The Hindu Business Line : `Road ahead for tea industry is not smooth'

THOUGH there has been some improvement in tea exports since October 2003, the future of the industry does not look bright for various reasons. Added to this, imports of tea for re-export and domestic consumption also seems to have its impact.

Imports will create additional pressure on supply position in the domestic market, says Mr B.B. Medaiah, President of UPASI, in an interview with the Business Line. Excerpts:

What is your assessment of the tea exports during the current year?

There is a noteworthy improvement in country's tea export during the current year. Tea export during January-May was 60.6 million kg compared with 48.2 million same period last year.

In fact, the increasing trend in tea exports was noted since October 2003. Importantly, the performance of South India on the export front has been remarkable. Tea export from the region was higher by 12.3 mkg compared with North India, where the quantum of tea exported was higher only by 0.15 mkg.

Turnaround in export performance could partly be attributed to improvement in exports to UAE, the UK and Iraq, though export to CIS was lower.

Another important factor for better export performance has been the increase in exports to markets such as Pakistan, Kenya, Australia, etc.

I believe that if we can sustain this trend, it will not only help us in diversifying our export market portfolio but also improve our global competitiveness in the long run.

How is the tea trade world over and where do we stand now?

Looking at world tea trade, invariably all major tea producing countries reported explicit improvement in their export performance during 2004.

The available information on world tea exports for 2004 indicates an increase of around 42.6 mkg compared with the corresponding period a year ago. The countries that reported higher exports include Kenya, Sri Lanka, India, Argentina and Bangladesh. This trend obviously hints at an increase in world demand for tea.

What are the constraints, which impede growth in export of tea?

India is now fourth in the row after Sri Lanka, Kenya and China, with a world export share of around 12 per cent in 2003. The problem with Indian exports is the highly concentrated market portfolio or rather heavy dependence on CIS. In the light of economic recovery in Russia, there is a considerable shift noted in the consumption/buying pattern favouring orthodox tea. Sri Lanka has taken advantage of the changed consumption/buying pattern in Russia and is increasingly establishing its foothold in that market. On the other hand, the Russian market is price driven in the CTC segment, where cheaper teas from rivals like China and Vietnam are edging out Indian teas. Moreover, logistical advantages favour these countries vis-à-vis India.

How do you think, we can overcome the hurdles and raise exports?

In this era of globalisation, the buzzword is competition and the bottom line is competitiveness. The key strategy should be to augment our competitive strength in the supply/value chain, production, processing or manufacturing and marketing. I also feel that we should address our product mix, which is skewed in favour of CTC teas whereas the global demand is for orthodox teas.

Considering the additional cost involved in switching over to orthodox production, we had requested the Government to consider an incentive package for the entire orthodox production and not just for incremental production, so that producers can work out a strategic and integrated plan for production and export. An additional incentive was also sought for export of orthodox teas, which should be available both for merchant-exporters and direct export by producers.

What is the present condition of tea plantation industry in India in general and South India in particular? Is there any scope for recovery?

The downturn in tea industry that started four years ago, reached alarming proportions in 2003.

South Indian auction price during 2003 was just Rs 40.28 kg compared to Rs 41.62 a kg in the previous year.

The magnitude of the crisis is stunning if one compares the price realisation with the cost of production.

The average tea price in estate sector in South India during 2003 was only Rs 45.50 a kg, whereas the average cost of production was estimated around Rs 63 a kg.

Some firming up tendency on tea prices was noted since April 2004, but it is still early to vouch for any optimism.

The reason for the improvement in prices could be the increase in exports since October 2003 coupled with shortfall in the domestic production.

Do you think acquisition and merger and/or FDI into this sector could save this sector?

According to me, FDI in tea plantation and manufacturing would enable stronger linkages between plantations in India and tea marketers outside the country, providing avenues for sustainable exports.

It also provides an exit option to players who have been adversely affected with the difficult conditions prevailing.

But to my knowledge, not a rupee of FDI has been attracted to this industry, though FDI was thrown open nearly three years ago.

This indicates that the road ahead for tea industry is not rosy, unless the industry drastically reduces the cost and improves its competitiveness.

It is alleged that inferior quality tea is imported from SAARC countries without paying import duty and sold in the domestic market. Has it affected the domestic price?

If one looks at quantity imported from Sri Lanka under the bilateral agreement, the quantity imported is rather insignificant.

Having said this, let me also add imports of tea into India has increased substantially since the removal of quantitative restriction in April 2001.

Tea imports have increased to 22 mkg in 2002. Though tea import during 2003 was lower at 6.8 mkg, the current year trend indicates that we will be back to square one on the import front.

Another disconcerting fact is the low unit price at which certain countries imports tea, for instance Vietnam's unit price of tea imports into India during January-March 2004 was just Rs 26.88 per kg.

Imports for re-exports has two implications: First re-exporting sub-standard teas in the guise of Indian tea would tarnish the image of Indian teas.

Secondly, import for re-export would result in additional pressure on supply position in the domestic market, as otherwise this tea could have been exported.