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in
CASE 4
HINDUSTAN TRACTORS LIMITED (AR)
Pashabhai Patel, Chairman of Hindustan Tractors Limited, Baroda, was wondering what options he had as he
reviewed the performance of the company during the year ended March 31, 1972. The production (375 tractors)
amounted to less than 20 per cent of the peak achieved in 1968, and formed only 13 per cent of the installed capacity.
Operations in 1971-72 had resulted in a loss of Rs. 81 lakhs on a turnover of Rs. 1.88 crores. It was the fourth
consecutive year of deficit. Cumulative losses at the end of March 1972, at Rs. 1.18.crores, exceeded paid-up capital
of Rs. 1,000 crore. No preference or equity dividends had been paid for three years. Secured and unsecured loans, at
Rs. 4.52 crores, were fully stretched, and the company had defaulted on payments to fixed depositors (Exhibit 1).
He was aware that it would be quite some time before the upward revision statutory price fixed by the Government of
India helped the company financially. While the picture was gloomy, closing down the plant was not an easy option;
Pashabhai was aware of the importance the government gave to increasing the production of tractors, an essential
commodity, and of the continued demand for tractors in the country. The Government had, in fact, appointed a
committee under Section 15' of the Industries (Development and Regulation) Act, 1951, to investigate into the fall in
production of Hindustan Tractors.
Historical background
The company was founded by Pashabhai Patel, businessman-cum-politician, a relative of Sardar Vallabhabhai Patel
and a close associate of Mahatma Gandhi. Pashabhai left Baroda College in 1921 in response to Mahatma Gandhi's
call for non-cooperation. He was intrigued by an imported tractor he saw at the Baroda model form of Maharaja
Sayajirao. He started custom hiring and custom ploughing in Surat/Bulsar area with a fleet of imported tractors: Later
he started tractor repairs and their import, sales, and service. A forceful person, and considered an outstanding
salesman, Pashabhai pioneered the use of tractors in remote villages.
Pashabhai Patel & Co. Private Limited (a predecessor of Hindustan Tractors Ltd.) was formed in September 1946 for
the import, sale, and service of tractors, ploughs, bulldozers, and other farming and earth moving equipment. As plans
for entry into manufacture took shape, a new company, Tractors and Bulldozers Private Ltd., was formed in 1959 and
became the successor for company to Pashabhai Patel & Co. Private Ltd. It was in turn converted into a public limited
company in 1964 with Pashabhai & Co. as the managing agents. Pashabhai Patel and Co. were associated with other
companies making earth moving and construction equipment and tractor parts. One such company, the Hindustan
Earth Movers Private Ltd., was located on adjacent land which it had leased from Hindustan Tractors Ltd., at
Viswamitri in Baroda, and supplied several components.
Hindustan Tractors had financed Construction Equipment Co. Pvt. Ltd., with Rs. 12.4 lakhs. It became 'an associate of
the managing agents in May 1965. Although the money was repaid by March 1966, the company directors had
contravened Sections 295, 369 and 370 of the Companies Act, 1956.
In February 1965, equity shares of Rs. 50 lakhs were issued to the public. Pashabhai Patel, his relatives and friends
held about 50 per cent of the equity in 1972. The Life Insurance Corporation of India, the Unit Trust of India,
nationalized banks and insurance companies held 35 per cent of the equity. The Life Insurance Corporation held
almost 100 per cent of the preference shares issued in 1968.
Pashabhai believed in direct action whether in politics or business. He was arrested and put in jail for two years when
he withheld the payment of tax of Rs. 1.9 lakhs in protest against the imprisonment in 1943 of Mahatma
1
The central government could have an investigation made of any scheduled industry or undertaking under Section 15 if it was of
the opinion that a) production had unjustifiably fallen or was likely to fall, or b) there was or likely to be an avoidable
deterioration in quality, or c) there was or likely to be an unjustifiable rise in price, or d) an undertaking was being managed in a
manner detrimental to public or industry, interests. Based on, or even during such an investigation, the government could issue
under Section 16, directives on production, price, distribution, or on any other relevant aspect.
Prepared (1976, revised 1984) by Prof. K.R.S. Murthy, Indian Institute of Management, Ahmedabad. Used with permission.
Case material is prepared as a basis for class discussion. Cases are not designed to present illustrations of either correct or
incorrect handling of administrative problems.
Copyright (C) 1976 of the Indian Institute of Management, Ahmedabad.

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Gandhi, Nehru, and Sardar Patel. The government sealed the premises and the business was halted. Pashabhai paid up
the amount after the release of the leaders and on the advice of Mahatma Gandhi. In 1963, he was' involved in another
tax inquiry and admitted tax evasion. A Parsi lady relieved from the company's service because of some quarrel with
him had complained about this tax evasion to Feroze Gandhi, a member of Parliament. An enquiry was made when
Feroze Gandhi sent the complaint to Morarji Desai, the then Finance Minister2. The inquiry ended with a compromise
between Pashabhai and tile Income Tax Department.

In 1967 Pashabhai was elected. to the Lok Sabha from Baroda on a Swatantra Party ticket.. He continued as Chairman
of the company. The company changed its name to Hindustan Tractors & Bulldozers Ltd., in 1965 and -to Hindustan
Tractors Ltd., in 1967. When the managing agency system was abolished in 1970, brothers Chandrakant and
Indrakant, who were members of the board of director earlier, became its managing directors.

Organization
The company was run by Pashabhai Patel and his relatives (Exhibit 2). There were very few non-family members in
executive positions.
Nagindas, a brother, was' the first to join Pashabhai. Chandrakant and Indrakant joined in 1940 after a spell of training
in USA, in the manufacture, sale, and service of tractors. Rameshchandra Patel, sales manager, and Niranjan Patel,
foundry manager,_ both nephews of Pashabhai, joined the company in 1954. They had earlier undergone training with
Vickers-Armstrong in UK and Allis-Chalmers in USA. Rashmikant Patel, the joint works manager, another nephew
joined the business after obtaining a B.Sc. (Tech.) degree.
Family relationships were more important in practice than formal titles or organizational boundaries. The position of
Pashabhai in both the Patel family and in the business was dominant one. Sales, purchase, finance, government
relations, and production were handled by family members. S.P. Suji, works manager, was one of the few nonfamily
executives. Pashabhai, shrewd judge of opportunities and people, had contacted Suji in 1967 within three days of his
leaving Premier Automobiles Ltd., Bombay, where he had worked for 22 years.
Pashabhai was far-sighted in his understanding of the role of tractors. His early attempts to make a plough failed but
he had a keen business sense and was ahead of many in .starting its manufacture in India. He travelled many countries,
saw many tractors, met with many farmers around the world before picking on the Zetor 50 h.p. tractor for
manufacture.
Entry into Manufacture
In. 1960, the Tractors and Bulldozers Private Ltd. entered into a technical collaboration with Motokov, a
Czechoslovakian state-owned foreign trading corporation, and with Zavody Jana Svermy, a Czechoslovakian state
enterprise. The agreement provided the company exclusive rights to manufacture and assemble 50 h.p, Zetor Super
tractors, a model that had proved popular with Indian farmers when imported in 1961. The Czech company was to
provide technical know-how, drawings of tools and fixtures, and necessary components on nine months credit, and to
train personnel sent to Czechoslovakia at the Indian company's expense. In return the Indian company was to pay the
Czech party a royalty of five per cent, subject to Indian taxes, of the net ex-works (as of Brno, Czech.) selling price of
components manufactured in India. The price of Zetor Super 50 was fixed at 700 in 1964 The' Indian company had
rights to export to Nepal, Burma (where there was a, 50 h.p. Zetor unit), Singapore, Thailand, and other South East
Asian countries.
The agreement required Hindustan to buy at least 50 per cent of the value of 1000 tractors in the first year, 30 per cent
in the second year, and 20 per cent for the next eight years.
Production of 50 h.p. tractors started in February 1963. Manufacturing facilities had been established for 50 h.p. while
the company was mainly. an assembler of 35 h.p. tractors. The collaborators helped in the assembly operations also.
Both the licensed on installed capacities had been increased over the years. At the peak production of 1967-68-1, 194
50 h.p. tractors and 838 35 h.p. tractors-the utilization of installed capacity was over 70 per cent (Exhibit 3).
In 1968, Hindustan Earth Mover Pvt. Ltd., a sister concern, obtained an import licence for 100 crawler tractors of 100
h.p. and 50 of 50 h.p. They were imported at a cost of Rs. 1.27 crones from 14 Oktobar Rudnap, a
2
Morarji Desai, The Story of My Life, Vol. 2 (Delhi: Macmillan Company of India Ltd., 1974), pp. 205-206.

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Yugoslavian/firm with whose collaboration Hindustan Earth Movers had plans to manufacture track type crawler
tractors.

Other Manufacturers

In 1972, Hindustan was the smallest of six units in regular production. The International Tractor Company of India
was the largest; it made tractors of 35 and 44 h.p. It was set up jointly by the Mahindras, who were in the automotive
business manufacturing jeeps, and the Voltas, who used to import International tractors earlier, in technical and
financial collaboration with the International Tractor Company of UK. Tractors and Farm Equipments Ltd., Madras
(part of the Simpson group which made Perkins diesel engines, piston rings, and automobile ancillaries),
manufactured 35 h.p. tractors in financial and technical collaboration with Massey Ferguson of Canada. Escorts which
was already in the automobile industry started with the manufacture of agricultural implements and then set up a unit
to manufacture 37 h.p. tractors using diesel engines of Kirloskar Oil Engines and in technical collaboration with Moto
import of War Poland. Escorts had also started manufacturing 40 h.p. tractors in collaboration with the Ford Motor
Company of USA and were planning to make their own diesel engines. Eicher of Faridabad and Hindustan Machine
Tools manufactured smaller horsepower tractors of 27 h.p. and 25 h.p. respectively. Eicher had German collaboration,
while HMT had collaboration with Motokov 'of Czechoslovakia. Exhibit 4 gives some details about various
manufacturers.

Production

The Hindustan tractors had over 1,200 parts, some highly specialized. The 50 h.p. tractor weighed nearly 2.7 tons.
The majority of the. components were bought from ancillary units. Hindustan made a larger proportion of components
than other tractor manufacturers. It was the only unit, to make its own engines and several castings. The final
operation was an assembly of different types of items-ferrous and non-ferrous machined castings, carbon and alloy-
steel machined forgings, sheet metal fabricated parts, and rubber, instrumentation, and electrical, items. acct materials
cost ranged between 80 and 90 per cent of the total ex-works cost 'depending on volume and male.
Mr. Suji, works manager, a soft-spoken production engineer, thought highly of Hindustan tractors:
Our 50 h.p. tractor is sturdy and a little overweight. The modern tendency is to put weight and direct material
costs. But our tractors have a 50 per cent longer life. I have seen 12-year old tractors in use and have tested.
our 50 h.p. engines up to 60 h.p. without any difficulty. In this business, procurement of raw materials and
imported and local components and their availability on time are critical.
After I joined Hindustan in 1967, I introduced a work order system, worker efficiency cards, and an industrial
engineering department. Data on materials consumed and labour time used were supplied to the Planning
Section, Systematic costing and planning have, however, lagged partly due to high turnover and frequent
changes in planning engineers.
In 1962, the company set up a captive foundry. We have a modem machine shop, with a capacity for
sophisticated operations. 'We subcontract to. units in Bombay, Calcutta, and Madras. We are the only
automobile unit in the state, and there are no ancillary units in Gujarat.
Mr. Suji thought that the company's plant and machinery were good but poorly maintained. In 1971-72 only Rs.
19,000 had been spent on machinery repairs as. against 'Rs. 2.4 lakhs in 1967-68.

Demand for. Tractors

According to a study conducted by the National Council of Applied Economic Research, the. potential demand for
tractors was ,high in India. Demand Estimates varied widely. The Indian Agricultural Research Institute, Delhi,
estimated that 1,750,000 tractors would be required during the Fourth Plan period (1966-71), of which 250,000
tractors would be between 28 and 50 h.p., the range manufactured by large tractor producers. The estimates of the
Planning Commission were much lower-150,000, of which about 110,000 were to be in the 20 to 50 h.p. range.
Individual manufacturers had their own estimates generally closer to the Planning Commission's figure.
Indigenous production had increased from nil in, 1960-61, to nearly 20,000 in 19707.71. To meet the gap, between
demand and indigenous production, the government allowed tractor imports mostly from the Soviet Union and

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other East European countries. Exhibit 5 provides some data on the availability and growing use of tractors in India.
Demand Trends by Horsepower Range
Nearly 80 per cent of the indigenous production was in the medium horsepower range, around 35 h.p. Manufacturers
had yet to develop special purpose tractors and a full range. On the basis of a national sample survey of farms, the
NCAER Plot that the preponderance of 35 h.p. tractors was more an indication of its availability than of farmer
preference.
The Indian Agricultural Research Institute and the Planning Commission estimated a large requirement of lower
horsepower tractors, while industry representatives thought that the trend would be towards higher horsepower
tractors. Manufacturers told the Tariff Commission in 1967 that they could make 18 to 20 h.p. tractors, but did not
think they could offer them at prices much below those for the 35 h.p, tractor; they could reduce the prices by about
Rs. 1,500.
The smaller horsepower tractors of up to 25 h.p. were more in use in the deltaic states of Bihar, Andhra Pradesh, and
Tamil Nadu, while the higher horsepower tractors, were more common in the Terrai areas of Maharashtra, Haryana,
and Uttar Pradesh. The distribution of tractors in use in 1972 by horsepower and the expressed preferences of farmers
are given in Table 1.
Table 1 Percentage Distribution of the Use of Tractors and the Preference of Farmers by Horsepower

Horsepower Use Preference

Up to 25 29 22
26-35 43 62
36-59 16 6
Above 50 1 10
Source: Demand for Tractors (Delhi: NCAER, 1974).
Tractor Customers
Tractor buyers were mostly owner-farmers of substantial means. Dealers had long waiting lists of eager customers
who were willing to pay a premium for immediate delivery. The used tractor market was also good. A survey in 1972-
73 in two talukas of Gujarat showed that many farmers had paid prices higher than average market prices.* The
premium range is given in Table 2.
Table 2 Tractor Prices Paid by Farmers

Average Range of premium paid

Year. Market Price (new and used) %

(Rs.) Rs.

1960 16,570 6,430 39

1966 19,745 9,255 47

1967 19,746 4 to 3,354 0 to 17
1968 20,870 130 to 1,583 1to8
1969 20,870 630 to 4,330 3 to 21
1970 20,870 7,630 to 9,520 37 to 46
1971 22,580 5,127 to 7,352 23 to 33

*Source: M.S. Patel, "Effect of Tractorisation on Tractor Prices", The Economic Times, (January 1, 1976).
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Manufacturers had provided no credit facilities. The farmers in the two talukas of Gujarat relied to a large extent on
their own resources. Land mortgage banks, state departments of agriculture, banks and state agro-industries
corporations provided credit facilities for the purchase of tractors.

Marketing Practices

Manufacturers carried small quantities of finished tractor stocks in the late '60s and the early '70s. Under the
government's distribution control order, a dealer was required to give a 90-day notice to the first customer on their
waiting list who had booked an order. On receipt of the consignment he was require to give in writing a notice of 30
days for payment. If the customer failed to. make such payment, the dealer could turn to the next customer.
Marketing practices varied form manufacturer to manufacturer, partly depending on the collaborators. Tractors and
Farm Equipment Ltd. and International, through their sole selling agents Voltas, provided free installation services
and some training to the farmers. Through an Installation Certificate TAFE collected data on where each tractor it
sold was located and who the buyer was. Besides it maintained a 200-acre farm and a Product Training Centre where
it trained its dealers.
None of the manufacturers spent much money on advertising. Voltas published a journal on mechanized farming and
other news of interest to farmers.
In 1966-67, of the four manufacturers, Hindustan with Czechoslovakian collaboration spent the least on selling-Rs. 98
per 35 h.p. tractor and Rs. 123 per 50 h.p. tractor. Selling expenses were the highest for Voltas. Escorts' selling
expenses were Rs. 562 per tractor and TAFE's Rs. 309. The government fixed uniform selling expenses for all
manufacturers including a dealer's commission of. Rs. 2,050 per 50 h.p. and Rs. 1,850 per 35 h.p. tractors.
Punjab, Haryana, Uttar Pradesh, and Rajasthan accounted for nearly 60 per cent of the tractor population in 1966.
Selling and Distribution .
Hindustan sold through a small network of about 30 dealers all over India. It gave a warranty of six months to farmers
and of one year to government departments. It provided after sales service directly to government departments and
through dealers to the general public. Dealers paid cash on delivery; they were paid a commission of 10 per cent on
the ex-factory selling prices. The freight and forwarding charges were charged separately.

Government Policies

Entry into the industry and expansion of capacity were controlled by the government, as in other industries. The heavy
capital requirements posed a barrier,' although banks' and financial institutions provided considerable finance. The
industry, relied heavily on external sources of funds.
Licensing during the late 1950s and the early 1960s was based on the low figures of estimates during the First and the
Second Five Year Plan. This, along with the government policy of encouraging competition, has resulted in several
small-volume manufacturers with different collaborators. Because of the specialized nature of design of each tractor
and the lack of standardization of components, ancillary units experienced no economies. The view in the mid-1960s
was that an economic volume of production was not less than 10,000 tractors a year. Hence when the government
licensed additional capacity in 1965-66 to cover the gap between estimated long-term demand and likely production,
most of it went to existing units, Escorts was the only new unit. To bridge the immediate gap between demand and
supply, the government imported tractors from various countries, mostly East European countries.
In 1971, an additional capacity of 36,000 tractors was licensed-Kirloskar (10,000), Harsha (10,000), Escorts (6,000),
Perfect (5,000), and United Auto (5,000). Several letters of intent were also given.
Most of the tractor manufacturers-TAFE, International, Escorts-were earlier in the automobile and ancillary industry
and all entered into foreign collaborations for the manufacture of tictors. Escorts was planning to integrate backward
from tractors to the manufacture of oil engines, while Kirloskar, was integrating forward from oil engines to tractors.
Hindustan Machine Tools was diversifying from machine tools to tractors. Such growth

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and diversification required long-term planning and commitment as suppliers of plant and machinery and vendor
development took a long time.

Research. and Development

Research and development expenditures were low and mostly geared to developing local supplies of complicated
components and to finding acceptable substitutes for expensive materials. New indigenous model development was
non-existent. Vendor development and quality and cost control were key problems for the industry. Procurement of
tyres was also difficult at times. As assemblers, tractor manufacturers were affected by strikes, power cuts, and raw
material shortages at supplier units.
Indigenization received a boost when the government banned the import of complete tractors in 1963. Import licenses
were based on indigenization targets. The pace of indigenization was slow but steady. Over 70 per cent indigenization
had been achieved by 1972. With each CKD import consignment some items were expected to be deleted by
manufacturers as they made arrangements for either buying them locally or for own manufacture. A Tariff
Commission study of 1967 showed that the cost of indigenizing a rupee of the c.i.f. (cost, insurance, and freight) value
of deleted items ranged from 95 paise to Rs. 1.62, depending on volume and other factors. In one instance, considered
small and non-representative, the cost of replacement was as high as Rs. 3.16. In 1972 it was difficult to get
indigenous suppliers for many complicated forged and machined components such as crankshaft, camshaft, and
differential bevel gears.

Price Control

The good demand for tractors and the tight supply position had led the government to impose price and distribution
controls. In early 1967, the government of India declared tractors as an essential commodity within the scope of the
Essential Commodities Act, 1955, and initiated price control.
Before the price controls were introduced in 1967, Hindustan tractor prices were less than those of the others. The
Hindustan 35 h.p. tractor was priced at Rs. 13,350 as against International's price of Rs. 19,835 prior to devaluation in
1966. Hindustan had difficulty supplying the cost data requested by the Ministry o1 Finance (Cost Accounts Branch).
One reason was that it did not maintain adequate cost record. The statutory prices were fixed for the first time in mid-
1967. Prices fixed for Hindustan were less than the company's selling prices at that time by 6.5 per, cent for 35 h.p.
and 8 per cent for 50 h.p. tractors.
The Tariff Commission conducted a regular price investigation in 1967. According to the Tariff Commission's cost
estimates for 1967-68, the direct cost of materials accounted for nearly 80 per cent of the ex-factory costs (Exhibit 6).
In October 1967, on the basis of cost plus 15 per cent return on capital employed (net fixed assets and four months'
cost of production as Working capital), the Tariff Commission made recommendations on prices to be effective for
two years up to March 1969. The prices recommended varied from unit to unit; for 35/37 h.p. tractors prices varied by
nearly 36 per cent from Rs. 15,680 for Hindustan to Rs. 21,270 for Messey Ferguson of Tractors and Farm Equipment
Ltd., Madras (Exhibit 7). Although this approach to price fixing did not provide an incentive to high-cost units to
reduce cost, it was considered necessary because of the widely different collaborations, import content or stages of
deletions, royalties, production volume, location, costing methods, etc.
The Tariff Commission recommended escalation clauses for changes in rates charged by collaborators for Completely
Knocked Down (CKD) packs or for deletions of items. No escalation was provided for an increase in rates of
indigenous items, except for engines in the case of Tractor and Farm Equipment Ltd., Madras, which used Perkins
engines made by a sister concern, Simpson & Co. Ltd., Madras, and Escorts which used Kirloskar engines of
Kirloskar Oil Engines Ltd., Poona. Where fresh delegations were replaced by indigenous items no escalation was
provided as the 57.5 per cent devaluation of June 1966" was considered an adequate cover. These escalation clauses
were accepted by the Government of India.

Based oh the Tariff Commission's report, the Ministry of Industrial Development and Company Affairs, Government
of India, revised the statutory selling prices of tractors in June 1968 with immediate effect (Exhibit 7). The prices
fixed by the Ministry were less than those recommended by the Tariff Commission (in all cases except Escorts). The
government allowed only a 12 per cent return on capital employed, .consistent with the amount allowed to other
industries, while the Tariff Commission had recommended a 15 per cent return. The

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difference accounted for the price reduction of Rs. 247 for TAFE, Rs. 321 for International, Rs. 165 for Escorts. The
government made other adjustments-in the case of TAKE and International for the devaluation of the pound sterling
in November 1967 and in the case of Escorts for double counting by the Tariff Commission of some items, once in the
CKD pack and once in locally bought or manufactured items. For Hindustan 50 h.p. tractors, the government reduced
drastically the replacement ratio of 300 per cent allowed by the Tariff Commission for expected deletions of items
from CKD packs.

Pashabhai, like the other manufacturers, thought that the statutory prices were unremunerative. He felt that
Hindustan's prices were fixed particularly low and was quick to represent to the government the serious impact the
"un-realistic" statutory prices would have on the profitability of the company. Upon repeated representations, in 1969,
the government asked the Bureau of Industrial Costs and Prices to examine the costs and prices of Hindustan tractors,
but later, in September 1970, requested a de novo examination of costs of all makes. Based on their report the
government revised upwards the statutory prices in September 1971. A substantial increase in prices-over 30 per cent
was granted in 1972 because of sharp rises in prices of raw materials and components.

Purchase Policies

Nearly 300 of the 1,200 parts and components of Hindustan tractors were made at Hindustan, a proportion of
somewhat higher than that of competitors. Hindustan Earth Movers Private Ltd., a sister concern, supplied nearly 140
items. For the other parts, Hindustan had about 150 suppliers located at Bombay, Madras, and Calcutta. For some
items there was only one supplier. For many others, splitting the small-volume specialized orders among suppliers
was expensive. The tools for making the parts customarily belonged to the suppliers although they were paid for by
Hindustan. The company had developed and encouraged several ancillary 'units.
The geographical distance between the factory and the suppliers posed several problems of cost, delivery, and quality
coordination. The company maintained high inventories of raw materials, components, and work-in-process whose
value was in excess of sales from 1969-70. Strikes and power cuts at supplier factories, market conditions and
availability of items, such as tyres and batteries, affected Hindustan's operations. Quality problems on forgings were
severe. In spite of high inventories, completion of tractors was often delayed for want of critical items, and this
resulted in high-in-process inventory.
Hindustan was dependent on the Czechoslovakian collaborators for the supply of some 12 critical items such as the
crank shaft, the cam-shaft connecting rod and crown wheel and pinion. There were no Indian suppliers'for these items.

Indigenization

Although the pace of indigenization had been slow in the industry, Hindustan had kept in, line with other,
manufacturers in import substitution. For the 50 h.p. tractors, Hindustan manufactured or had local suppliers in 1970-
71 for items equivalent to 85 per cent of the c.i.f, value of a completely imported tractor against the target of over 90
per cent set by the Government of India (Exhibit 8). The Tariff Commission had noted that Hindustan had resorted to
the import of components outside the CKD packs so that the actual number of components deleted was less than the
apparent number in CKD packs, which it pointed out was "against the spirit of import substitution". In 1966-67,
Hindustan had imported components worth Rs. 633 outside CKD packs for 50 h.p. tractors on a c.i.f. value of Rs.
7,323 for each pack, which the Commission used as the basis for determining its cost of production.
The managing director, Chandrakant Patel, commented on the import of components outside the CKD packs as
follows:
It was done only once and represented only a small percentage of the pack value. Components had to be
imported as an indigenous supplier had failed to deliver the goods at the last minute.

Personnel and Industrial Relations

The company employed 1845 workers when in peak production in 1968. Pashabhai handled most of the personnel
matters. He was a hard driving man and had not recognized any union. Wage rates at Hindustan were lower than those
of other companies in the area. Most of the workers were temporary and their turnover was high. Unskilled workers
from neighbouring villages would gain experience and quit without notice when they got better jobs.

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Supervisory turnover was also high although the wage disparity in their case was not large. Supervisors left if they
could not get along with the family members particularly Pashabhai or meet their expectations. Pashabhai rewarded
those he liked and those who put up with his ways.
The unrecognized union was led by Sanat Mehta, member of the Praja Socialist Party, the Gujarat State Legislative
Assembly and a prominent politician. The Engineering Wage Board recommendation, which would have increased
wage scales by nearly 50 per cent for the workers had not been implemented by the company.
An illegal one-day strike in October 1970 on a dispute. regarding payment of bonus was followed by a lock-out . that
lasted 35 days. Chandrakant Patel described the strike as follows:
The strike was politically provoked by Sanat Mehta's union for reasons best known to them. The management
was very firm and when the workers realized their mistake, they quickly approached Pashabhai and requested
him to allow them to work. They signed an agreement with the company not only apologizing for the strike,
but accepting all the conditions including no salary for the lock-out period and unconditional resignations of
their ring leaders.
The company retrenched 560 workers in May 1971, mostly unskilled workers in the foundry and machine shop. They
were paid 15 days retrenchment compensation, one month's salary for every year of service, and privilege leave
salary.
In 1972 morale was low and there was no work for many as quite a few production departments had been partially or
wholly closed down.

Financial Policies

Pashabhai was worried about the serious financial stringency of the company. Pashabhai considered the government's
price control to have crippled the company. Several of the risks he had taken with the expectation. of an early increase
in tractor prices had proved very costly. Even maintaining the already low production volume had become difficult.
Work in several production departments had been stopped.
The company had a hypothecation limit from the State Bank of India of Rs. 95 lakhs against the security of raw
materials, components, finished goods, and other inventory. The bank had also sanctioned a limit of Rs. 225 lakhs for
opening letters of credit to foreign countries. The bankers had taken personal guarantees from Pashabhai and his
brothers in addition to the hypothecation of all moveable assets before granting these limits.
Secured loans were more than three times the equity and the interest burden had nearly tripled from Rs. 18 lakhs in
1969-70 to Rs. 53 lakhs in 1971-72. The directors had foregone their salaries and the board members their sitting fees
in view of the continuing losses of the company. Labour was paid on time though the increase recommended by the
Engineering Wage Board had not been implemented, and bonus payments had been delayed.
Supplier credit had been stretched to the limit domestically, and there were occasional defaults on letters of credit
opened by the bankers and in payment of royalties to collaborators. The company's accounts with the bankers had
become irregular. Some of the fixed depositors were threatening to file suits for liquidation proceedings.
Most normal financial sources, including the director's own, were exhausted. Pashabhai was seeking cash credits from
the State Bank of India, the company's bankers, who were now insisting on guarantees from the state government or
financial institutions.

Industry Profitability

The Industry profitability was generally lower than the average for all industries. Gross profits as a percentage of
capital employed was 5 per cent for the tractor industry in 1969-70 as against an average of 9.9 per cent for all
industries (Exhibit 9). The industry's performance was affected severely in 1970-71 because of a sharp rise in the cost
of raw materials and components while tractor prices remained fixed at an earlier level. Several units went into the
red. The industry's reliance on external sources of finance was high-owned funds formed only about a third off the
total capital employed.

Tractors and Farm Equipment Ltd., in spite of its larger volume, had suffered losses (Rs. 35 lakhs on a turnover of Rs.
5.4 crores) in 1970-71. International had not slipped into the red yet but its gross profits had declined from

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10 per cent of capital employed to 6.7 per cent in 1970-71, and profits after tax had dropped from Rs. 63 lakhs in
1969-70 (sales Rs. 9.7 crores) to Rs. 4.2 lakhs in 1970-71 (sales Rs. 11.4 crores).
Hindustan's profitability was the poorest but Pashabhai was hopeful that Hindustan would turn the corner in view of
the substantial price increase of February 1972. But the immediate problems of turning the company around were
overwhelming.
Questions
1. Identify the problem or. the central theme of the case.
2. What internal and external factors have been responsible for the deterioration in performance of the firm?
3. Do you think that as a Chief Executive Officer of the company Pashabhai Patel failed in .the proper discharge
of his duties or responsibilities.
4. Identify any other points relating to the case and present your analysis.

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Exhibit 5
HINDUSTAN RACTORS LIMITED (AR)
Total Availability of Tractors

Year Production Imports Additions during Cumulative Mortality*

the year number in use
1960-61 - 2,586 2,586 31,015 --
1961-62 880 2,997 3,877 34,349 543
1962-63 1,414 2,616 4,030 37,815 564
1963-64 1,983 2,349 4,332 41,540 607
1964-65 4,323 2,323 6,646 47,255 931
1965-66 5,796 1,939 7,735 53,966 1,024
1966-67 8,816 2,591 11,407 63,776. 1,597
1967-68 11,394 4,038 15,432 77,047 2,161
1968-69 15,437 12,397 27,834 100,984 3,897
1969-70 17,101 12,801 29,802 126,614 4,172
1970-71 19,535 16,679 36,214 157,758 5,070
1971-72 16,535 16,000 32,535 185,738' 4,555
Source: Demand for Tractors (Delhi: National Council of Applied Economic Research, 1974).
*Derived figures.

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Exhibit 7
HINDUSTAN TRACTORS LIMITED (AR)
Prices of Various Makes of Tractors
(In Rupees)
35 h.p. 50 h.p.

TAPE International Escorts Hindustan Hindustan

At start of 14,450 16,380 15,400 12,500 17,500
production(Data) (Early '62) (Feb. '65) (Mid '66) (Early '65) (Mid '64)

Pre-1966. 15,906 19,835 13,350 18,850

Post-devaluation 20,821 19,927 17,300 17,250 23,785
Selling prices
(Early/Mid 1967) 20,838 20,900 19,500 16,110 21,880
Tariff Commission's
recommendations
(Oct. 1967)** 21,270 20,230 17,690 15,680 23,370
Statutory
prices***
(Mid 1968) 21,140 19,570 17,910 15,750 22,357
Sept. 1971 , 24,190 17,470 17,470 24,900
Sept. 1972 24,100 24,100 32,900

*' Prices fixed by Government of India, based on a cost investigation by the Cost Accounts Branch, Ministry of
Finance, include excise freight, expenses, and cost of the following accessories: hydraulic life, three-point
linkage, power take-off, head, tail, and plough lights, tool set, and electric horn. Where any accessory was not
standard, statutory rebates were to be given.
** Ex-works, consumers to be charged extra for packing, freight, and insurances, estimated at the time to average
Rs. 215 for TAPE, Rs. 157 for International, Rs. 211 for Escorts, Rs. 128 for Hindustan 35 h.p., and Rs. 205
for Hindustan 50 h.p. Includes dealer's commissions and selling expenses.
*** F.O.R. destination, including packing, freight and insurance, selling expenses and dealer's commission.
Source: Tariff Commission Report, 1972, and company records.

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