down UnitDGTD - Directorate General of Technical DevelopmentHMT - Hindustan Machine Tools LimitedITC - International Tractors Company of IndiaLDB - Land Development BanksLMB - Land Mortgage BankRBI - Reserve Bank of IndiaSKI) - Semi-Knocked Down UnitVA1E - Tractor and Farm Eauipment Limited

STJRVEY OF TRACTOR MANIJFACTITPING

TNDIA

TABLE OF CONTENTS

Page sNo.

SLUNMARY A,ND CONCLTISIONS .. ........................=..i

T. INTRODUCTION . .................. ,.,, .t

T. SECTORPlT FRAMEWORK ..... ..................... ,.

A. History, G-overrum.ent Policy and T ns'-ut4ons .... 2B. Industry Structure .. 4

III. ANALYSIS OF PERFORMANCE .................. . ........... , 6

A. Production, Capacity IJtilization and Market Share. 6B. Plant Operations ... . ... 8

1. Product Engineering. . . 92. Manufacturing. . .. 93. Material Management .......................... 104. Marketing .................................... 1o5. Financial Controls and Reports .... ........... 106. Organization ............................. 11

C. Financial and Economic Performance . .............. 111. Prices ............

2. Cost Structure ........ .. ......... ...... 133. Price and Cost Competitiveness .............. 154. Profitability, Productivity and Financial

Structure ...................................... 16

D. Demand Forecast and Expansion Plans ....... ....... is

IV. PRINCIPAL RECOMMENDATIONS AND A PROGRAM FOR ACTION .... 22

A. Current Status and Major Constraints - Synopsis .. . 22

B. Principal Recommendations ................. ........ 231. Product Engineering . ................ ....... 232. Manufacturing ........... ................ ..... 23

3. Marketing ....... . .. 244. Financial Reports and Controls . ........... 245. Corporation Organization ..................... 24

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TABLE uF CONfTfNTS CONTINuED

Paue No.

C. Program for Action .... ......................... 24

1. Role of Government ............. . ... 242. Role of Firms ........ .25

ANNEXEs-

1 PrnirCt10n nf Trartonrs in Tndia- 1965-1979

2 Plant Operations Rating System3 EcoFnnin Analysis

4 Financial Data and Analysis

EwAP - Tocation of Ma4or Tractor Plants

*,.i,.,..t~. ,.C .. AIit -U..k. . ... ..... A...... .kLl..... .LfLl.C. .

ij Addit1onal data lis contained in-a..separate report entitled: India,Farm Tractor Sector, General Ajpraisf4 (Vol. 1) and, India, Individ'ualTractor Manufacturers, General A'rsal tVb1. 2); dated January 15,1973 and prepared by Raymond . m...bto-Asso,ciates, Inc., Detroit, U.S.A.,con.sultants. The consultants report is available from. Mr. Goderez ofthe Industrial Projects Department on, special request only and since itcontains confidential data: on eaph of the. tractor nanizfacturprsits use is restricted to authorized personnel within the Associationand Indian Government offfc'iils.

SURVEY OF AGRICULTURAL TRACTOR SECTOR

INDIA

SUMMARY AND CONCLUSIONS

i. Since 1964. the International Development Association (IDA) hasextended seven credits to India totalling US$680 million for the import ofmaterials, comDonents, spares and some balancing equipment for selected in-dustrial sectors. The purpose of these credits has been to increase capac-itv utilization and oneratine efficiency and reduce manufacturing cost byhelping to provide a timely flow of needed imported inputs at competitiveworld nrices. Tn its pant annraiRals. IDA had given about equal attentionto each of the 5 to 12 industrial sectors variably covered but these apprais-als were evidentlv not sufficiently detailed to allow meaningful recommenda-tions on specific measures regarding sectoral policies and improvement ofinditutrinl nprformnance. To arhieve this anal. it was recognized that moreintensive sectoral surveys were required and the Indian Agricultural TractorTndtAit~rv was aslected as one of the t-wn h4ihest nrioritv sectors (the other

was Commercial Vehicles) for the initial exercise in connection with theRighth Tn.Asitv4nI TInmprta GreAit.

ii. The indian tractor fleet has increaAed from 20go00 in 19q6/%7 tn

about 210,000 in 1972/73. While the increase has been rapid, farm mechaniza-tior. 4ls st-4l1 ve.,r low by inentira star.dards; cropped hectares per tractor

is 720 in India as compared to 27 in Europe, 40 in the U.S.A., 140 in the USSRanAd90 inn La:i-&a A-^rica.-WW'a~.J L&U L.=64.LI CJUE= A. I-&

A.J.J. Asbmbly adU manufacLLe of' tractors started L. i I t U L.d output

has increased from 9,000 in 1966/67, the first year of IDA credit to this in-,- .n4" n r-__ ItU … - - - - -a -dustry, to 23,500 in Il"lz7w. rive manuracLurers nave an XtIbLa.eCU capaCLty

of 37,500 per year on a 2-shift basis and employ 6,500; additionally, twofirms have initiated assembly of SKD's in preparation for future maUufacture.Progress in indigenization has been good and currently only 20% of the ex-factory cost consists of direct imports. Tractors produced are generally5 to 10-year old models of foreign collaborating companies and range between2u and Ju n.P.

iv. Despite the rapid increase in domestic prouuction the industry hasnot been able to meet the recent demand, estimated by the Government at 70-80,000 tractors and 30-40,000 by tne industry in 1971/72. To satisfy demand,existing manufacturers were granted expansion licenses and about 15 licenseswere issued to new firms to manufacture an additional 150,000 tractors perannum; tractor imports were intensified under bilateral trade agreements andabout US$64.6 million were allocated under IDA agricultural credits to financethe import of about 21,000 tractors. To avoid abuses arising from the short-age of tractors, prices have been controlled since 1968.

v. However, since mid-1971 there has been a significant change in thedemand-supply balance. Two price increases on domestic tractors plus theimposition of a 30% duty on imported tractors and tractor components and a10% excise duty on all tractors have raised prices to the farmers by 30-60%.Credit terms which were accessible to the average farmer prior to the price

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increases were not modified until late 1972. The price increases and therelatively tighter credit reduced effective demand to below current installedcapacity of 37,500 and only marginally over the expected production in 1972/73of 32,000 tractors.

vi. The performance of the industry in terms of product design and plantoperating efficiency varies among individual manufacturers, but in general,can be improved. Two of the five manufacturers; TAFE (Mavsev-Ferguson) andITC (International Harvester) have demonstrated their capability of producingtractors of good auality and performance characteristics although models aresomewhat out of date by world standards. The remaining three have seriousproduct deficiencies. Product design undating shounld be intensified throughnew collaboration agreements covering advanced foreign designs as well as co-operative research hetween the industry and Indian universities and engineer-ing research centers. Plant operations on the whole compare not too unfavor-ably with Western manufacturing standards. How.ever, areas needing remedialattention include material handling, quality control, marketing,.and finan-cial controls and renorts.

vii. There is areat uneveness 4ir demand for indigenous tractors withtractor quality being the major determinant of farmer choice. TAFE, the mostpopular tractor.. ennoys a backloa of orders amounting to several years produc=tion; however capacity utilization has been extremely low (50%) due to laborproblems at its affiliate, Sim-pson Co. L td. which supplies -t 1with. engies,ITC, producing tlte seconr.1 most popular tractor is operating at 129% capacitywhile the other producers operate at less than 50%. capacity. The sectoralcapacitv utilization has been averaging less than 60% over the last threevears-

_i Ii _ Prof - t t b it'y of the .r. ustry as measured bJy retlur,L on .apital hlasci-ellined from about 7% in 1968/69 to less than 1% in 1971/72. Of the majorcM.ani-es, o1ly ITC has maintained a moudest though declining profitability,despite increasing capacity utilization; the others are operating at a loss.The declining profitabiiity can hbe largely explained by the fact that ex-factor- Prices of tractors have increased by only 5% per year over the lastthAree vears wihiIle prices of inputs, which are not controlled, have increasedbv 10-115% per year. Consequently, despite a nominal rate of protection of3JU%, the eflective rate of protection has steadily declined and is now about-25, for TAFX and ITC tractcrs.

ix. The domestic resource cost of 1 US dollar saved is estimated atabout Rs 7.5-8.0. Compared to the official exchange rate of Rs. 7.9/US$1.0,this clearly shows that production of tractors for the domestic market iseconomic. Despite the growth and relative competitiveness, the industry isweakly structured - there are too many manufacturers producing outmoded modelsat low production levels and making little profit.

x. The earlier proliferation of factories and models and correspondinglow levels of production was further aggravated by over-licensing in 1970/71.To prevent further deterioration of an already poorly structured industry,Covernment should (i) clarify the confused demand picture through a new com-prehensive study of future demand, (ii) based on this projection, reconsider

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industria1 lice.s4.ng policy -A.d procedures to e.courae efficient .maufac-__7~--- -- - - . * L** t

turers to expand production and update product design. This last point iss--..4-

4.i 4lf 4 a 4- to use itsnr:en C.efs capacity to 4-t- at eco-

nomic prices.

xi. However, in the face of controlled prices and the resulting declin-irg profits, it n-aud seem un.likely 4-tat existi.g producers w Ibe mot4vatedA.1 jA Lt. .BC L %. WJAL%& C4_ A It.L~ . L L.& B U.LCB.1 A a W'Jfl v ..s. i...v

to expand capacity. Given that the gap between supply and demand has dropped._ __I _ _ _ __ U. . __ _ _t . _U L. L _.La .t LU_ .LJ _J- ... :_ -- a. .L_ 'D___to aSx- apparentl;y manageabl 4x:eA swVn u L&1L F_l J.&ILUUCIa ;LZ SD Upt:tL&r'aL. - *s coD

than 60% of capacity, the need for price controls is questionable, and seriousconsideration should be given to their removal.

xii. Granting the importance of the measures suggested above - tnosebasically under Government control and which the Government has agreed,during negotiations, to consider - achievement of the industry's ruli poten-tial will only be possible through plant operational improvement, an areadirectly under the control of management. Tne report makes speciric recom-mendations for a program of action, which the Government has also accepted,to improve plant operations and update product design.

I. INTRODUCTION

1.01 In May 1972, in presenting the Seventh Industrial Imports Project

in India, the Executive Directors of the International Development Associa-

tion (IDA) were informed that IDA, in close cooperation with the Indian Gov-

ernment, would thenceforth carry out intensive surveys of the priority sec-

tors that had been receiving assistance under the Association's industrial

import credits. The purpose of these surveys would be: (a) to establish

in the Bank a better understanding of sectoral problems, constraints and

potential for growth and (b) to suggest possible remedies for improvement

of industrial performance.

1.02 In its past appraisals, IDA gave equal emphasis to each of the 5

to 12 sectors variably covered by the seven credits approved between 1964

and 1972. This approach has adequately served the purpose of producing what

might be termed macro-evaluations of acceptable depth for the sectors. But

it had also become increasingly apparent that meaningful recommendations on

more specific measures affecting sectoral policies and industrial performance

would have to be supported by more reliable data and more incisive analysis.

Furthermore; sinee it was clearly beyond the capacity of any reasonably-sized

mission, time schedule or budget to undertake intensive surveys of several

sectors siam-iltaneouslv it was recognized that a new appraisal methodology

was required.

1.03 The appraisal of the Eighth Credit, therefore, was implemented in

steps: (a) an intensiv e survey of the coumercial vehicle and agricul-

tural tractor industries, two categories deemed of high priority, and (b) a

reappraisal of the remaining !DA irndustries based on a limited field survey

and the updating of performance data. In each future appraisal, it is planned

to survey intensively one or two of the other DA industries, so that in a

cycle of three to four years all will have been appraised in depth. This

report reviews thle agricultural tractor ir.dustry. II/

1.04 Essential to the successful i.mplementsatior of the intensive review

was the need to incorporate in it a higher level of technical expertise thanI I I- * An

4n a.ihr

had Deen tne practice in prior missions. After consideration of a number of

international consulting firms, the services of R.E. Danto Associates, Inc.

OfJ Detro'L (uSAl) were contracted. The compan.y' expertise rests on long years

of experience in operations and management plus consulting services to leadingtruck aniu tractor ufacturers in the U.S. andA abroad.

1.05 Tne report LI refLects th.e 'Lin.Lings of a mission to I-A44 i Sept-gx

October 1972 which consisted of Messrs. Goderez (Chief) and Iskander of

the Industrial Projects Department anud Messrs. R. Danto and D. Rowe, consul-

tants. It is based on a comprehensive questionnaire returned by major tractor

manulacturers prior to the arrival of the miss'onLln India; visits to all major

1/ A similar survey for tne coumercial vehicle industry is attached tothe President's Report.

2/ This report was prepared by Messrs. Goderez and Iskander o' the IndustrialProjects Department.

and most of thte smaller plants; and di'scussiLons writh com,ipany m,anagem.ents and'Government officials. A short follow-up mission took place in January 1973to fill some data gaps uut more importantly tLo r1ev±w withL Lthe Gover1nmentL tnemajor findings and recommendations for action of this report, to which theGovernment reacted favorably. The excellent cooperation extended to themission by Government officials and company managements and staff is highlyapprecLated; without the indigenous inputs, a meaningful report could nothave been prepared.

!I. SECTORAL NRAPEwORK

A. History, Government Policy and Institutions

2.01 Significant progress towards farm mechanization in India startedonly after independence. In 1946/47 the agricultural tractor parc was esti-mated at 5,000, rising to 8,500 in 1950/51, 20,000 in 1956/57 and 210,000 in1972/73. While the increase has been rapid, farm mechanization is still lowby international standards. In India, cropped hectares/tractor is about 720compared to 27 in Europe, 40 in USA, 140 in USSR and 200 in Latin America.

2.02 Recognizing the importance of the tractor industry to agriculturaldevelopment - the major factor in general economic development in India -government policy has been to promote farm mechanization through a two-prongedapproach fostering as a first objective indigenous production and, secondly,providing for finance of imports to close the gap between tractor supply anddemand. IDA industrial import credits have supported the primary objective -allocations totalling US$10 million to finance imports of parts and materialsfor tractor production have been included in every credit since the third in1966 - while other IDA credits totalling US$64.6 million have been approvedunder agricultural development programs to cover imports of about 21,200finishled tractors.

.l33 The main instruments used by the government to stimulate and guidethe deve].o7,ient of the tractor manufacturing industrv are: (i) industriallicensing, (ii.) 3 mort licensing, (iii) indigenization targets, (iv) fiscaland financ'al incentives and (v) price control. Tractor manufacturing wasclassified yv the government in 1970 as a "core industry'" which entitlesmanufacturers to more liberal imports of raw materials and components (otherthan those produced locallv in sufficient quantity) as well as capital goodstequired to achieve licensed capacity. As a further incentive, five yeartax holidays have been granted to manufacturers.

2.04 Agricultural tractor assembly and manufacture started in 1963/64and production has increased from about 9,000 trartnrs in i 9nIF67 thefryear of IDA lending to this sector, to 23,000 in 1971/72.

2.05 Despite the rapid increase in production, the industry until 1971/72has not been able to meet local demnnd. To avoid abuses arising out of theimbalance between supply and demand, tractor prices have been controlled since

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1968 and duty-free imports were intensified under bilateral trade agreements.Imports consisted mainly of Eastern European tractors in the 20-30 HP rangewhich were not produced in India. In addition, licensing of tractor manufac-turing was liberalized from 1968 to 1970 to encouraze exnansion and adeqttateforeign exchange was provided for expansion projects. As a result of thesemeasures. tractor availability - domestic manufacture nlus imnnrt-s - in-reasedrapidly as shown in the table below:

Availability of Tractors in India, 1965-72

Domestic Production ImportsYear Tlnit-s T nf Tntal TUnits i% of Total Total

1965/66 5,714 73 2,064 27 7,7781966/67 8,816 75 2,884 25 11,7001967/68 11,394 67 5,500 33 16, 8941968/69 15,466 78 4,276 22 19,7421oPo/7A PM If. nC e n nIA n n El ,/. ' " '} v $t 7 _J 7 st U 4 { J _ +1970/71 19,304 58 13,954 42 33,2581971/72 23,500 62 14,000 38 37,500

2.06 P.Uistoricailly, the goverra.ent 'as tended to overest'mt fetv'.JUV 1L.L LL LLaL.L., tLI1 ILVLULLL LL~LLuU Lu uveLmaLe elrecuive

demand 1/ as shown in the table below comparing government forecasts for theFurt LFI 1ve-Ye rPlan W.LI LLIUtSh 01 LWO otner sources:

Tractor Dnemand Forecast, 19169-74

Source 1969/70 1970/71 1971/72 1972/73 1973j74Xs _& A-- 1^ ~~~~~~ --fl-- ---4lf P94-- 4'% -n '- - -

rMin.LrILLy of Agriculture 0,00UU 70,U0U i,0uUU 85,),0UUU 9U,UUUIndian Society of Indus-

trial Engineers 31,000 38,000 43,000 47,000 52,000Tractor Manufacturers 27,000 30,000 33,000 36,000 38,000

Guided by its optimistic estimate of demand, Government has issued 17 indus-trial licenses or letters of intent since 19i7 ror expansion of existingplants (2) and new plants (15) which, if fully implemented, would raise in-stalled capacity from 26,800 in March 1971 to over 180,000.

2.07 By 1971, it had become evident that effective demand was less than50% of the government forecast, falling somewhere between the projections ofT-ne Indian Society of Industrial Engineers and the manufacturers. In thatyear, tractors began to be sold increasingly on credit and the less popular(poorly designed) brands were experiencing difficulties in selling. In June1971, a new situation was created by the imposition of a 30%O duty on imported

1/ The Government's estimates were primarily based on the apparent hugebacklog of orders with little attention paid to multiple registrations,price sensitivity and possible future credit constraints. In retrospect,the results were clearly unrealistic.

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tractors and components and an excise tax of 10% on both imported and domestic

tractors. The effect of those levies. together with cost escalation in Europe,

was to raise the price of tractors to the farmers by 50-60% for imported andby a lesser amount for indigenous tractors. The industry estimates current

effective demand to be in the range of 30-33,000 per year or about 15% below

its earliar estimate; indicating that the market is somewhat price elastic.

It is quite possible, however, that more adequate credit availability would

generate ri-sing dclmand.

2.08 The issuance of the Tractors (Distribution and Sales) Control Order

1971 in September 1971 has further underlined how exaggerated earlier esti-

mates of tractor demand wpre. This order, besides giving the Government powers

to direct where tractors should be sold and prohibiting resale for two years,

-stablished a system of re1gitration of tractor orders. If the dealer cannot

supply a tractor within 45 days, purchasers are required to deposit Rs. 1,000

with the post of-fic and ped_cP the denosit book with the dealer against the

purchase application. The total number of registrations appears to be less

than 40,000 versus earlier estimates of more than 100,000. Further confirma-

tion of lower than expected demand is the fact that stocks of unsold tractors

wi. th manufacturers, importeva and Aaro-induistrv eornorations now total about

5,000.

2.09 Most of the institutional credit for agriculture comes from the co-

operat'Lve movement, with the co-.e4al bankis pro…viding a relativelv unimpor-

tant, though growing contribution. Within the cooperative sector, short and

mleuium-teril loaris are provided by the primary credit societies with the State

Cooperative Bank as the apex institution; medium to long-term loans are made

by the Cooperati-ve Land Mortgage Ban.ks (LT4R). The State Cooperative Bank

utilizes the rediscount facility provided by the Reserve Bank of India (RBI),

and the LMBs obtain their funrds froum State Governments, the RBI and in the

case of special schemes, from the Agricultural Refinance Corporation (ARC).

B. Industrial Structure

2.10 There are five established manufacturers of farm tractors, with a

total installed capacity of 37,500 tractors/year in 1972/73. .wo new manu=facturers (Escorts Tractors Ltd. and Hindustan Machine Tools Ltd) with a com-bined licensed capacity of 18,000 started assembly from imported CKD's and

SKD's in 1971/72, and two more with a licensed capacity of 20,000 are plan-ning to start production possibly in the next fiscal year (1973/74). Th.e

principal firms making tractors in India, their licensor, foreign ownership,

principal product, installed capacity and indigenous content are listed 'n

the table on the next page.

ract;or Industry -wner hp and Production Data 1972/73

% IndigenousFirm - Year % Foreign Princ:ipal Istallec Production Content(ForS Collaboratio) ;Started 0Xmership Product H .P. a a cit /72 _ 7071_

:Enternational Tractor Co. ofIndia, Ltd. (ITC)-- h 1967 24.0 B-275 35.() 7,000 9,00D0 80%

(International Harvester, UK)

Tractor & Farm Equipment (TAFB) 1961 49.0 lIF 1035 35.() 7,000 3,.400 88 I(Mass1ey- Ferigusan, UK)

Escorts Ltd. 1966 4.6 Escorts 34.c, 16,000 6,600- 60%(hybrid) 3036

Escorts Tractors Ltd. 1971 40.0 Ford. 46.0c 2,02/ 51%(Ford1, USA) 3000

Eicher Tractors India Ltd. 1961 24.0 Eicher 26.5 1,500 800 82%(Eicher, F. R. of Germany)

HIinduistan Tractor Co. 1960 0 Zetor 315/0 6,C)00 400 80%(Motokov, Czechoslovakia)

Hindustanu Machine Tools Ltd. 1972 0 Zetor 20.0 31(Motokov,p Czechoslovakia) 2011

TOTAI 00 '250

Source: IDA Questiamaire filled by man-ufactturers.

1/ InstalIed capacity given on 2-shift basis.'/ Aincludes the assenibly of C0D's and SlKD's totalling for the 2 firms about 4700.

1F/ Sntirely assembly of CK)'s and SKD Is.

2.11 About 90% of the tractors produced are in the 26-35 HP range, withthe balance evenly divided between 20 HP and 36-50 H-. Most tractors are ofolder deisgn (1965 and earlier) with relatively crude hydraulic system. Ex-cept for ITC, all firms are relatively small in size. Ownership of all tirmsis private except for Hindustan Machine Tools Ltd. Western collaborators havea significant equity participation in their Indian licensees (24-49%).

2.12 The degree of vertical integration is not as high as in the commer-cial vehicle sector; materials and bought out components amount to 75-85% ofthe ex-factory cost compared to 66-75% in the commercial vehicle sector.The two leading manufacturers, ITC and TAFE, are affiliated with commercialvehicle and engine manufacturers (Mahindra and Mahindra and Simpson Co. Ltd.,respectively) and procure their castings and/or engines and some major compo-nents from them.

2.13 The amount of indigenous content is relatively high (80-88%) forfirms manufacturing tractors as opposed to assembling CKD's and SKD's. Directimport content ranges from Rs 2,000-3,500/tractor. Imports consist substan-tially of critical components still not produced in sufficient quantity andacceptable qualty in India such as sterring assemblies, hydraulic pumps andrear axle housings.

2.14 Employment is estimated at 6,500. On the average, the industry isas capital-intensive as the truck industry with net fixed assets and capitalemployed per employee of about Rs 18-25,000 and Rs 35-40,000 per employeerespectively.

III. ANALYSIS OF PERFORMANCE

A. Production, Capacity Utilization and Market Share

3.01 Production of tractors increased from 15,500 tractors in 1968/69to 23.500 tractors in 1971/72. corresDonding to an averaze annual growth rateof about 14%. This sectoral growth rate, however, conceals wide unevenessamong individual firms as shown in the table below:

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Tractor Production, 1968-1973(numbers)

Average AnnualGrowth Rate

Firm 1968/69 1969/70 1970/71 1971/72 1972/73 1968-72(est.)

I.T.C. 4,001 4,403 6,507 9,006 12,000 22%T.A.F.E. 3,275 2,344 2,267 3,412 4,200 1%Escorts Ltd. 5,625 7,835 8,770 6,633 5,100 4%Escorts Tractors - - 710 1,950 2,000 -Eicher 346 378 359 789 1,200 22%Hindustan Tractors 2,319 1,665 1,191 377. - -60%H.M.T. - - - 1,301 5, nno -

Total 15,466 16,625 19,304 23,469 32,000

/1 See Annex 1.

Source: Manufacturers of tractors (IDA questionnaires)

In fact, only ITC has shown consistent growth based on a well designed prod-uct, sound manufacturing methods and an active marketing program. As a re-sult it has enjoyed a capacity utilization of over 100% in the last few yearsand has increased its market share from 11% in 1966/67, its first year of op-eration, to 20% in 1968/69 and 25% in 1971/72. As shown in the table below,all other firms have had a very disapnointine nerformance with canacftv util-ization seldom rising above 50%.

1968/69 1971/72Canaci ty Market Capacity Market

Utilization Share Utilization Share

I.T.C. 114% 20.3% 129% 25.0%T.A.F.E. 94% 16.7% 49% 9=5%Escorts Ltd. 80% 28.5% 41% 18.4%Eieher 29% 1.0%7Hinduran 63% 11.7% 6% 1.5%ImnortR ana Othprs - 21.8% -

The repaon for th-c rmthpr nnnr nprfremjnrA 1n tJ)o f or nf ctavflng AdmnA nd-a

varied. Competition from imports has been cited as a factor, but a more ap-pronriant-e to be thna 4r^ports were filling a need that localmanufacture has been unable to satisfy. Manufacturers cite the familiarlicensin- problems affecting the imports of -------- ,bt heeprbl.

are not new and Indian manufacturers in other sectors have learned to planar.d operate effectively within i these constraints. TLherte wtere Soml.e LOmLplaints

0

about the erratic supply of domestic components, but this problem can and hasbeen mitigated in other sectors (commercial vehicles, for example) by manu-facturers taking the initiative in developing dependable sources of supply.A further complaint has been the profit squeeze resulting from productioncosts rising at a much faster rate than Government controlled tractor prices.The fact that ITC has still managed to maintain a reasonable return on in-vestment, even though it is admittedly decreasing, indicates that an alertmanagement should be able to cope with this problem, at least to some extent.

3.02 While the problems cited are substantial, it does not follow thatthey are the major causes of poor performance. Since there have been neitherdemand nor unusual input constraints (except in the case of TAFE, which hassuffered from a disruption of engine supply from its associates, SimpsonEngines Ltd., as a result of labor troubles), the explanation for poor per-formance must be sought elsewhere. The evidence points to deficiencies inthe operational areas under management control, namely, product engineering,manufacturing, materials management, marketing, financial controls and re-ports, and organization which are discussed in the following section.

B. Plant Operations

3.03 Evaluation of plant operations was carried out by the consultants.The performance of the major firms in seven major functional areas of plantoperations as well as the average sector performance are given in the tablebelow. A detailed description of the functional areas and the rating systemis given in Annex 2.

Summary Performance Ratings of Tractor Manufacturers

/1 V.S.T.Function Sector ITC TAFE Escorts- Eicher Tillers

Product Engineering 65 88 92 33 14 93Manufacturing 74 88 86 76 36 85Marketing 34 50 50 29 22 20Material Management 72 90 88 73 30 80Parts & Services 69 71 71 79 44 77Financial Controls &

Renorts 50 76 49 38 31 55Organization 69 91 89 50 31 88

Total 62 76 75 58 32 71

100 = Ton nprformance

/1 Escort Ltd. and Escort Tractors

3.04 In the following paragraphs, the principle features of operatingperformance are briefly reviewed. Ry necessity. a summary of this sort cann-not more than touch on the differences in performance' afi6g ilfdividual manu-facturers, which - as the table above demon-strates - varIes wtidPly. Detaileddescriptions of each manufacturer's performance are given in the consultantsreport.

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1. Iroduct Engineering

3.05 n a sector basis, product engineering - including tractor and

engine design, styling and product planning - is rated 65%, or just aboutadequate. TAFE's tractor MF1035, although based on an 8-year old foreign

model, received the highest rating of 92% (an evaluation which appears to

De endorsed by the farmers who have registered a backlog of orders amoounting

to 7 years of current production even though the price of the MF1035 is some-what higher than a competitive un't produced by ITC). The MF 1035 is poweredby a three-cylinder Perkins 35 HP diesel engine manufactured by Simpson and,

while costly to manufacture, it is an econom'c tractor to operate. The

transmission and the axles are Massey-Ferguson designs and together with

the Perkins engine form a balanced and depenrdable power train. Ac.essory

implements have been developed by TAFE to suit local conditions and the

hydraulic system of implement control is excellent.

3.06 ITC manufactures its own engines and other major coThporien-ts to

designs provided by International Harvester Co. (UK). The tractors are

serviceable, economic to manufacture but somewhat more expensive to operate

(relatively high fuel consumption) than competitive models. Its hydraulic.

system was inferior to TAFE's MF 1035 but improvements have been introduced

recentlv. The product line is rated at 88% or slightly under TAFE's rating.

3.07 The Escorts and Eicher tractors are considered deficient in many

respects. The Escorts tractor is an unbalanced hybrid design (a blend of

features from several foreign models) reflecting poor product planning. The

product is costly to manufacture, operate and maintain and also lacks a sys-

tem of properly designed accessory implements with automatic hydraulic con-

trol. Frequent product changes adopted after only limited engineering eval-

uation and testing have confused customers and have adverselv affected market

acceptance. Eicher builds approximately 800 one-cylinder engine tractors

per year based on an obsolete German design. It is 407 less powerful than

the ITC model B-275, costs about the same to manufacture but is simpler to

operate.

3.08 Product planning which is concerned with the design and development

of products to meet clearly defined cost and marketing objectives consonant

with consumer needs does not exist as an organized effort. Firms have adopted

the designs of their licensors and except for marginal changes have not tried

to improve or adapt models to Indian conditions or keep up with modernization

trends.

2. Manufacturing

3.09 Manufacturing including buildings, machines, quality control, mate-

rial handling systems and personnel relations is rated 74 % on a sectoral

basis, the highest rating for any function. Except for Ficher, which mightmore accurately be classed as prototype shop rather than a production plant,

all manufacturing functions, except labor relations, compare favorably with

plants in the U.S. and Canada. Buildings generally are in good condition

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and well maintained. Machines are suitable, layout is efficient and toolingand fixtures are comparable with American and European standards. Exceptfor TTC. buildings and machines are underutilized, largely due to poor plan-ning (TAFE), shortage of engines and parts (TAFE) and electric power (HMT),and low product acceptance (Escorts and VST tillers). With the exception ofTAFE, preventive maintenance should be improved in all plants.

3.10 Material handling systems have not kept pace with increased produc-

tion and material flow is apparently not yet recognized as a major productioncost factor. Quality control is practiced but could be improved. Systemsof tabulating and reporting quality defects in a timelv manner are deficient

so that feedback and corrective action are lethargic. Generally, firms needsubstantial improvement in labor safety, labor training and improved working

environment.

3. Materials Management

3.11 Under the given conditions (import and domestic ancillary procure-,erLt problems) ,aterials management, including procurement and inventories,

is satisfactory in all firms except Eicher. Inventory turnover, however, isabout 2 times which is ver low compared to turnover rates of at least 6 forthe industry in developed countries. The reasons for the high inventory.level are: (1 sm,all scale of production, tfhi4h -ean.s that purchases haJe

to be made in relativelv large lots; this is particularly true of items im-ported under t'ed aiu programs; (2) uncertainties regarding foreign ex hnge

availability and import licensing; (3) unbalanced plants resulting in highin-process materLaL 'Lnventory; () uncertainty about locall supply of compo

nen*ts which, because of the inherent slowness of the import licensing regime,cannot be made up by ti.mely imports; and (5) poor scheAu1ing and control of

in-process materials and components. All tractor firms reported a growingconcern regard'ing the increasing shortage of quality castings which neces=

sitates increased use of more expensive forgings.

4. Marketing

3.12 Marketing, rated at 34%, is the poorest of the seven functionalareas. Very little effort has gone into planned, organized and aggressive

marketing. TAFE seems to have the strongest marketing organization sellinga dependable product and offering good after-sale service. ITC sells itsproducts through an agent, Voltas, a reputable TATA firm, and measured by

sales, performance has been excellent. With supply and demand rapidly coming

into balance the marketing functions will require strengthening.

5. Financial Reports and Controls

3.13 All firms suffer from inadequate financial reporting and controlsystems although ITC rates a fairly respectable 76 % in this functionalarea.. Thus there is little change of timely detection and correction ofdeficiencies. To achieve reasonable control of operations a system ofdaily, weekly and monthly reports should be instituted based upon depart-metical "profit-center" concepts.

flrcyn-n 4 V 1*4 ryn

3.14 nrgar:4 zatin 4ir.ludir.ng structure, managem.ent competen^e an.dc..

munications are excellent in TAFE, ITC and V.S.T. Tillers. In these firms,the organizat40n st. ctLure is complete, Au tes and, r. sibilities arelogically grouped and clearly assigned. Personnel are competent and com-m-Unication systems wel3 AefineA and ut-41-9zed, exer-ing th1ereb-y a salutaryeffect on performance throughout the organization. Escorts management,whille de.m.onstrating st -O-1rong en.ereera drve app-r to be wea at4-- ----- 1-1

the middle level as evidenced by the recent history of poor financial andproduct plan.ring.

J. I -J LU 1UUUIU i LlIe LL-e .aco niLuUtry Lyin Ut:llW113 rLadLUU LtLa LtL 'Ia

the technical capabilities to manufacture quality tractors if supported bygood collaborationL from,. foreign partners providing well-designed products.This is the case with firms like TAFE (Massey-Ferguson), ITC (InternationalHarvester), Escorts Tractors Ltd. (Ford), Hindustan Machine Tools (Zetor)and V.S.T. Tillers (Mitsubishi). On the other hand Escorts Ltd. (Escorts)and Eicner tractors have suffered from poor product design. Tne Eichertractor, although of obsolete design by Western standards, has some attrac-tion due to its simplicity and ease of operation and maintenance, but theredoes not seem to be much chance for growth, plant improvement and economiesof scale without a massive injection of capital and know-how. V.S.T. Tillershas a problem unique to the industry. The "walking tractor" design concepthas encountered buyer resistance and it remains to be seen whetehr the marketin India can be induced to grow (as it has in Japan) in the face of the ap-parent Indian farmer preference for standard 4-wheel tractor vehicles.

3.16 Improved performance generally will depend on the extent to whichfirms are able to overcome the operational deficiencies noted in the preced-ing paragraphs. The more serious deficiencies are definitely in productengineering and product planning. However, very few firms have the capabil-ity to upgrade their products and it is not expected that they will acquirecapability in the future especially at the current scale of operation and lowprofitability. Therefore, improved product design will require a flow oftechnology from foreign sources and firms should be encouraged to negotiatethe needed technical assistance contracts with existing and new collaborators.In addition, firms should initiate cooperative programs with universities andengineering research centers (e.g. The Central Mechanical Research Institute)aimed at developing tractor features especially suitable for India.

C. Financial and Economic Performance

3.17 The purpose of this section is to briefly review the financial andeconomic performance of the industry to determine its problems, constraintsand prospects with a view to formulating a plan of remedial action.

1. Prices

3.18 The effect of the levies imposed in June 1971 (para 2.07) togetherwi'th cost escalation in Europe was to raise the price of imported tractorsto the farmers by 55-65%. Retail prices of indigenous tractors rose byabout 25-55% since 1970/71 as a result of the imposition of the 10% excise

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tax and two adjustments in the controlled prices, and are currently aboutequall 1t-o prices of Eastern European 4iports and 20-30% below Irices of

"Western" imports. These price changes are tabulated below.

Retail Prices of Indigenous and Imported Tractors-

Indigenous TractorsP r i e Price

Adjustment Adjustmentof of Tncrease Im,porte

Sept. 18 Feb. 10 1970/71 Tractors-Modei n.Pr. 1 97 17 1v to 17 '972

~ d'U~ 4L~ -1 C I 1J.rt' 1 AbI 1or ')~ '). I .ff~TAFrE 017r IC35) 35 ',4 244,19 I2 6,300 24.4 35I,000U /5

ITC B275 35 19,570 22,810 25,200 28.8Hindustan ritiD O50 ju 5 2,3u JO 24 3 47.2Hindustan HWD 35 35 15,710 17,470 24,100 53.4Escorts 35 /2 19,930 25,200 26.4 /3 25,600 /6Eicher 26 17,910 19,466 25,200 40.7T1T/Leter 2011 25 - - 22,750 - 23,80

/1 All prices include freight, dealer margin and excise duty but excludeCentral and State sales tax.

/2 1970/71 model has been discontinued; it was not comparable to the modelmade in late 1971 and 1972.

/3 Price increase for period September 1971 to Februarv, 1972.A4 Through the State Trading Corporation.7T Imported prices apply to IMT 533 (Yugoslavia), an equivalent model./6 Imported prices apply to URSUS 328 (Poland), an equivalent model.

3.19 It is interesting to note that the prices set by the Governmentfor the Eicher 26 HP model have registered one of the larger increases andit is currently priced higher than the Hindustan HWD 35 (Zetor 35 HP) andequal to the ITC B275 (35 HP), both of which are more powerful and tech-nologically superior. Eicher's price is only slightly lower than the mostpopular tractor (MF1035) for which there is a much higher demand and whichcommands a resale premium of about Rs 3,000. Another interesting exampleof the effect of the price control regime is the ITC B275 (35 HP) which istechnologically superior and is more popular than the Escorts 37 but sellsat the same price. These examples illustrate how the current pricing systemfails to take into account quality and reliability of product, ease and costof operation, after sales service and other factors important to the customerand therefore, inevitably results in a black market for favored brands.

3.20 Manufacturers report that, following the price increase of 1971/72,the availability and terms of credit became critical factors in tractor de-mand. Credit offered by LMB's and LDB's now carry an interest rate of 9%,with 15% downpayment and repayment of up to 9 years. However, their insist-tence upon collateral security in the form of land has definitely constrainedthe purchase of tractors by small and medium farmers. Credit from commercial

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banks is only available on stiffer terms, namely, 25-50% down payment, 10%interest and repayment over three years. Furthermore, some commercial bankshave a loan limit of Rs 20,000 while a local tractor plus accessories costsabout Rs 40,000 and the imported package costs about Rs 50,000. These areclearly difficult terms of borrowing for small and medium farmers.

3.21 While the objective of imposing an import duty and excise taxeswas to make tractors relatively more expensive than they were in order toinduce more intensive utilization, it was not intended to price them out ofreach of small and medium farmers. Unfortunately, this appears to havehappened under the current credit terms and partially explains the contrac-tion in demand.

2. Cost Structure

3.22 The following table gives a typical ex-factorv price breakdown fora 3S-HP trartnr manniifartirdiD In Tndi in 1q6R8/9 anid 1971/72 and a rough com-parison with Western manufacturers in 1971/72; with 1971/72 treated as a baseyear in' which t-he Indian ex-factory price is 100.

Cost Breakdown of Ex-factory Price ofIndian & Western Tractors

ComparableDomestic Western Tractor

Bought-out Materials 19686 L/ 1071 /72/- 1 971/ 7 i2/

al Imported n.a. 1=0n.a.b) Local n.a. 60-65 n.a.

Total Bought-out Materials 58 75-85 56

Labor 4-8 6-10 n.a.Depreciation 2=3 2-4 n.a.

Interest 2 3 n.a.Other -Expenses 6 6-8 n.a.Profit before tax 5 5-6 n.a.

Total Conversion Cost 22 20 19

Total 80 100 75

/1 Ex-factory price = 80 i.e. 25% less than 1971j72.7T Base Year: ex-factory price 100./3 Ex-factory price 75 i.e. 33% less than Indian 1971/7Z ex-tactorv price.

The current cost structure (1971/72) shows that only 15-20% of the ex-factorycost consists of imported materials and components implying a foreign exchangerequirement of Rs 2,000-3,500/tractor.

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3.23 Comparison of the 1968/69 andl 1971/72 domestic cost structures

shows that compared to an average tractor price increase of about 25% overthe last three years, the cost of bought out items increased by about 35-40%over the same period reflecting the combined effect of duties on importedtractor components (30% as of June 1971), price increases for locally pro-cured materials (15% per year) and components (10% per year). Labor costhas also increased by about 10% per year and interest charges by 50% overthe last three years because of increased dependence on borrowings to fi-nance fixed and working capital. This wide difference between the priceincreases of tractors versus inputs is reflected in steadilv falling pro-

fitability which dropped from an average of 6% on sales in 1968/69 to 1%

in 1971/72.

3.24 Comparison of the domestic and foreign cost structures indicatesthat the cost of purchased materials and components in India is 45% higher

than for comparable western manufacturers while the conversion cost is onlymarginally higher for domestic production. The relatively high cost of pur-

chased materials is due to the transportation cost and duty on imports and

the relatively high cost of locally procured components, which on average are20-80% higher 1/ than c.i.f. prices of comparable imports. Local componentsare more expensive for a number of reasons including: (i' in spite of the

small scale of their operations, tractor manufacturers maintain multiplesources of supply for most items to induce competition among suppliers and

guard against disruption of supply; thus further aggravating the disecon-

omies of scale; (ii) the high price of imports; (iii) production ineffi-ciencies; (iv) and high profits among ancillary producers. Most of the dif-

ficulties of the tractor manufacturers with ancillary suppliers is due to

the fact that, unlike the commercial vehicle manufacturers who have developedrelatively efficient ancillary suppliers dependent on them for financial,technical and sales support, tractor manufacturers have grown as an appendageto the auto ancillary industry. Consequently, tractor manufacturers are in

a weak bargaining position vis-a-vis their suppliers. Despite these diffi-cultiesj tractor manufacturers renorted that generally there has been someimprovement in quality, quantity, and delivery of locally procured components.

3.25 The marginally higher domestic conversion cost, despite much lowerwage rates is de-h-n to: (i) structural weaknesses, namely, the small scale of

operations, product design and higher interest charges on working capitalrequirements to finance large inventories of raw materials and cnmnnnents

and (ii) operational weaknesses including production inefficiencies andpoor labor relations.

1/ It should be noted that some components are already competitive. Theseare usually made of steel and have a high labor content, e.g., castings,forgings, machined parts, fuel injection pumps, etc. On the other hand,prices of proprietary items such as electricals, batteries and tiresare 2 to 3 times as high as the c.i.f. prices of comparable importspartly because of high cost of raw materials and import duties andpartly because of the low scale of operations of most plants andinefficient plant operations.

3. Price and Cost Competitiveness

3.26 Despite the relatively high cost of materials and conversion, prices

of domestic tractors compare not too unfavorabiv witn imported tractors c.i.f.

as shown in the table below.

Price and Cost Competitiveness of Mjor Models

Simple Price Adjusted Price Domestic Resource 3

Product Difference /1 Difference /2 Cost of Foreign Exchangc-

X % (Rs/USS)

ITC - B275 11% -3% 7.5

TAFE - KF1035 16% -3% 8.0 /6

Escorts 337 39% 5%7 10.0

- Zetor 2011 38% 6% 11.0

/1 Simple price difference - defined as the percentage excess of the

ex-factory price of the product over the c.i.f. value of a comparable

product. This measure is used as an indicator of gross protection in

the price of the final product (Annex 3).

/2 Adjusted price difference with inputs at international nrices - defined

as the percentage excess of the ex-factory price, assuming inputs at

prices which would prevail under free trade conditions, over the c i.f.

price of a comparable import. This is the protection which the itemwou;ld require if the domestic vehicle manufacturer were to pay for both

imported and domestic inputs the prices xwhich would obtain under free

t'radALe conditions, given the existing ,roduction eff6oicnc It is

lower than the simple price difference by inefficiencies and/or highprofits 'n the supply Industries or high cost material and equipm.ent

procurement or higher domestic cost caused by protection or a revenue

orientCed t-ariff system (ne )

/2 TDomestic Resource Cost per unit of Froreign Exchanoe Saerd or Earned -

defined as the ratio of direct and indirect domestic resource cost, to

the dIfference between the c. i.f. value of imports (or the f.o.b. value

for exports) and the foreign exchange expenditure, direct and indirect,required fLor domestic production . It provides a measure of efficinenc

of the whole sector including the supplier and sub-supplier industries

for this product (Annex 3).

1 Calculated on the basis of 1972/73 cost data.

3.27 The simple price difference indicates ex-factory prices of tractors

of Western origin (ITC and TAFE) is 11-16% higher than the c.i.f. cost of a

comparable import. If import duties on direct imports (ahout Rs. 1,500/tractor)

or 6-7% of the ex-factory price of the tractor) is deducted, and local bought-

out components were to be obtained at international prices (i.e. at about

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Rs 2.500-3.500 less ner tractor) the nrice of local tractors would be abouit3°,' less than the c.i.f. cost of equivalent imports. This clearly indicatesthat the conversion process bv tractor manufacturers is coin ntirlup Pven arthe low scale of production. This cost competitiveness is achieved becauseof the relatively high transnortation cost element of a finished tractorinnort comrared to components, and because of low labor costs.

3.28 The domestic resource cost per unit of foreign exchange saved byirnort substitution of "Western" tractors ranees from Rs 75 tno Rs=o!uS

WTith an official exchange rate of Rs. 7.9/USS, the manufacturing of tractorsin Tndia is Pcnnntmir and eouild 'h Pven monr so if the scalP of prnodrtion

were to increase. Comparison of the domestic resource cost for ITC and TAPE-,which nrondtic sbistantialqlv snif1 ar trartors using czimilar m.uftur-ne

methods with more or less the sapie degree of vertical integration and plantoneration effiriencyr- shows that increasine the scale of nroduction from5,000 to 10,000 units/vear reduces the domestic resource cost by 5-7%, im-nli ing that government pci -ct shoufld Dncovrage exfstxng efficient manulfacturersto expand production.

3.294 The simple and adjusted price differences as well as the domesticresource cost per iinit of foreign exchange saved for tractors of EasternEuropean origin are higher than those for tractors of Western origin. Thisis in-inly due to the abno-m,ally -to ..4.f. prieIf tatr n rco

coMponents of Eastern European origin. Adjustment of these prices to bringt!-;em^ Tore ir, line wit"- esti-mated real c08ts of prodduction would presu,nabl-,.loKrer the indices of price and cost competitiveness to the level of tractorso f 17 LCe s tern origin.

1 . r 1L'; £ L dIP.LJ._LLy 1 4. LU ULILLVLYL_ d_l r LLLdLId L AL OLLL1C LUL CZ

3.30 As shown 'elow, profitability has been decliningr notn absolutelyand in comrarison to the industrial sector as a whole:

Profitability of Tractor Industry Compared to al1 Industry

Tra,ctor. industrvY AIl 1TnAIi gL Vr

1968/69 1969/70 1970/71 1968/09 1969/70 1970/71

Gross profit as , of sales 6.3 4.£ 0.6 11.3 11.3 11.9

Cross profit as % of totalcapital e,l*^e 6.9 5.0 0.6 1)o 99 11 1.;)

,^ eL pro4fit .-I, of o,wned funds 9, 5 .I 121 1 0

Th1is poor profit trend is partly due to price escaLation of inputs whichi hasbeen more rapid than for controlled tractor prices and partly due to lowercapacity uitilization in the tractor factories as a result oL poor productdesign and performance (Escorts and Eicher) and strikes (TAFE and HinduistanTractors).

I/ See Annex 4,.

= 17

3.31 The table below shows the uneveness in financial performance amongfirms:

Profitability of Major Tractor Manufacturers

ITC TAFE HINDUSTAN ESCORTS- EICH-tER

Gross Profit as % of sales 69/70 6.8 3.4 -3.3 10.1 070/71 3.2 -5.8 -4.2 6.7 1.5471/72 3.0 -2.8 n.a. n.a. 2.64

Gross Profit as % ofcapital employed 69/70 14.0 10.1 -1.8 12.2 9.26

70/71 8.6 -11.5 -2.6 8.7 14.3571/72 11.0 - 0.2 n.a. n.a. 21.5

Net profit as % of equity 69/70 15.6 4.6 -25.4 20.8 070/71 9.1 -13.5 -107.5 15.1 11.371/72 12.4 -11.9 n.a. n.a. 24.2

, ' Icnc±lut:es al LLi te activ.lties of Escorts.

C L's obviously thle best performer. Too 4 l -ance should not be

attached to Eicher's growth in profitability; its production is marginalk8out units3/year)l andu profits depen(d on t.he dist-orted price structure discussedearlier.

3.32 ITC, despite its buoyant growth in production, capacity utilization(129% in 19717i2 compared to 93% in 1970/71) and productivity of both capital

and labor, has experienced declining profitability. This shows that underthe Government pricing policy firms cannot maintain proflitalLity even whenincreasing capacity utilization and productivity.

3.33 Further proof of the distortions caused by the Government pricingpolicy is obtained by calculating the erfective rates of protection for themajor producers. 1/ The effective rates of protection for tractors of Westernorigin range trom -22% to -27% compared to a nominal protection of 30%.This is inadequate for an infant industry that has shown a reasonable growthpotential. Effective rates of protection of tractors of Eastern Europeanorigin are about 40-50%; but this apparent high rate is misleading becausethe prices of tractors imported from Eastern Europe are unrealisticallylow.1/ Effective Rate of Protection - the concept of effective protection

refers to the protection of a process as distinct from the protection ofa product itself. It is defined as the percentage excess of domesticvalue added, obtainable by reason of the imposition of tariffs and otherprotective measures on the products and its inputs, over value addedin a free trade situation. It includes the joint effects on the processactivity of protection of the product and its inputs.

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3.34 Utilization of fixed assets as measured by the ratio of value added/fixed assets has improved marginally for ITC and Eicher, as a result ofincreased production and capacity utilization, but fell for other firms forreasons previously mentioned. The same trends hold for labor productivitvas measured by value added/rupee of labor cost.

3.35 As noted in nara 3.11, inventories of raw materials and componentsare quite high. Inventory turnover averages about 2 times which is very lowwhen compared to turnover rates of about 6 times in foreign tractor factories.Manufacturers pointed out that inventories could be reduced by 50% (i.e. under3 months stock of local imports and 4-5 months for imports) if a more regularflow of materials and components were assured. This objective could be partiallyachieved if some portion of the import licences were "freed", i.e. usablewithout regard to the banned list. Thus, rather than maintain high inventorylevels of a large number of components as a hedge against disruption of domes-tic stunply, free import licences could be utilized in immediate response toa suddlen shortaep of anv item. It is eRtimated thnt if 9Y of the ActualUlsers licences were to be freed, inventories of bought-out components couldbe redueed hy 1n7- Since the carrving enst of inventories is about 19-?n7 ofthe value (11% interest on working capital plus handling and obsolescence),the estimated reduction in carrving costs for the industry would he Rs. 0_75-1million per annum, equivalent to a reduction of Rs. 25-35/tractor. The negativeimpact of such a srheme on sales of annillnrv nrodiiers would he negligblp

3I3k Excepnt for TTC_ there has been a general incre2se in debt/equityratios for all manufacturers primarilv due to borrowings to offset losses.Thlere has qlsc been a slight deterioration in the working capital situationhut the liquidity position of all companies appears still satisfactory.

D. Demand Forecast and Expansion Plans

3.37 Long-term demand forecasts in the tractor industrv are even moretincertain than for Industry generally. To the usual variables -ust be addedweather, the impact of land reform legislation, trends in farmer preferences,crop prices and others. Estim.ates from severall sources are itablullated lUbeLowfor the period 1972/73 to 1978/79 and compared with projected installedcaa ci.t, an<' prod;;ction:

- 1 9 -

Estimate of Demand/ , Installed Capacitv and Production, 1972/197C3

Projected Demand 1972/73 1973/74 1976/75 1975/76 1976/77 1977/78 1978/79

1. Working Group 1968(Min. of Agric.) 80,000 90,000 - - - - -

2. Working Croup 1972(Min. of Agric.) - 40,000 46,000 53,noo 61,flno 70,000 80,00o

3. Leading TractorManufacturers 33,000 36,000 39,000 42,,000 45,000 47,500 50,000

4. Industrial Projects(IBRD) /2 35,000 37,500 40,000 42,000 44,000 46,500 4(,00fi

Projected InstalledCapacitv 37,500 50,000 60,0OO 70,000 80,000 90,0n00 90,00(

/3Projected Production 32,000 36,000 41,000 441,000 47,00 50n,nn0 5s:,nn

/1 Dividetd annrnoimately into 20-25%1 for tractors in the 20-3n 61P range, 65%

for 3n-40 HP tractors and 10-15% for tractors above 40 1IP.

/2 Assurming no supply or demand constraint.

/3 Annex 1.

3.38 As mentioned earlier, the Working Group estimates of tractor deman(cin the Fourth Five Year Plan were largely based on tractor orders nendin9 with

various sources of supply and has proved to be ahout double the real demand.

Cronsequently, Working Group demand estimates have been revised downmwards for

the Fifth Five Year Plan (1973/74 - 1978/79), but are still 15-70% higher than

othl-er estimates.

3. )2 Against th'e ear.lier h1i gh1- estlimate of demand, the Covernment issuedbetween 1968-1971 licenses and letters of intent for additional production of

150,,000 tractors/year. T'ihe table on page 21 11sts the f4.Os with ex-an-i-licenses, new licenses and letters of intent, their operational status and

resultins industry structure in terms of size of firms and product range,

assutming all approved projects were to he implemented. Although it is unlilkely

that al] the projects will go forward, even if half of t'hem were to materiali z

domestic capacity among 10 to 15 manufacturers would increase to over 100,000

bv 1975/77, a level far higher than the most optimistic dernand forecast.

3.440 Analvsis of the cost structure of th.e industrv has shown that t:i'-

break-even noint is seldom reached with a production level of less than 5,00(

uinits and that a volume of approximately 10,0100 units per year is reauired to

achieve a return on investment of tlhe order of 12-15% if tr-actors are priced

to be W.ith in the reach of small and medium farmers. On thU; basis, and

assurming a realistic demand of about 50,000 tractors/year in the late 197's,

- 20 -

it would appear that not more than 5 or 6 manufacturers could operate on an

economic basis. Government licensing policv appears.inconsistent with this

conclusion. The proliferation of models resulting from over-lJicensing of

tractor manufncturers, and the corresponding disecononies.of small scale

production have had the adverse effects noted in earlier sections of this

report and these effects will intensifv if all approved new frcilities are

installed.

3.41 The licensing svstem was designed to fulfill planned targets of

tractor production. Its function is to ensure that implementation - plant

sjPs, terchnnlogy2 locations and the actual choi:ce of plant,.technology,

timing - is carried out in a. manner to ensure, social as well' as. private

profitahlli rvt.- Tt has failed' because targets supplied by the Planning

Comnission were not based on in-depth studies of economic,., technical and

financial fnct*Ara afferting rrarteor demand and supply. Secondly. the

allocation of licenses was not based' on explicit economic, technical or~~L n4 q-arnnA - ninl.1-nrdprprl; _ -renseswere

otLer criter;a and in the absence of -erll-or1dered; riortties licensesw

issued on an ad hoc basis. There is: no evicdence of any studies having been

carried out by the DGITD on- optimal size, nimna phasing and lorations a,f tractor

plants;. nor is there evidence that applicantse for industrial licenses have to

pass the Tractor Testing and Ttaining Station (TTTS) tests. in Rudni , Mada

Pradesh. 1/ It would seem that improvement in. the licensing system would

necessitate that the Governmrent (a) undertake a romnrehensive study of factors

affecting tractor demand and supplv and establish realistic targets; this

Wouldi cJatlfy the conwfu.ede mand p4cture and- serrm e as a guide for nrnduct

investment and production planning (hopeftllly, such a forecast would discourage

existing indus triat liceLnse 'J 1,nlA ders from starting r …establish

well-ordered nriorities and' policy guidelines based on rigorous techno-economic

cr'teriLa.

1/ It is interesting to note here that only three out of the 20 current

and would-be tractor-makes manufactured in India have passed these

tests: these are Massey-Ferguson (U.K.), Zetor (Czech), and Swaraj

(Indian).

LaICENSED CAPACITY & UNITS ISSUED WITH LCTM75 OF T17TrET

I LICEiED UN3T5h 11 UNITS 1SAF.D WITII LErTER OF INTENT TOTAL

I 1,H_ _ _ ____ __ - N, P. W'AXz _____ __H P. _M H P b1

FIRM GOLIABORATO, I#DL /UPLvh TO 25 26-35 36 - 50 AOVE 50 T7TAL EMARKS 1P Tn 71 2

6 - _ 36 - 50 ROVE 50 TOTAL

Tractor & Fara Eqotp.oot (TAFE) Mo..ey Fergon. (U.K.) MF-1035;1MT 555558 ,000 7.000 1, Pr-doct Eo 7,000

I.t.r-tlonal Ttactor- of I.dil I.t.ntwtio )I,t r (U.K.) B-275; 8435 ,000 7.000 3,000 10,000 13,000 20,000

E..artt Lt.. PbtlVMort (Polood) E-37/3036 ,000 7.000 9.000 9,OI) 16,000

E..crtt Trector- Ltd. Ford Motor Co.(U_A) Ford 3000 6,000 6,000 6,000

Hi.d..ta. Tractor. Ltd. Motoko, (C .. k) Tetor 30D1;Super 50 .00 5,000 7,000 7.000

ELch-r Troctor- Ltd. Echer (W. ra-ay) 0 BB? .000 2,000 2,000

KtilO.kv- Tr..tor. KIockn lr Hobldt Do.t. W.G-ra) D-3006;D4006; 2,500 ,000 3.000 500 10,000 Al-oaly St.rtod 10,0000-5006 ;D- 10006

H.raha Tr-coter Pro.aeuh.port (USSR) T-25 10,000 0,o00, 10,000

U.it.d Aato Trott-r Inda.tri. Eleport (Ku-uL.) U S00-' 65000 2,500 2.500 S,000 . 5,000

Hiod..t-n Ms.hi.. Ta,-1 Motok- (Ce.ck) oter 2011/2511 12,000 12,000 12,000

PFrf.ct Tractor- Ltd. Rhe.ist0hl Htnoy (W.G.r-t.y) ,000 5.000 Not 1n Pn,duont 5,000

PucJ,b Trottr ---- 12,DOO 12,000 , 1 2,OD

8Ft0s Indi. Stoyr, (Acetri.) 540 12,000 12,000 , 17,000

Proot- r IrrLg.tLio Enulp-et D-vLd 000-c (U.K.) Dvid Eroco 990 5,000 5,000 5,000

Byford Trac-tr. Ltd. S-2000 S,000 6,000 6,0om

R.j-ath.. St.te-lId D-valopot-t Corp. ILnsclt (Fr-ae) 4611P 5,000 S,OOs 5,0(0o

Bh-rot I.d..trIL. 6 Cocrtiol Corp. _- EI-35FLP/45H2P 5,000 5,000 10,100 O,000

A.t.obil. Product of indi. L.ylmod (U.K.) 154 (25,HP) 12,000 12,000 12,00u

L-.or. & To,obaora Ltd. Joh. Derre 52-82HP 6,00 S.000 6,0500

gt bdhS. ftit -_ 25-SO ELF L_ 2,500 2,500 L.00_ 5,000000 -- 25-SO HF -- - - - 5 - - -

TOrAL 34,000 34,000 0,500 8,00 123,,000 000 12,000 15,000 6,001 65,000 1B0,000

Soc, DGTD, Nev DelhL, I.di. (October 1922)

3.42 Comparison of demand and production projections indicate that thesupplv-demanOl gap might be bridged within the next two to three years. llowever,it should be noted that production figures for the next three years incltldeabout 6,qO0-S,000 unpopular models. Accordinglv, the total import needs duringthe next three years might he higher than projected and would probably reach8 - 10,000 tractors.

3.43 C-iven that the gap between supply and demand has dropped to an

apoarentlv manageable level and that the industry is operatin, at less than607, of capacitv, the need for price control is qustionable. This is especiallytrle since tle current pricing policy which is based on a cost-plus basisr-nvides no incentive to improve efficiency, fails to take farmers' preferencesinto account and has resulted in declining profitability of the industry andredtuced growth and by so doing has acted to defeat the objective of providingsmall and and medium farmers with inexpensive tractors of good quality. Itis understandable that Government should have a certain amount of anxietyover possible price increases if controls were lifted, but it is doubtful that-mnufacturers who are currently experiencing difficulties in selling wouldfurther hamper their sales by increasing prices. The onlv tractor price thatrlight increase is the popular TAFF. (MT-1035), but even then it is unlikely thatit- price wouLld increase bv more than 10%. 1/ In the event of relinquishingstatutory price control, Government still would retain a nuimber of instrumentsto influence prices, including (i) stepping-up production in the public sectorplant 2/ (ii) increasing imports of lov-priced Eastern European tractors, ancd(iii)~ rare1erlt-ifn imports under TDA agricultural credits.

TIV PRINCIPATL RECONTIENDATIONS ANND A PROG1TA FOR ACTION

A. Current Status and Major Constraints - __

4.91 In terms of tractors produced and the level of irei onization, th-etractor indulstry has achieve(d reasonable growth over the last 8 years. The

orep ,:l dowesictractors are only about 15% hi,-h r ta h .. i:

ot complarahle imports and production for the domestic market is economic,indi1cati4n5- tha the irport subti::io poiv,dspt -qinbegrwn

pains, has been effective. Despite the growth and relativo competitiveness,Chr indus>t-v is ue aClY struct-rd = th1ere are tJoo man mlantuf,lctulrers prod.t1:C4nci

outmoded meodl.s at low production levels and making little profit.

il .n? The earlier proliferation of factories and mocdels and correspondin-Iov- le-rels of production -,,as further aggravatec' buy over-licensln- in 190/7l.u1 : LVL I I J1 L'uUCL±UI W L -I IL aI-VLE y JV ~ U JI J I I .

To prevent further deterioration of an already poorly structured industry,UovernL,,er,t slhou`d (i) clari-fd the V cont-d UdeImIU and LLIL th Lill aUn c om-I

prehensive study of fuiture demand, (ii) based on this projection, reconsider

1/ A price increase of 10%, would raise the dealers' pricc to the black...U 1 NC C - 1 A-.1 A , 1 -. c on idere fa u p4 ert' U'> x LiLt

price increase.

.! H industan Machine Tools.

- 23 -

industrial licensing policv and procedures to encourage erficient manufacturersto expand production and update product design rather than adding new producers.Trhis last point is essential if India is to use its current excess capacity toexport at economic prices.

4.03 However, in the face of controlled prices and the resulting decliningprofits, it xwould seem unlikely that existing producers would he motivated toexpand capacity. Given that the gap between supply and demand has dropped toan apparently manageable level and that the industry is operating at less than60% of capacity, the need for price control is qtuestionable, and seriousconsideration should be given to their removal.

4.04 Granting the importance of the measures suggested above - thosebasically under Government control - achivement of the industrv's full potentialwill only be possible through plant operational improvement, an area directlyunder the control of management. While it is difficult to generalize on thedeficiencies of the industry because of the wide disparity among firms, ageneral pattern of possible plant improvement measures is discernible, and theseare summarized in the next section.

B. Principal Recommendations - Plant Operations

4.05 The recommendations presented in this section, and which aredesigned primarily to help improve plant operations, are derived primarilyfrom the operational problems of the industry as summarized in para 3.03-3.16(based on the detailed review in the consultants report which also containsmore specific recommendations for each of the tractor mantifacturers). Manu-facturers should undertake the measures recommended under the functionalareas as listed below:

(i) Product Engineering - Upgrade product design to reducemanufacturing costs and improve reliability and performance.This will require a flow of the latest technology fromforeign sources and firms should actively negotiate theneeded technical assistance contracts with exist-ing or new-collaborators. Indigenous capabilities will grow throughcollaboration agreements but, in addition, firms shouldinitiate cooperative programs with indigenous universitiesand engineering research centers (such as, for example, theCentral Mechanical Engineering Research Insitute) aimed atdeveloping tractor features especially suitable for India(para 3.05-3.08).

(ii) 'Manufacturing - Review and modify where necessary existingproduction methods to reduce costs and improve efficiencyand productivitv (para 3.09). Special attention is neededin (a) plant layout, to reduce material handling and achievebalanced flow of parts and components (para 3.10); (b) materialsmanagement and procurement procedures and to improve qualityand delivervy reduce costs and inventories para 3.11); (c)preventive maintenance, to reduce machine down-time (para 3.09);

- 24 -

(d? inspection and quality onntrol, to reduce defects and rejects(para 3.10); and (e) training, to strengthen skills of management,supervicsory personnel and skilled work- - .1 n Tnaddition, plants should consider installation of standby powgerTenerators to help maintain production levels.

(ii i arketing (and after-sales service - could be iLpro[veUi inrost comnanies by strengthening the internal marketing organiza-tion and the planning process, dealer training aned spare partsdlistribution (para 3.12).

(iv) 7inancial Reports and Controls - Renorts are not timely andJnadJpquateley Lol'Lowed-up; assignmients or coSts bv departmentand/or product is not the usual practice making it difficulttc iUentiLfy exact cause or location of anomalies. Manufacturersshould develop and use variable volume expense budget techniques,and a systrem of action-oriented reports which would be constantlycompared with budgets (para 3.13).

(v) Corporation Organization - Rationalize and streamline managementorganiuzation and proced'ures to clarify responsibilities and groupfuinctions in a logical order and improve internal communications

('aa3.14).

C. ,A ro.ram 'or Act-on

4.06 A sectoral program of operational and product improvement requiresclose cooperation between industry and Government if it is to succeed. Therecommended program for action in the following paragraphs, tlherefore, ispresented mnder two headings to indicate where primary resnonsibility resides.Agreement crn the action program has been reached during negotiations for theEight Industrial Import Credit.

1. Role of Government

(a) CGovernment will make known to the manufactuirers the findingsand recommendations relevant to each companv's operations(nara 4.05 and Consultants Report).

(b) Each company to file with Government a "plan of action" toimplement the reconmnended cfficiency measures, including atimetable for implementation. It is recognized, of course,that there is room for discussion and some plant managementsmav have honest differences of oninion as to the validity ofthe report's conclusions, but such differences, it is believed,w-ill be matters of degree onlv since most of the deficienciesare quite self-evident.

(c) Semi-anntual follow-up, with the possible assistance and addedsupervision of IDA whenever needed to evaluate eachl company'sprogress in implementation.

- 25 -

(d) Government to consider freeing 5,7 of Actual Uisers licensespermitting their use regardless of the banned list (para 3.35).

(e) Government to reassess and revise its tractor licensing policv(para 3.41). Government to encourage ancillary industriesexperiencing actual or anticipated shortages to expand,primarily by expanding existing efficient producers but alsoincluding, where necessary licensing new modern facilities.A very high priority need is increased foundrv capacitv(para 3.40, 3.41).

(f) Government to consider elimination of tractor price controls(paras 3.18, 3.19 and 3.43).

(g) Government to consider favorably appropriate proposalsinvolving collaboration agreements and/or technicalassistance designed to achieve improved product designor operating efficiencies in existing plants (para 3.16).

(h) Government to encourage joint R & D between tractor manufactl,rers,universities and research centers (para 3.16).

(i) Government to undertake a new comprehensive studv of tractordemand (para 3.41).

2. Role of Firms

(a) Preparation and implementation of the action programs to improveplant operations, based on the specific recommendations in the ConsultantsReport and summarized in this report (para 4.05).

INDIA -__EItkffrfl INDUSTRIAL IK(PO#T CRtEDIT

P¶WDVvtIO04 GP TRACtORS IN I!l& 1965-1979

1965-66 1966-67 1967-68B 1968-69 1969- 70 19 70- 71

Up rc. Above Up to Above Lip to Above Up toi Above Up to Above Up to- Above,25 26-35 36-50 50- 25 26-35 36-SO 50 _25 26-35 Z6-50 50 25 26 -35 36-50o 50 25 26-35 36-50 50 23 26-35 _ 36 iL50

Intero.stioriaL Tractor Go. - - - - 1,301 - - - 2,901 - - - 4,001 - - - 4,403 -- - 6,507 - -TAPE - 3,066 - - 3,3917 - - 4,087 - - - 3,275 - - 2,3~44 -- 2 ,26? 7 Escorts~, Ltd, - 1,258 - - - 2,1u33 2,556 - - - 5,625 - - - 7,935 -- - 8,770 - -Zscorts Tractors, Ltd. - - - - - - - - - - - - - - - - - -- - 710 -Etcher- 123 - - - 92 - - - 204 - - - 314 - - 318 -- - 859 - -Hlindustan TraLctors - 870 397 - - 80 1,093 - - 343 1,303 - - 1,156 1,063 - - 514 1,15L 446 74, Hlindustan Machine T'ools - - - - - - - - - - - - - - - - - -- -- -liCrloskaer- - - - - - - - - - - - - - - - - --- -Others- - - - - - - - - - - - - - - - - -- --

Totals 5,317 397 7,721 1,093 110,091 1,303 14,4031 1,063 15,474 1,151 18,849 1,655)(93) (7) (88i) (12) (89) (11) (93) (7) (83) (7) (93) (7)

5714 8816 11,194 15,466 16,625 19,104

I321±~~~~2.2 19~~72-732- 19713 74.?'17-7 9t-92

Up to Above Up Ito Above Up to Above UP tol Above Up to Above25 26-35 36-50 50 2 5 26-- 35 36-50 s0 25 26-35 36-50 50 25 26-35 36-50 50 2 5 26-35 36-50 50

Internetionat Tractor Co. - 9,006 - - - 9,000 3,000 - 9,000 -3,000 -10,000 3,000 -12,000 - toocTAFE - 3,412 - - - 4,000 200 - - 5,000 500 - - 6,000 Sj - - 8,000 -Escorts, Ltd. - 6,633 - - - 5,0(00 - - 6,000 - - - 6,000 - - - 1,000 - -Escort Tractors, Ltd. - - 1, 952 - - - 2,CO0 - - - 2,500 - - - ,00 5,,000 -Et,cher - 789 - - I,0 A - - - 1,500 - - 1,00') - - 2000 - -Hindusaln Tracetors - 355, 22 - . - - - - - -- - - - - -Hlindustan Machine T'ools 1,301 - - - 5,000 - -- 6 ,000 - - - 7.000 - - - 9,000 - - -K(irloskar -r - - - - 500 - - - 1,000 - - - 1,500 - 2000 1,000 -Others - -- 2,000 - - - 2,00O" - - - ,000 * - - - Go

TotalS 1,301 20,195 1,972 7, 000 19.000 7,700 3,000 8,000 21,000 4,000 3,000 10,00') 22.,000 5,000 3,000 12!,000 2)0,000 7,000Q L,0U(5,5) (86) (8.5) (22. 5) (61) (1I (11. 5) (22) (57) {11) (10) (25) (55) (12) (83) (23) (57) (13) (19)

23,469 31,000 36,000 '41,000 5 3, 000

Source; DCTIDIDA Questionnaires

l/ Estimated-il Projectedt

Indus-t-rial ProJectS Department,14a16,1973

INDIA: IDA JIG.GHH INDUSTFLIAL IMPORT CREDI)T eANX 2

PLANT OPE1MATTOWNS .A'rTTr' R. a

Perforr,mce Ratin,gs Coon,crct.il Vehic'ie M4anufacturers

Functional Area- Mad2Uxrnu Values Assiznable

PFRODMUCT E .". INE , _ . T 100

Vei-icle Design 30Engine Design 30Styling 10Prodict P1 nnnirg 30

'AiUFACThT7.r 360Facilities- Age and Condition 10)

.L yout 20)

- Housekeepirng 10)- 1aintenance 20) 100- Materials Flow 10)- Utilization 10)- Material lhandling Systems 9

Machines

-Suitabinityr3o

- Maintenance 20) 70- Adequacy 20)Eaui.oment- Conveyors 10)- Boxes, Racks and Pe'llets 20) 60- Tooling 20)- Mnterinl H lr½inr 7 Mpthodq 10)

Qul.t Contrcl- Receivinrg insectkon 10)- Gages aalc De--ices 20)- Control S-rsteM3 20) 70- In-rcs Td -.'Lnpcio40

- Vendor Assistance 10)Personnel- S-afety 15)- Labor Relations 15) 60- Working Conditions- Training Progrars 15)

YATZHTAIAS 1A!IAGSN >',TT 0Crdering 10Value Analysis 10Vendor Analysis 10VU±LAUU1 ILZ11CQ

M.2J9.TI'T"I'-'Domestic 30Exoort 20VMerchandising 4U

Forecasting 30F- arnin g

Daily Renocrts 501WeeUly 7eports 50Controller's Analysis 40

PARTS A ..:D SZ1.\ iCE 142

Adequacy 50Trainira 50Crganization 0

OROA:IZAT.'ION! soSti-ucture 30Corpetence '3

Coirrrruni:cations 20"

Total 1,000 1,000

Industrial Projects DepartmentM'v 16, 1977

INDIA: IDA EIGHTH INDUSTRIAL IMPORT CREDIT

Ecor.omi c Analysis

Concepts and Methodology

The policy of import substitution followed by India since World Waar -,Ladu thle twin objectlives of imp.vving th e, Lbalance of -aL.n. - a--- -- t stlmain

development of indigencus marnu-a0t.ur r, . TlE' }ritcijal instrumxents used toimpliement thispoli. c iJ. n tuhlLe tXractor lA nduUC UsLty ere. .Iindus trI L t_LLiienslrI., .I It-I

enous content requirements, restrictive import licensing, (quantitative restric-L._LVI VIJI _LIIIjLY J.1_ ± UJI I f,J.UI ID .LCLIU.J. U U1~ LLI. e_U ±L L -J-JIU±d.L /

ilhe purpovse of this Ainex is toL 'vlut the dere of 3 -protection

implied by the set of measures listed above and the current cost competitive-ness of the ind-ustr-es. The indexes which are used- in this section to measurethe extent of protection and the cost competitiveness of the two industries are:

1. Simple price difference2. Adjusted price d-ifference with inputs at international prices3. Effective rate of protectionL4. Domestic resource cost of foreign eAchange

These concepts are defined in the following paragraphs.

1. Simple price aifierence, aefinea as the percentage excess oi the eŽ-factory price of the product to the cji value of a comparable product. Ihismeasure is used as an indicator of gross protection in the price of the finalproduct.1/

2. Adjusted price differences with inputs at international prices isdefined as the percentage excess of the ex-factory price of the product withinputs at prices which would have prevailed under free trade conditions overthe import of CIF price. This is the protection which the item would requireif the domestic manufacturer were to pay for both imported and domesticmaterial inputs the prices which would obtain under free trade conditions fora like import, given the existing production efficiency. It is lower than thesimple price difference by inefficiencies and/or high profits in the supplyindustries or high cost material and equipment procurement or higher domesticcost caused by protection or a revenue oriented tariff system.

3. Effective Protection - the concept of effecti-ve protection r-efers tothe protection of a process as distinct from the protection of a product itself.It is defined as the percentage excess domestic value added, obtainable by

1/ In the presence of quantitative restriction, as is the case in India, thereare conceptual difficulties in interpreting tne implicit tariff uuoaiLeU bythis measure since there is no guarantee that the real equilibrium (import anddomestic output levels) will remain unchanged in the economy if quantitativerestrictions are replaced by an explicit tariff of the same magnitude as theone implied by the simple price difference. Nevertheiess, the measure isgood approximation to a gross protection in the price of the final product.

reason of the imposi Lion of tariffs and other protective measures on theproducts and its inp!uts, over value added in a free trade situation. Itincludes the joint effects on the process activity of protection of the productand its inputs.

The effective rate of protection calculated applies to the tractormanufacturers' activity only. As such it represents the private (as opposedto social) effective rate of protection and is meant to provide a rouch measureof the "resource pull" into the activity.

The principal instruments of protection in India are quantitativerestrictions on imports and/or prohibitive tariffs, thereby necessitatinvthe use of domestic prices and import prices (actual or assumed) in calculat-ing; the effective rate of protection. In makinz price comparisons we hlavetal-en the ex-factory cost of the tractors to be the relevant domestdi price;for imports the relevant domestic prices were the ex-factorv cost of sunlpiesplus the taxes paid by the tractor manufacturer. These prices were then comparedto the c.i.f. import prices.

Value added can either be defined in terms of gross or in net' termsdependinr on whether we include or exclude depreciation on building,, -.iachiner---ana eouipment. To measure the extent of protection, the latter form-ll-ationn -;more appropriate and has been used here, since it takes account of the factthat inveserient aoo are innuts. and in large part internation201, tadped inputsThe treatment of non-traded inputs follows the Corden method. This entailsincludincT the value-- 2ddep in the. nroduictlon of the non-t.raded.H irnput in the npr-cessLng of the activity in question.

4. Domestic Resource Cost

This is defined as the domestic resource cost element (difect andi ndi recit.) of a nprodimc-t, ovpr the diiffeprencre hbetween the c i -f- rnlii of irnrts

(or thefob.value for exports) and the direct and indirect foreign exchange(convertible into impees at. the offici al exchange rate) required for domesticproduction. It provides a measure of efficiency of the whole industrial structureof the sector including the supplner and subsppi er industries for this product.The activity is economic if this index is less than or equal the shadow excliangerate;

Tn calculatini the domestic resorce cost 1l ir dgen.ous s -A

components are treated as "home goods" since it is doubtful that large majorityof th-e suppliers wiuld prod-ce t-ator co.or.ents -ithout th e ordAers of the ,

1.11 - - S JJ.S '~., ui I - - - -', i -. .lS*tJ.S±v.. Wl J. Uf .J iAU Ui J. 'A JZ UluI

domestic tractor industry. Materials and supplies procured locally also weret1re-ated as h.-oJme good s it was f.d.,4 that, 1b1 -y 'I Ld large. - pri -ces

lie between the c.i.f. price of imports and f.o.b. of exports.In calculatingUth dAJo U.L resoUrce.!. costU, makeL.LtiUU priceU Were adQUJ stUedA Uto refILec U Uth-e opport.Ju-

nity cost of the factors of production in employed in employed directly andE idirectly In prLduUcin U,lthe Vehicle s .t Di s criminator-1I y taxesU(i d r I'U UUtdis,

excise tax, etc.) were excluded from the domestic resource costs since theyrepresent a transfer paymient -w-ithin, the econUomy. However, n1orI-discrimlnator-taxes were included in the domestic cost element since they could be consideredas fees paid for services supplied by the Government.

The opportunity cost of capital was assumed to be 15A. The combinedreturn on capital for suppliers and subsupplier was found to be 12-l5W, andaccordingly no correction was found neces,sary.

No adjustment was made for wage,s and services because it is estimatedthat the wages and salaries paid to labor (75o., skilled, 91 semi-skilled and liunskilled) and supervisory persbnnel 4 technical, and 3,1 non-technical)adequately reflect opportunity cost.' Accordingly, ex-factory prices of -homegoods" after adjusting for discriminatory tax have been used as an adequateapproximation to the shadow price of domestic factors.

Data

lhe data for calculation of the above measures of protection -ndcompetitiveness were obtained from questionnaires sent to tractor manuf_acturersprior to the mission visit to the firms. The information obtained was furthersupplemented during the mission's visits to the plant. The data obtained on aconfidential basis, consists of:

I. Prices of final product:

a) ex-factory costb) import price of a comparable product (c.i.f.)c) export price (f.o.b.)

(Major differences between the locally produced product and the exported onewere also described).

II. The Cost Structure of the Product:

1. Raw Materials Inputs: a) locally produced; b) imported2. Bought out Components: a) locally produced

b) imported3. Labor including benefits4. Manufacturing expenses and overheads5. Depreciation6. Sales Expenses7. Interest8. Taxes9. Profit after tax

III. List of duty rates on imported material and components.

IV. Price comparison between the, locally produced and bought outcomponents and comparable imported product.

V. Annual reports for the last three financial years.

VI. Composition of labor and training cost of labor

1 Labour consists mainly of high school graduate recruited and trained for aperiod of 2 to 4 years at a cost of Rs 20,000-30,000 Rs/trained labour.The wages of benefits of skilled labour (averaging as 3600-6000) are thusapproximately equal to the opportunity cost (assumed 15%).

LiAtustrial T'rojects DepartmentMay 16, 1973

ThDIA: IDA EIGHTH INDUSTRIAL D(PORT OMIT ANNEX

T A F B

TNANCIAL. DATA AND ANALYSIS

1968/6S 19o9/7 1570/71 1971/72

Profit & Loss Account Information

Sales (excluding excise tax) 85.40 82,40 59.90 110.90Materials & Bought Out (B.O.) Parts 70.90 68.60 51.30 96.60Salaries, Wages & Benefits 5.70 5.w 6.25 69Profit before tax and interest 3.70 2.80 (3.33) (0.05)Profit before tax 3.70 2.80 (3.48) (3.00)Profit after tax 1.40 CV .0 l.4) (

Balance Sheet laformation

Fixed assets 11.00 1 .20 1.60 1Current Assets 38.00 28440 41.70 70.10Current Liabilities 21.30 15.90 29.10 32.50

Debt 0 0 3.00 29,30Squity 27.70 26.20 25.80 25.80

Capital Employed 27.70 26.20 | 28.80 | 55.20Total Assets 19.00 42.10 57.90 87.70

Value Added 14.50 113.80 | 8.60 114.30

No. of Rmployees I "a .- E n: 3Inventories 18.90 27.30 30.20 57.30

Ratios: IGeneral

Sales / Total Assets 1.714 1.95 1.03 1.26

Sales / Capital employed 1 330 ,v '.9Net Profit before tax / Sales | 4.33% 3..40% -5.581%& -2.75%

Structural + /

Fixed Assets / No. of Employees (1000 Rs / Employee) n.a. | n.a. n.a. 18.90 Hatxerials + B.O. parts / Sales I 0.83i 1 0.83 0.86 I 0.86

Kanagerial Performance

Net Profit before tax and Interest / Capital Employed A

Value added Capital Employed 0.52 .54 .30 0.26Value added/ Fixed Assets I 1 , 1Value added I No. of Employees (1000 Rs / Employee) n a. 15Value added! Rs Labour j 2.54 2.37 1.38 2:06

Sales / Inventories 4 .52 3.01 1.98 1.93Materials & Bought Out Parts / Inventories 3.69 j 2.47 1.59 1.63

Financial Performancee

Debt / Equity Ratio | OCurrent Assets / Current Liabilities a1.7

Profit after tax & intereat / Equity 5.05% 14.58 j (l3.49%) ( (.86%)

4-2

|196 9/6S 1969/70I 19;0/71 19721'772I .1 (in millitn Rupeea) ___

Profit & Loss Account Infortion

Sales (excludig excise tax) 75 90 68 I: 1. I1743 450°Materials & Bumght Out (3.0.) Parts 5590 6830 112.20 i 714.40Salaries Maggea & Banafita 5 .9o 7.10 8.60 13.5(1Profit before tax ead Interest 760 9.0 la .80 1- i 'u

Profit before tax 5:60 ~~I6.60 4 4 6.140Profit ftore tax 5.60 6.60 14.140 I 6.40

Balance Sheet Inforation I

BalAnce Sheet Inforuatis 1 29.90 | 42.h40 47:20 356620

Current Assets 4 10 o7 O 66 60 132 , Current Liabilities 14 .20 25.20 22.80 70.50

Dobt 34 60 21.80 42.80 67 50Equity 23.10 42.90 h48 20 51 o70

Capital Ewployed 57.70 64.70 9100 119.20Total Assetso 72.00 89.80 103.80 189 80

others

Value Added 16 20 29 50 214 80 2. 3j jNo. of Employees ..7 150 5 1802 2199 ;Inventories 29:10 38.00 514.80 8j

Ratios: |

GeneralII!

Sales / Total Asset. 1.00 I 1.09 | 1.32 1t09

Sales / Capital employed 1 25 1.51 I 1 . I 1.?4Net Profit before tax / Sales 7 77 675% 3.21% 3 08%

Str_ t Ur-I

Fixed Aasets / No. of Employees (100O Re Employee) 24 60 | 8 20 26.20 25 70 steria.l + B.O parta / Sales 0.76 0.70 0.821 0.84

Managerial Performance

Net Profit before tax and Interest / Capital Employed 81350 | 14.0 8.57% 11 C

Value added C.apfa;l ,mployed 0.u 2 0'-5 0.u 81 .C

Value added / Fixed Assets 0.5| 4 O 0.70 | 0.52 | 0 57Value added / No. of Employees (1000 Rs / Employee) 113 1i6 13.7 | 1value added R s Labour 2. 7 U.i 5) 3.0

Sales / Inventories| 2-48 2.5 22.8Materials & Bought Out Parts I Inventories .192 1.0 l 2.05 2 .o9

Financial Performance IDebt / Equity Ratio 1.50 S 51 0 89 1Ciurrent Assets / Current Liabilities 2.96 1.88 2.92 | 188

rofit after tax & interest / Equity | 24.24% |1 .57% 9.13% 12.38%

WI_ L l

196V69 |1969/70 | 7W71 | L971/72

Profit & ,aa Accoamt InfozuatLoc . 15.5 185

Sales (xexludLag excise tax)| 6-59 |8- 71 |15.50 | 8-95ktaterLal & Bought Out (B.O.) Parts L.15 5.57 10.64 12.96Salearies,aYom & Bnciefteit 121 I., 1.69 2.23Profit before tel ead iteraet (0.21D ) 0.5k O.9i 1 hjProfit before tax D.85) 0.21 0.50Proft aftor t=t n,MN =2 rQ

Z Sb_eat Infortien I I -

Corret sots43 5.232 86 12.38Cirre Liailitia 4.5 5.66 4.Ij0 10.87

Dobt 3.38 | 371 | .10 4 451 kuity i t.69 2:1 2.12 2. D

Ccpit l Employed 5.07 5.83 6.S5 6-55 |Total Assets 6.1h 798 1 .06 14. .:

I I I I Value Added | 2.5J 3.iL 4.86no. of yee n.c ne& n.A. 56 ilaventories 3 * 4 49 7 28 0

I I I~~~~~~~~~~~~~~~~~~~~~~~~~Ratios I | I I

General

Sales / Total Asa-ts 1.02 1.09 I -he) |Sle t Capital ,,Loyed 1.30 1.50 2.36 2789Net Profit before tex / Salez -13 0 1. 2 6u

I I~~~~~~~~~Structural

FJied Assets / No. of &ployees (1O00 Rs J loyee) n.a. n.a. | n.a. | .4V1Meateril. + B.O. Darts I Salsa 63A It fU .

mnjgerial Performaco I I Not Profit before tax ard Interest / Capital &ployed 4-4-14% 9.26% 14.35% 21.52%

Valtw added r Canttal n1oyed 1 ..4°. 0 /4 0.11Value added / FYid kAets 1.17 t1. | 2.0 2 58Value added No. of Rlpcyges (looo Rs I EIployee) .n n.a. n.a. I l52Value ad/ed RJ Lho .16 2 i8 2.87 j 2.68

Sales / Inventories 213 1.94 | 2.13 | 1.85ht £ ter ..1 J hQ t .t n.:.r J . *to.las i.33 1.24 | 146 j 1.26

Financial Performance I I IDO-t / Ei ty Rto 2.00 .. 75 2:06 2.21Curreat A-osets / urrett Liabilities 0-9 0 94 2 19 1.14

.f ater tax torst i Equity f -50.3% 0 11.32% 2.51%

Inldustrial Projects Pe-artjent { |.u.a.' 1 9 73

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