April , 2019
Indian tea Industry fights for survival
14:23 pm

Tushar K. Mahanti

“If you are cold, tea will warm you. If you are too heated, it will cool you. If you are depressed, it will cheer you." This was how William Ewart Gladstone, the four-times prime minister of the United Kingdom, described Indian tea, which came to the British market in the early 1800s.

The observation was made a long time ago, but Indian tea is still a morning necessity across the globe. It’s among the finest in the world because of its unique geographical features, continuous innovations, changing product mix, and strategic market expansion.

While China, Sri Lanka and Kenya have made huge in-roads to the global market, when it comes to quality, Indian tea still tops the list in quality. But low-priced teas from China, Sri Lanka, and Kenya have slowly replaced Indian tea in many global drawing rooms. Stiff price competition has given an upper hand to both Kenya and Sri Lanka. Kenya and Sri Lanka have continued to surpass India in CTC tea export, although their combined production is much less than India's.

India losing out in the global market

In 2017, India accounted for 23% of the global tea production. But Kenya and Sri Lanka contributed to just 13% of the world's production. However, when it comes to exports, both have an export share of about 38% against less than 10% of India's.

Indian tea has lost large global markets because it continues to be traded as a commodity. The much talked about value addition is limited and came late. Only the markets that have consumers with shallow pockets buy tea as a commodity and that share is fast depleting. Despite being a large producer of tea, the country lacks properly organised production systems in which small tea producers find a respectable place. The industry has limited, except a handful of big players, access to capital at globally competitive rates.

The deceleration in export volume of Indian tea began with the breakup of the Soviet Union in the early 1990s. The region used to import 130-140 million kg of tea from India annually. After the breakup, the region suffered and the purchasing power of the Russians declined. They also shifted from high-priced, hand-rolled orthodox tea to the more common CTC variety. Subsequently, India’s tea export to the region dwindled and today it stands at just 48.1 million kg valued at $ 120.8 million. Other big purchasers were Iran ($126.4 million), UAE ($61.2 million), UK ($ 55.4 million) and the US ($51.2 million) in 2017-18.

Things seem to have changed somewhat recently. Indian tea industry has recorded the highest ever production and exports in 2017-18. The total tea production was 1325.05 million kg – an increase of 74.56 million kg as compared to 2016-17. In percentage terms, the increase was around 6%. Similarly, the total quantity of tea exported during the financial year 2017-18 was a record 256.57 million kg and foreign exchange earned from exports of tea was $ 785.92 million.

In rupee terms, the total value of the exports was Rs. 5064.88 crore in 2017-18. The value realisation increased by Rs. 432.38 crore or 9.3%. The growth in exports was largely driven by higher purchases by Egypt (increased by 7.49 million kg), Iran (increased by 6.95 million kg), Pakistan (increased by 4.96 million kg), China (increased by 2.91 million kg) and Russia (increased by 2.89 million kg).

As per industry research, the global tea market was worth Rs. 2,619.37 billion in 2013 and is projected to reach a valuation of Rs. 3,183.17 billion by the end of 2020. The market is expected to grow at 2.8% annually compounded, between 2014 and 2020. If so the present uptrend in exports may be further augmented; given that adequate planning is done at the industry level backed by governmental initiatives.

Tea production records new high

Back to production; the domestic tea industry is going through a favourable phase currently with 2017-18 turning out to be one of the better years in recent times, particularly for the north Indian (Assam and West Bengal) producers. Aggregate tea production touched a record high of 1,325 million kg in 2017-18 – up by about 75 million kg or 7% over the previous year.

Healthy demand trends, combined with stagnant production levels in the domestic market, have supported prices at north Indian auction centres, particularly from August onwards. Further this firmness in prices at north Indian auction centres supported margins and debt coverage indicators of most large bulk tea producers based out of North India in 2017-18 according to an ICRA report. The extent of improvement however, was affected by cost pressures, mainly attributable to increasing wage rates. Prices at South Indian auctions were impacted by higher production levels. Nonetheless, most large bulk tea players in south India did not witness any significant material contraction in operating profitability as the increase in production largely negated the impact of lower prices.

Consumption and price trends

India is the second largest producer of tea after China and accounts for the highest tea consumption globally. Around 80% of the total tea produced in India is consumed by the domestic population. This is, however, on the strength of India’s population and not due to high per capita consumption. When it comes to per capita consumption, India’s figure is pathetically low. India’s per capita consumption at 0.78 kg per year is way below 3.2 kg in Turkey, 2.2 kg in Ireland, 1.94 kg in UK and 1.5 kg in Iran.

To boost consumption, the Indian Tea Association has been campaigning since 2012, starting with business-to-business road-show and gradually moving to BTC (business-to-consumer) formats and then, directly targeting youth.

Even the Tea Board is concerned about the low domestic per capita consumption of tea. Industry experts feel that the low consumption is one of the major causes of stagnant auction prices in the face of rising production. Low auction price, where the larger part of the tea is sold, is affecting the finances of the tea companies which are already in trouble due to rising production cost.

The improvement in auction prices from August 2018 onwards as ICRA report suggested has, however, failed to make any significant gain for the year as a whole. The average auction prices rose marginally to Rs. 140.40 per kg for 2018 against Rs. 134.36 in 2017. In five years, between 2013 and 2018, the average price of tea in auction has increased by about 9%; that is, less than an average two per cent a year. This is much lower than the inflation rate of the country. The lower rate of rise in tea prices has greatly affected the finances of the tea companies which are facing numeral problems to survive.

Challenges faced by tea industry

The industry that earns foreign exchange for the country, employ a huge workforce and cater to the morning needs of billions is, however, facing serious sustainability challenges. Tea gardens in Assam and West Bengal are facing a major challenge due to climate change resulting from uneven distribution of rainfall and extreme temperature patterns which is affecting quality and production. Droughts, floods and severe attack of pests have been commonplace and are adversely affecting production, quality and costs.  The tea industry despite low carbon footprint faces critical environmental challenges. A comprehensive strategy to deal with climate change duly supported by government funding is an immediate necessity.

Low productivity is a major cause to affect the finances of the tea companies. The wage component constitutes over 60% of the total cost of production. Escalating input costs of electricity, fuel, pesticides and agro-chemicals and irrigation, etc. make Indian tea non-competitive in international market. Almost 80% of the total cost of tea production has little scope for reduction. To reduce cost, sometimes, longer picking cycles are adopted resulting in poor quality tea production which fetches low price and incurs losses for the industry. Some planters cut costs by postponing the uprooting, replanting and modernization of gardens, risking long-term viability. Inconsistent investment is not ideal for the tea industry. Most of the labourers come from socially and economically weaker sections of the society and are located far away from their native place. Therefore, tea estates have to provide facilities like house, water, social-welfare, etc. which incur costs.

The rising labour cost is a major cause of concern in the face of stagnating prices. A study of five select tea companies finds that more than three fifths of their income goes to pay for labours only.

Organised tea plantation in India suffers from weak fundamentals and unless there is a magical improvement in the scenario, a shakeout is imminent. That’s not good news for Assam and West Bengal. According to the labour ministry, in July 2016, India had 11 lakh tea workers, of which nearly seven lakh are in Assam and over three lakh in West Bengal.


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