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India’s Economy after Independence

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India’s Economy after Independence essay
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In 1947, as India gained independence from British colonial empire, the level of agriculture mechanization was low. The socialist oriented five-year plans of the 1950s and “60s aggressively promoted rural mechanisation via joint ventures and tie-ups between local industrialists and international tractor manufacturers. Despite these efforts, the first three decades after independence local production of 4-wheel tractors grew slowly. By the late 1980s tractor production was nearly 140,000 units per year, and a prevalence rate of less than 2 per 1,000 farmers.

After economic reforms of 1991, the pace of change increased and by late 1990s with production approached 270,000 per year. In early 2000s, India overtook the United States as the world’s largest producer of four-wheel tractors. FAO estimated, in 1999, which of total agricultural area in India, less than 50% is under mechanized land preparation, indicating large opportunities still exist for agricultural mechanisation.

In 2013, India produced 619,000 tractors accounting for 29% of world’s output, as the world’s largest producer and market for tractors. India currently has 16 domestic and 4 multinational corporations manufacturing tractors.

The tractor industry has showed a positive growth during FY 2016-17. While domestic volumes increased by 18.2% between April-January FY2017, exports remained flat. Domestic growth was fueled by favorable farm sentiments as the southwest monsoon performance remained healthier compared to the previous two fiscals.

While the monsoon performance augured well for Kharif production, it also replenished reservoir levels that supported Rabi sowing despite weak winter monsoons, according to the latest report by rating agency ICAR.

The rating has forecast a growth of about 6-7% for the tractor industry (domestic + exports) in FY2018, which is marginally lower than the long term CAGR estimate of 8-9% for the industry. According to ICRA the long term industry drivers continue to remain intact.

The government of India remains committed towards rural development and agri-mechanization, a critical component in improving the state of agriculture in the country. Also, continued support towards enhancing irrigation penetration through fresh allocations would reduce rainfall dependence over long term. This coupled with other factors such as increasing rural wages and scarcity of farm labour is likely to aid growth in industry volumes over the long term.

In 2017, the growth momentum witnessed a pause in November, 2016, with demonetization causing a cash crunch resulting in a decline in monthly volumes by 13% (YoY basis). After the minor blip, however, domestic volumes recovered, with the industry volumes growing by 8% and 6% respectively in December 2016 and January 2017. In February, 2017 also, leading tractor OEMs reported a healthy growth in domestic volumes, pointing to a continuation of the growth momentum for the domestic industry.

According to the ICRA report tractor exports growth, which moderated in FY2016, remained weak during the current fiscal as well; the weak demand in the global markets led to near stagnant volumes in FY2017. Although OEMs have continued to take initiatives to enhance their distribution networks in various geographies and launched products tailored for specific markets, the weak demand in the global markets constrained export volumes. While Mahindra & Mahindra maintained market leadership, TAFE lost marketshare.

Competitive intensity in the domestic tractor market remains high; although there have been subtle changes in market share over the past few years, the market structure has remained largely similar. M&M continues to maintain its market leadership status, constituting 44% of the total domestic industry volumes in 9 months FY2017. The company has gained market share across all regions, benefiting from a strong brand recognition, financing support from captive and pan India presence.

TAFE, the second largest player, has lost market share across various markets over the past two years, owing to aggressive product launches by competition. Escorts, the fourth largest tractor manufacturer in the country, gained market share across most regions, benefitting from enhanced management focus and improved product portfolio post new launches. The company’s weak presence in the Southern region has however hindered market share gains at a pan India level.

John Deere, which was the only OEM to record a growth in volumes in FY2016, has continued to gain further market. The Southern region continues to lead growth; the northern region struggles amid weak replacement demand.

Rabi sowing remained healthy in spite of demonetization; healthy estimates of crop production provide hope. Sustained demand at a pan-India level; select pockets of Northern region however continue to struggle The southern region has outpaced growth across all other regions on a consistent basis over the past three years, with the growth being led by a robust demand in states like Andhra Pradesh, Tamil Nadu and Karnataka, on account of government support programs and better rural sentiments which helped maintain the growth trajectory in some of these states even in November 2016 (in the immediate aftermath of the demonetization).

Notwithstanding strong growth, a weak northeast monsoon with drought like conditions across several states in the region has kept reservoir levels low, and thus, remains an area of concern.

The eastern region continues to report strong volume growth in the current fiscal, albeit on a low base, benefitting from various government initiatives to boost farm mechanization. There has been a recovery in demand in the central and western regions led by improved farm sentiments on account of estimates of improved crop production and resulting farm cash flows.

The northern region continues to lag the pan-India growth; while Uttar Pradesh, the largest tractor market in the region, has recorded healthy growth, other key markets such as Rajasthan and Punjab continue to struggle, as a result of weak haulage and replacement demand respectively.

Advance estimates indicate healthy increase in crop production; El Nino formation possibility remains a concern the performance of the south west monsoon was healthier and relatively widespread than the past few years; a healthy monsoon helped improve farm sentiments and has led to estimates of an improvement in crop production.

After weak crop production for two consecutive years, there was an uptick in Rabi production of wheat, oilseeds and pulses in April 2016; the Second Advance Estimates of crop production released in February 2017 indicated a healthy increase in crop production for both Kharif and Rabi seasons. If the final estimates are similar, then farm cash flows are expected to mark a healthy improvement over previous fiscals.

As per the Australian Bureau of Methodology, there is a moderate possibility of El Nino formation towards the fag end of the monsoon season; although initial estimates have generally ruled out a significant impact of the same on rainfall precipitation, the impact of the same on south west monsoon and consequently crop production would remain critical.

Industry growth moderated by demonetization in the current fiscal. Any significant impact of El Nino on monsoon precipitation could adversely impact farm sentiments The industry outlook projects growth to remain at moderate levels over the medium term The tractor industry has witnessed a healthy recovery in domestic demand since the beginning of the fiscal, with farm sentiments uplifted by reasonable Rabi crop production, healthy rainfall precipitation as well as government support programs.

A healthy monsoon precipitation in the current season, when compared to the previous two fiscals, has helped replenish reservoir levels across various regions. The advance estimates of crop production indicate a healthy growth in production for both the Kharif and Rabi seasons; an improved crop production on the back of two fiscals of disappointing crop production estimates is likely to provide a boost to farm cash flows; additionally the government remains committed towards rural development and agri-mechanization, and has enhanced allocations in its budgetary plans to promote farm incomes.

After a robust growth in domestic volumes in the festive period, the growth momentum in monthly domestic sales was halted in November 2016 by demonetization, wherein the domestic volumes declined by 13% (on a YoY basis). After the minor blip, sales volumes growth has recovered over the past three months, with industry volumes continuing to grow at a moderate pace.

The healthy sales volumes growth in the past three months points to continuation of healthy farm sentiments; a fallout of demonetization however, has been a rise in delinquency levels as per channel check, which is likely to limit incremental lending in the industry and hinder volume growth. This apart, various channel partners also remain circumspect about the impact of the recent cash crunch on the quality of Rabi sowing, even as the advance estimates point to a healthy production.

ICRA has an outlook of 14-15% growth in tractor volumes (domestic + exports) in FY2017 (a slight oderation from growth recorded in the fiscal till date). In light of concerns about probable formation of El Nino towards the middle of the monsoon season, the impact of the same on monsoon precipitation and consequently industry demand still remains unclear.

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