While the CAGR of input costs in the last 5 years has increased by 8%, tea prices have grown at a CAGR of 1%.
Despite India being the second largest tea producer in the world, accounting for 23% of the global production, the sector is reeling under pressures of high cost of production, low labour productivity, low price owing to oversupply and an ineffective auction model. Despite the increase in production from 1,200 million kg in 2013 to 1,339 million kg in 2018, tea prices have grown at a compound annual growth rate (CAGR) of only 1%. The Sunday Guardian spoke to Vivek Goenka, chairman of the Indian Tea Association, on the issues plaguing the sector and devising strategic policies to revive its lost glory. Excerpts:
Q: What are the current challenges in the tea industry?
A: High cost of production is hampering the competitiveness of tea business and tea prices are unable to keep pace with it. While the CAGR of input costs in the last five years has increased by more than 8%, tea prices have grown at a CAGR of only 1%. Tea being a labour-intensive industry, labour cost constitutes 65% of the total production cost. Hence, any increase in wage also impacts the industry.
Another challenge is oversupply. Indian tea production has grown significantly over the last few years from 986 million kg in 2007 to 1,338 million kg in 2018. This is mainly attributed to the growth of the bought leaf factory (BLF) sector and the small tea grower (STG) sector, which today account for almost 50% of the production. The Registered Tea Gardens (RTG) sector i.e. tea estates registered under the Plantations Labour Act with a resident workforce, incurs higher cost overheads due to various social welfare obligations covering housing, water supply, sanitation, education, fuel, concessional food grains, dry tea, medical facilities etc. The BLF sector comprising standalone factories do not have such social welfare costs and hence their overhead costs are much lower. On the other hand, a large cross-section of the RTG sector with high costs of production is unable to match the same price levels.
Due to unfettered expansion of tea areas, there is an apparent oversupply, thereby creating an imbalance in the demand-supply equilibrium, leading to depressed prices.
Q: How has climate change played its role in deepening the crisis?
A: The rising temperature and decreasing rainfall have made the tea estates highly vulnerable to the vagaries of nature. A report by the Tea Research Association in the Food and Agriculture Organisation confirms reduction of rainfall by 220 mm and rise in temperature by 1.3 degrees Celsius on an average in upper Assam in the last 30 years. The scarcity of rainfall has exposed the tea plants to various pests, which have adversely affected their yield and quality.
Q: Given the complexity of the challenges, government intervention is must. What are the steps required to deal with the crisis?
A: Some of the suggested policy interventions are coverage of the tea sector under the various government social welfare schemes; review of the present policy on expansion of tea areas to curb oversupply; review of the present price sharing formula of Green Leaf supplied by STG; all benefits provided to tea workers under statute or agreements should be included within the definition of “Wage” in the Code on Wages, 2019; institutionalising a scheme for the sector in line with the spirit of the Pradhan Mantri Rojgar Protsahan Yojana Scheme; coverage of tea sector under the Interest Equalisation Scheme on pre- and post shipment credit, which provides an interest subvention at 5% on export credit.
Q: Do you think the model of tea auction mechanism should change in India?
A: The Tea Board had commissioned a study to IIM, Bangalore, towards strengthening the e-auction platform for tea trade and efficient price discovery. Some of the recommendations include improving price, equal opportunities for both small and large buyers, elevate industry standards through higher quality certification, standardisation of grades and packaging norms and special strategy for outlet teas in auctions.
Q: Do you think government should give compensation to the tea industry during natural calamities, like in the agriculture and allied sectors?
A: Yes, the government should do so. The advent of climate change has adversely affected tea production and resulted in crop loss, but the Pradhan Mantri Fasal Bima Yojana does not include tea within its purview, although the purpose of this scheme is to provide insurance coverage and financial support for crop failure as a result of natural calamities, pests and diseases.