Tea industry in crisis: Has corporate farming failed?

Ashok B Sharma

The domestic tea industry is in the midst of a crisis with exports falling in the face of increasing global demand, decline in profit levels and large accumulation of stocks. This is notwithstanding the fact that there is large-scale corporate farming in tea and the government often intervenes to boost exports.

The net profit of the world’s largest tea company, Tata Tea Ltd, in 2000-01 fell to Rs 100.21 crore from Rs 124.57 crore last year. Its operating profit too declined to Rs 104.74 crore from Rs 143.60 crore last year. The company’s operating income dropped to Rs 809.57 crore in 2000-01 from Rs 899.26 crore in the previous year. Its scrips, too, have been showing a downward trend.

There are over 134 tea companies in the country. Recently, the government exempted tea companies engaged in cultivation or processing from disclosing in the profit and loss account the information required under sub-clause (1) of clause (a) of sub-para (ii) of para 3 of part II of Schedule VI to the Companies Act for a period of three years.

The current situation in the tea sector gives ample reason for a rethink on whether corporate farming can really boost agriculture. Is it the duty of the corporates to go for cultivation instead of developing backward and forward linkages with farmers through contract farming?

The tea industry in India has a legacy of corporate farming right from the days of British rule. In fact, tea was the first agro commodity to come under corporate farming. It could have been a success story for corporate farming with all incentives given to it for both production and exports, but expectations have been belied.

The domestic tea industry says that the current situation has arisen due to US military action in Afghanistan and liberalisation in the Russian tea market. Such an excuse for bad performance sounds ridiculous. The fact is that the Indian tea industry has not been globally competitive. It has concentrated more on building up its large estates and has given less attention to processing and improving the quality by proper blends.

It is high time the tea companies sold out their large estates to farmers for cultivation. If the government disinvest its equities in public sector undertakings (PSUs) for ensuring more competitiveness, why can’t the tea companies sell estates to farmers for making the industry viable? This would help the companies reduce production costs. In return, the companies should enter into contract with farmers by giving them technical knowhow and marketing support and all that is needed for backward and forward linkages. This way the farmer will be able to do his job better in a cost-effective manner. Indian farmers have done wonders by ushering in the Green Revolution and ensuring food security. They can do the same in the tea sector through proper production planning. But are the tea companies prepared to part with their estates and stop behaving like feudal lords?

Ideally, the Tea Board should be brought under the purview of the agriculture ministry for getting technical support from institutions like the Indian Council of Agricultural Research and other bodies attached to the ministry. This can render more support for tea cultivation.

A study done by the United Nations Food and Agriculture Organisation (FAO) has suggested the need for reducing the unit cost of production through productivity gains, capacity building of small growers, streamlining marketing channels, improving infrastructure, tailoring marketing activities to individual country’s demand, propagating health benefits of tea and promotion organic tea using the Tea Mark. This is exactly what the domestic tea companies should do.

The FAO has estimated that India’s tea exports in the combined two years 2000 and 2001 is likely to fall by 9.5 per cent. In its medium-term outlook, FAO has cautioned that exports of black tea by India is likely to fall to 1.51 lakh tonne by 2010 from 1.98 lakh tonne in 2000, indicating a decline of 2.4 per cent in 2000-01. This is despite the estimated over 1 per cent increase in annual global export growth rate in this period.

The Tea Board chairman, Naba Kumar Das, has stated that India’s tea exports in the current year are likely to fall to 195 million kg from 206 million kg in 2000-01. He said the ongoing war would have an impact on the movement of cargo. Already traders in Pakistan have advised their counterparts elsewhere to withhold shipments. He said India had planned to double its exports to Pakistan to 7 million kg, but the situation in Afghanistan may disrupt the plan. Mr Das said India used to export about 85 million kg of packaged tea to Russia.
But now, with the entry of multinationals like Unilever, Russia is processing tea and their imports of packaged tea has fallen.

The FAO report said in 2001, India’s tea output is to increase by 4 per cent . The global output of tea is also slated to increase by 2 per cent. This would weaken tea prices. Other factors that may influence global prices include the implementation of the bilateral free trade agreement between India and Sri Lanka, which was reached in March 2000. Import data indicate a more than doubling of exports to India since 1998. China, too, may lift price controls on tea sales as part of its bid to join the WTO. Little impact is expected in the short-term if China grants this concession. However in the longer term the impact can be significant.