Covid-19 impact: Planting seeds of hope

Published: July 1, 2020 3:25 AM

Since plantations may not be able to cope till prices recover, an impending crisis could explode, unless averted through an emergency policy.

Evidence is mounting that crisis will last much longer than a few months, and careful calibration of policies—fiscal, monetary and labour market—is required to contain the economic fallout.Evidence is mounting that crisis will last much longer than a few months, and careful calibration of policies—fiscal, monetary and labour market—is required to contain the economic fallout.

By Sivaramakrishna Sarma, Lekha Chakraborty & Vidya B Ramji

Extraordinary times require extraordinary policy responses. Fiscal stimulus measures have been announced to mitigate the economic disruptions from Covid-19. However, these were neither targeted nor sector-specific. Though Kerala has received international acclaim for “flattening the curve”, the clarion call for “unlock, unlock, unlock” has opened up the sector-specific challenges. The plantation sector in the state, though the second-highest provider of employment, is on the verge of a crisis and needs an urgent emergency policy response. Evidence is mounting that crisis will last much longer than a few months, and careful calibration of policies—fiscal, monetary and labour market—is required to contain the economic fallout.

What determines the competitiveness of this sector? Do “macro-fiscal policy determinants” affect the sector more than the “sector-specific production costs”? An analysis shows that it is not the macro-fiscal variables—especially taxation policies—that affect the competitiveness of the plantation sector; rather, it is the firm-specific “cost” determinants. To put this in perspective, prior to one of the major recommendations by the Raja Chelliah-led Tax Reforms Committee (that no direct tax rate should exceed the central income tax rate), the agricultural income tax (AIT), at 50 %, was a major impediment to capital investment. In 2018, AIT on plantations was abolished. This was arguably a big relief. However, for a sector plagued by rising production costs, adverse price competitiveness and burgeoning imports, these fiscal reforms alone have not been sufficient to restore profitability.

Ideally, an emergency package that is sector-specific should contain three components—the measures to deal with the economic costs; social security measures; social infrastructure and public service provisioning. Recent estimates show that in the plantation sector, the labour cost is the most significant component, at around 70%. This is mainly brought about by a high daily wage in Kerala which is, at `800, double that of other states. Thus, Kerala workers have out-priced themselves in the labour market. Further, a high degree of unionisation prevents movement of inter-state migrant labour into the sector. A “benchmarking of labour costs” is essential to ensure a level playing ground within the various states in the country. More importantly, targeted labour market reforms are an effective solution to the impending crisis.

What is required is not a reduction in wages in “absolute terms”, but an increase in productivity-linkage in the wage structure. A restructuring of the fringe benefits under the Plantation Labour Act, 1952, will have a significant impact. Under Payment of Bonus Act (1965), payout of minimum 8.33% bonus may be exempted by the government by taking into consideration relevant circumstances such as a pandemic. Thus, abeyance of bonus payments that can be given after a certain period can go a long way in assuaging the problems faced by this sector.

A staggered payment of 12% employer-employee contribution of EPF can provide additional ease to the liquidity constraints. The rationale for this abeyance—provision for which already exists in the EPF Act—is that the employer will save 12%. Simultaneously, the employee will get 12% additional take-home pay, which can stimulate demand. However, the Covid policy response was that the government, for 3-4 months, would remit EPF contributions for units employing less than 100 persons. However, for the units employing more than 100 people, the 12% contribution has been reduced to 10%, which really does not offer much relief. The wage component in plantations also includes a cost-of-living-based DA structure, which is revised regularly, through Plantation Labour Committee meetings.

During the period 2012-20, two tripartite settlements increased the wages by 20% and 23%, respectively. After incorporating the increase in DA, the rise in wages is about 50-55% without any corresponding increase in productivity. These two wage increases have been implemented despite a steep downward spiral in commodity prices, which is a matter of serious concern for the viability of a plantation.

With the removal of tariff and non-tariff barriers, the production has been exposed to increased international competition, fluctuating and downward trending prices. During the last decade, imports have increased by over 200%, domestic consumption has increased by 30%, whereas production has decreased by 25%. With the burgeoning domestic market, the potential for natural rubber is huge. However, the sector is not in a position to take advantage. The subsidy for planting in other major rubber producing countries in South East Asia covers a higher proportion of the total cost than in India. This differential adversely affects the competitiveness of Indian producers. Therefore, import duties and FTA need a revisit. A major portion (50.2%) of natural rubber (NR) in India is consumed by the automotive/aviation large tyre sector for which NR is indispensable. Such substitution projects reserved for domestic producers would also generate CERs (Certified Emission Reduction) and can ensure a captive market with financial security.

Furthermore, strengthening and reforming Price Stabilisation Fund can assist, if prices fall below a threshold level. Declining yield, despite an increase in the tapped area by over 35%, from 2008-09, is a major concern. The age of the plant has a crucial bearing on the yield. Hence, timely replanting will sustain productivity. Subsidy for replanting, being paid ex-post should cover the cost of interest on investment and not just the capital. It should also be based on the number of trees planted, rather than per hectare.

Under Plantation Labour Act (PLA), the planters have to provide welfare for workers through housing units, education facilities for workers’ children, health care facilities, drinking water and sanitation. The government should adopt NREGP for providing standardised modern housing facilities in a staggered manner jointly with the planters. This should be treated on par with the creation of social assets, and should not coincide with peak work seasons.

To sum up, ideally, when there is a prolonged period of non-tapping or no work due to coronavirus pandemic, the product prices should have risen. But on the contrary, the prices have declined. There is much uncertainty and pressure on the price of domestic natural rubber, and the industry does not foresee an upswing in the immediate future. Since plantations may not be able to cope till prices recover, an impending crisis could explode, unless averted through an emergency policy.

Sarma is CEO, The Travancore Rubber & Tea Co. Ltd, Chakraborty is professor, NIPFP and Ramji is senior public finance consultant, KRAN Consulting. Views are personal

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