Tea Industry Facing Severe Liquidity Problems Vivek Goenka ITA Chairman – BW Businessworld

In an email Interaction with BW Businessworld’s Prabodh Krishna, Vivek Goenka, Chairman – Indian Tea Association elaborates the effort of Indian Tea Industry to fight with odds. 

With fall in consumer demands for most of the sectors, how much has the tea industry suffered? 

Indian tea production has grown significantly over the last few years from 986 million kg in 2007 to 1338 million kg in 2018. This increase is mainly attributed to the growth of the Bought Leaf sector (BLF) and Small Grower Sector (STG) which today accounts for around 48% of the Indian production. The consumption level in India is not keeping pace with the rapid growth in production. Per capita consumption in India at 0.786 kgs is low when compared to several tea consuming countries like UK (2.74 kgs), Pakistan (1.01 kgs) etc. Due to the unfettered expansion of tea areas, there is an apparent oversupply thereby creating an imbalance in the demand-supply equilibrium leading to depressed prices. The identified strategy for dealing with oversupply is three-pronged  – Increasing exports, Boosting domestic consumption through generic promotion campaigns and Regulating unfettered expansion of tea areas.

The emergence of the Small Grower (STG) / Bought Leaf Factory (BLF) Sector have resulted in a dual economic structure with wide variation in the cost of production between the organized Estate sector and the STG/BLF sector.  The STG Sector’s tea harvest is primarily sourced by the Bought Leaf Factories (BLFs) which has the advantage of manufacturing teas at a substantially lower cost than the Estate Sector where high fixed overheads burden the cost of production. The large variance in the cost of production gives the BLF sector a competitive edge to offload teas at a lower price which often is below the cost of production of the Estate sector.

The viability of the tea industry is also under stress due to tea prices not keeping pace with the rising Cost of Production (COP) which has put considerable pressure on margins. An analysis of the last 5 years reveals that while the CAGR of vital Input costs have increased between 6-7%, tea prices during the same period have grown at a CAGR of only 1%.

Slow growth in exports must have created issues for the tea industry also. Your views? 

Indian tea exports have shown a significant increase over the last five years from 219 million kg in 2013 to 256 million kg in 2018. However, although India’s tea exports have maintained a level of over 200 million kgs in the past few decades, yet exports as a percentage of total tea production has declined from 60% in 1960 to 19% in 2018. This is primarily because of the rapid growth in production over the last decade.

India’s tea production has been rising rapidly for the last few years primarily because of the Small Tea Growers/Bought Leaf Sector who today constitute around 48% of the total production. The estimated increase in production in the coming years makes it imperative to focus on increasing domestic consumption and export volume to balance the demand-supply equilibrium in the domestic market and fetch remunerative prices which in turn would protect employment and ensure the overall sustainability of the tea plantation sector.

What is ITA doing to tackle the issues?

The ITA is working closely with the Tea Board in mounting delegations in key markets to boost export volume. In the last 2/3 years trade delegations have visited Iran, Russia, Egypt, Kazakhstan, USA, China etc resulting in increasing of India’s tea exports from 220-230 million kg to 256 million kg in 2018.

In order to achieve the export target, the industry needs some assistance from the Government. Indian exporters face costs disadvantages vis-a-vis other competitors by way of the high cost of production and high transportation costs including inland transportation cost, ocean freight Terminal Handling Charges etc. While the industry is making all efforts to strengthen its presence and become competitive in the global market, high export costs continue to impede India’s competitiveness.

India is primarily a CTC tea producing country. Presently around 110-120 million kg of Orthodox teas is produced in India out of the total production basket of over 1300 million kg. This needs to be enhanced to cater to the global demand as orthodox/Green teas have a 60% share in the global export market. The cost of producing orthodox tea is significantly higher than CTC teas. Therefore, adequate incentivization from the Government is essential to motivate producers to produce more orthodox teas to cater to the global demand. In response to the industry’s plea for enhancement of orthodox subsidy, the Commerce Ministry/Tea Board had commissioned a study on the Cost of Production to Indian Institute of Plantation Management (IIPM), Bangalore, which submitted its Report to Tea Board. The findings of the study reveal that the cost difference between Orthodox and CTC at All India level is Rs 25.73 per kg. The industry has, therefore, urged the Government to enhance the orthodox incentive rate from the present level of Rs 3/- per kg to Rs 20/- per kg to motivate

What about the wages conflict among labourers in plantation areas, how do you think it had impacted the trade? 

The Indian Tea Industry has a unique wage structure comprising of cash wage and in-kind benefits mandated by statute or agreements consisting of free housing, medical facilities, education, fuel, sanitation, concessional rations etc. This feature is not present in any other industry.

The Wages of tea garden workers increased by 22% in Assam and 33% in West Bengal in 2018 on an interim basis pending finalization of the Minimum Wage by the Government.

Discussions regarding Minimum Wage fixation is in progress under the Minimum Wages Advisory Board/Committee of the State Governments of Assam and West Bengal.

Operating Trade Unions have been requested by the industry not to resort to any agitation pending finalization of the minimum wage as frequent gate meetings hamper production and productivity and disrupts industrial peace and harmony. The Government of India has enacted the Code on Wages, 2019 by subsuming the Payment of Wages Act, 1936, the Minimum Wages Act, 1948, the Payment of Bonus Act, 1965 and the Equal Remuneration Act, 1976. The Code provides that value of in-kind benefits to be considered as part of wage would be limited to only 15% of the total wages.

The recent FSSAI norms had forced the food industry for disruption, what about your trade? 

There have not been any disruptions in trade on account of FSSAI norms. The industry welcomes the initiative of the Government to ensure compliance with food safety norms. Food Safety norms of the Indian tea industry are governed by the Plant Protection Code of the Tea Board and the guidelines enacted by the Food Safety & Standards Authority of India (FSSAI). The Indian tea sector is fully compliant with the prevalent regulatory norms. Good Agricultural and Manufacturing Practices and compliance standards have been adopted by the industry and more than 500 million kg of the teas are certified teas.

However, there is a need for harmonization between the Plant Protection Code and FSSAI norms for the smooth functioning of the Trade. The ITA is constantly engaging with the FSSAI, CIB&RC and Tea Board in this matter.

Why can’t tea marketers opt for coffee chains like options? 

Opening of Tea Lounges is slowly gaining momentum in India. The industry is gearing up to cater to the changing tastes and preferences of the consumer especially the youth segment. Tea Lounges can play an effective role in attracting the young generation to tea drinking. However, this requires large scale investment and the stressed condition of the industry is a major deterrent.

The Tea Board of India Study on Domestic Consumption of Tea has revealed that there is growing potential for Ready to drink tea (RTD) which needs to be properly tapped. RTD tea is expected to grow about 5% over the next 4-5 years, which is higher than the expected growth rate of normal tea.

There are multiple cottage level groups involved in the trade how had they survived during slowdown?  

The Government of India has in the past extended financial relief package for several sectors including textile, sugar etc to bail out the industry from the financial crisis. The Indian tea industry is facing severe liquidity problems culminating from the high cost of production and stagnant sale prices. There is a need for fresh funding to meet the developmental expenses including welfare activities for the workforce.

What are your demands from the government? 

In view of the severe financial crisis being faced by the tea industry due to rising cost of production, stagnant prices, climate change threats and several other challenges confronting the tea sector the ITA prepared a White Paper on Tea Industry which has been submitted to various Government authorities. ITA ‘s submissions include the following:

  • In-kind benefits being provided to the workers be considered within the definition of Wage in the Code on Wages, 2019.
  • Extending the benefits of Social Welfare and other Government Schemes to the tea sector.
  • Need for an overarching policy for regulating the expansion of tea areas.
  • Bringing in Auction Reforms to ensure fair price discovery for the tea producer

via Tea Industry Facing Severe Liquidity Problems Vivek Goenka ITA Chairman – BW Businessworld

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