Brewing new ideas to sustain tea sector – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/opinion/brewing-new-ideas-to-sustain-tea-sector/article33465737.ece?homepage=true

Tea plantation business has gone through a tumultuous last two decades, ever since the WTO came into being and quantitative restrictions (QRs) were lifted. Global movement of commodities became commonplace and consuming countries increasingly started relying on low-cost teas of South-East Asia, thus increasing competition on the demand-side, impacting the price line of Indian teas.

Being an industry with 65 per cent of its cost on wages, and prices not keeping pace with wage increase and other input costs, operating margins came increasingly under pressure. The wage/price movement has been adverse. Taking 1995 as the base year, and measuring over a 24-year duration up to 2019, wages have gone up by eight times whereas tea prices have gone up only by 2 per cent.

Consequently, many companies turned red. Some survived only subsidised by the parent company. Several shut shop. And, some abandoned operations, leaving their plantation socio-economic structure in disarray, particularly in Kerala and West Bengal, including the famed Darjeeling area.

South Indian plantations took an earlier and bigger hit because of the collapse of the captive Russian market. Plantations in Assam are also fast getting into serious financial trouble. Whilst some of this could be attributed to financial mismanagement , even well-managed corporates are incurring huge losses.

Branding and moving up the value chain were seen as a means to insulate oneself from the commodity price insecurity. But the integrated (forward and backward) tea companies soon figured out that captive production was a burden and exited, either fully or partially from captive production.

Climate change impact is increasingly playing truant with crop production targets. This leaves us with costs per se, employee cost to be specific, as the only realistically controllable component. Wages are invariably politically determined, and notwithstanding the value of social and welfare support provided to the plantation employee, plantation wages show up in poor light compared to other industries. Plantation wages will, therefore, continue to rise on aspirational basis.

Under the circumstances, the industry, in general, is in crying need to have a structural change in the way it operates. One way of ensuring a holistic sustainability of the plantation industry would appear to be to distribute land-ownership in favour of the plantation employees and buy back the raw material through a co-operative outfit.

The green leaf purchase can be based on a price-formula linked to, say, the published industry auction price. Individual corporates may want to pay a higher price, based on their end price realisation (as is being done in the case of bought leaf purchases). In consideration of transfer of land ownership, it should be made obligatory for ex-employees to sell the raw materials to the corporate which has the infrastructure and technology for processing the primary produce, adding value as appropriate and marketing the same.

Land disinvestment

The land disinvestment should also be viewed in the light of the increasing uncertainty over land ownership both due to ‘land title’ issues, as well as political, social and economic pressure for land ownership. Plantation lands, as we know them, cannot be alienated for purposes other than plantations and therefore no longer have a transaction ability, which will take away their ‘asset value’. In other words, the value of a plantation, be it in terms of ₹/kg of production or ₹/hectare of plantation will simply be based on operational profits.

Once the workmen become owners of land and cease to be plantation employees, it will be incumbent on the government to provide them with social and welfare amenities, currently provided by the plantation managements, through their various existing schemes. This will further bring down production costs for the corporates. The government can thus ensure complete social and welfare care for this populace — which may not quite be the case now. Such a proposal could also be used to negotiate a trade-off with the government, with respect to use of a certain percentage of land for independent-use by the corporate, without any strictures whatsoever from the government in terms of its use (this freedom currently is not available to plantation companies).

Thus, the corporates would insulate themselves from the wage increase cycle and their raw material cost would get linked to their end price realisation.

The onus of improved conditions of the workmen would shift to the government, for which various schemes already exist. The workmen, on the other hand, will have the social and financial security net of owning land, with an assured buyback arrangement for the crop. They will also be able to build a house, by themselves or through government schemes.

A win-win for all and therefore a truly sustainable and transparent model — a key requirement for a highly labour-centric industry like plantations.

The author is an independent tea consultant and a former Chief Executive of Harrisons Malayalam and a former President of the United Planters Association of Southern India

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