Why the new emission norms may not hit tractor makers that bad

The Indian government have been proactively pushing the automobile sector to adopt cleaner fuel emission standards and has already set higher benchmarks for passenger vehicles including both two-wheelers and cars.

However, the emission standards for tractors and construction equipment are regulated separately from the broader automobile industry in the country.

While emission norms became more stringent for construction equipment from October 2021, the new standards are slated to become applicable for tractors from next month.

The revised emission norms for tractors were earlier slated to be implemented from October 2020 but the transition was initially deferred by one year and subsequently by another six months, with the government providing some leeway to the industry due to the disruption brought about by the Covid-19 pandemic.

India has till now lagged behind developed markets in emission norm evolution for tractors but the new norms will help bridge the gap. The new emission benchmarks are equivalent or largely adopted from guidelines implemented across developed countries in Europe and the US.

In the past, automobile makers have taken a hit in their margins due to the transition. But this may not turn out to be that severe—at least not yet—for tractor makers such as Mahindra & Mahindra, India’s biggest farm equipment manufacturer, and Escorts Ltd.

India remains a medium to high HP (horse power) tractor market, with around 80% of the sales coming from the 30-50 HP categories.

The revised emission norms applicable from April 1, 2022 would apply only to tractors in the over 50 HP range, impacting around 10% of the overall industry volumes. While the transition to revised emission norms is expected to lead to 6-8% increase in the cost of tractors in the over 50 HP category, given their low share in the overall market it won’t be a significant disruptor for the tractor makers.

At the same time, the technological know-how is readily available with original equipment manufacturers as the export models are already meeting the evolved emission norms.

That said, for this segment, the extent of pass-through to customers would be gradual for the price-sensitive farming community. So, the firms would need to take some margin hit, howsoever small.

On the flip side, tractor makers are in the process of realigning their product portfolio, with tractors offering higher torque at lower HP being added to the portfolio. This could lead to a shift in HP-wise mix with the 41-50 HP segment gaining at the expense of the over 50 HP category.