India is one of the largest tea producers in the world, yet it suffers from very high costs of production. And that’s a drag on the Indian tea industry, which is trying hard to achieve newer highs in exports. The Dollar Business spoke with Santosh Kumar Sarangi, Chairman, Tea Board, on what the Board is doing to improve the situation and make the industry globally competitive.

Interview by Manisha Choudhari | April 2016 Issue | The Dollar Business

TDB: Please give us a brief overview of India’s tea exports. What role has Tea Board been entrusted with?

Santosh Kumar Sarangi (SKS): During FY2014-15, India produced 1,197 million kg of tea and registered a negative growth of 0.96%, which is modest and can be attributed to seasonal fluctuations. Out of this, about 78% was consumed domestically.

On the exports front, there was a decline in volume and unit price earning as compared to FY2013-14. Overall, 199 million kg of tea was exported at an aggregate value of $626 million, showing an overall decline of 27 million kg in export volume and $121 million in export value. During the April-September period of FY2015-16, as compared to the same period in FY2014-15, exports of tea went up by about 6% – from 93 million kg to 99 million kg. This positive growth in half-yearly exports can be attributed to the reversal in declining demand trend in all key markets such as Iran, Russia, USA, UAE, Pakistan during April-September 2015 period.

One of the primary functions of the Tea Board is to carry out promotional activities aimed at improving the demand for high-value Indian tea in international markets with high unit price realisation from exports. Promotional measures have been sustained to communicate the niceties of single-origin Indian tea to global customers. Focussed attention is given to select countries, where there is higher potential for increasing exports. Indian exporters are also provided with all possible support to encourage exports and marketing of Indian brands abroad.

TDB: What measures are taken to ensure that the quality of Indian tea meets global standards?

SKS: Ministry of Commerce & Industry, with Tea Board as the regulatory body, maintains the quality standard of Indian tea by monitoring and facilitating various control orders under the Tea Act.

In fact, we recently issued a comprehensive set of guidelines for safe usage of pesticides, also known as plant protection formulations (PPFs), in tea plantations under Plant Protection Code (PPC) for the Indian tea industry. The Board has developed this PPC, for effective use of PPFs, in consultation with tea research institutes and the industry.

The PPC deals with safe usage of PPFs, along with methodologies to be followed to reduce pesticide residues in tea. The PPC encourages tea growers to critically review and monitor the use of PPFs, reduce its use wherever possible and apply them in the safest way possible. The present version of PPC approves the usage of 35 formulations of pesticide permitted by the Central Insecticide Board & Registration Committee (CIBRC) in tea plantations across India.

Tea Board of India has also launched ‘Trustea’, a programme which aims to sustainably transform the Indian tea industry. A Trustea verified unit will not use any pesticides that have been banned by the central and state governments, or their affiliated bodies. This programme aims to transform 500 million kg, or 51% of Indian tea, spread over 300,000 hectares by 2017. Trustea initiative will also support the certification of 40,000 small estate holders who produce about 25% of Indian tea.

Furthermore, tea research institutes have been advised to monitor the use of PPFs in tea plantations, and generate residue and bio-efficacy data which are submitted to both national (CIBRC, FSSAI) and international (Codex, JMPR, FAO) regulatory bodies on a continuous basis for the fixation of MRLs (maximum residue levels).

In fact, the Indian tea industry is constantly taking steps to make tea cultivation more sustainable and reduce its reliance on synthetic plant protection formulations, and to ensure that Indian tea continues to meet the high standards expected by both domestic consumers and international importers.

Tea Board has also constituted two tea councils for monitoring and ensuring the quality standard of Indian tea exported abroad. We keep constant vigil on the quality of tea produced and exported by drawing samples from different sources including warehouses, manufacturing units and markets on a regular basis to ensure their compliance to FSSAI standard or ISO 3720 standard. Utmost care is being taken by Tea Board to maintain the quality and image of Indian tea, both in domestic and global markets.

TDB: The vision of Tea Board is ‘to make India, the leading producer and supplier of quality tea in the global market’. How far are you from achieving this vision?

SKS: We are already the leading producer of black tea in the world, with 1,207 million kg of production per annum. However, when it comes to exports of tea to international markets, there are challenges. The domestic market is also expanding, a reason why India’s share of world exports has remained static over the last decade. Further, most of the tea exported is produced by large producer groups, which have high fixed and social costs, unlike other tea producing countries, such as Kenya, where 60% of the produce comes from low-cost, well-organised small tea growers. The Indian tea exports also suffer from cost disadvantage vis-à-vis other tea exporting countries, due to higher inland transportation costs and ocean freight.

TDB: What are the main challenges faced by the tea industry today?

SKS: The high cost of production of tea has been impeding the industry’s competitiveness. In the cost structure, 80% of the total cost is fixed cost, with little scope for reduction. Input costs have gone up significantly. Labour cost constitutes about 55-60% of the total production cost, as the industry bears the majority of the social cost as mandated by the Plantation Labour Act. The industry is constrained by rising cost of production, which is not adequately compensated by reasonable price realisations.

Then, a number of estates have tea bushes which are over 50 years old (comprising 37% of the total area under tea cultivation). In order to sustain viability, an annual 2% of area replanting is essential. The cost of replantation and the gestation period involved pose a challenge for every tea estate. Moreover, companies also need to undertake regular technology modernisation programmes and quality awareness initiatives for upgrading the quality of tea. Despite the availability of government incentives, the high cost of production has been discouraging sustained investments into the Indian tea industry.

There is also growing evidence of the adverse impact of climate change with long drought periods and inadequate rainfall during the tea growing season. As the tea season is slowly getting restricted to eight months, there is a negative impact on productivity and cost of production. Climate change has also led to increased pest infestations, leading to severe crop loss. Under the circumstances, the industry’s dependence on irrigation has increased phenomenally. However, the present support schemes of the government mainly cater to the needs of marginal farmers, and don’t address the issues of the organised tea producers.

Production of safe tea using good agricultural practices is also of prime importance. The industry requires pesticides that not only effectively combat the rampant pest infestations but also keep the crop fit for human consumption. In fact, harmonisation of MRLs among various tea trading countries is one of the biggest challenges being faced by the Indian tea industry, which it needs to adhere to in order to remain competitive.

Small tea growers now account for over 30% of India’s total tea production, and have a positive impact on the socio-economic landscape in far flung tea-growing areas. However, the viability of this sector is linked to the price stability of the organised sector. Due to stagnation of prices and rising costs, the sustainability of this sector is a challenge.

Finally – coming to labour problems – since more workers are now opting for work in urban areas, the tea plantations have started experiencing labour shortage during harvesting. Additionally, the industry has multiple unions. The Trade Unions Act 1926 allows only 7 workers to form a trade union in an enterprise – this legislative permissiveness has resulted in increased growth of trade unions. The multiplicity of trade unions has complicated the process of collective bargaining, as a minority union reserves the right to challenge the agreement entered into with the majority of unions before the courts, increasing litigation and over-burdening the adjudication machinery. Recognition of the bargaining agent is, therefore, necessary to streamline and strengthen the collective bargaining process.

TDB: What are the reasons for the recent slump in tea exports?

SKS: Exports for FY2015-16 (April-September) is at 98.69 million kg, with FOB value of Rs.1,945.84 crore, and average unit price realisation at Rs.197.17 per kg. The value realisation in dollar term stands at $302.92 million. Exports during the period increased by 5.63 million kgs and FOB value increased by Rs.81.26 crore, but value realisation in dollar terms decreased by $6.76 million. This is because the unit price realisation in dollars during the current period is $3.07 per kg, as compared to $3.33 per kg during the same period last year.

TDB: India’s tea imports are also seeing a slow but steady rise. What is the reason behind this trend?

SKS: Generally, tea is imported for re-export after blending with Indian tea, as a value addition. India allows import of tea by EOU/SEZ under zero import duty. However, tea imported for the domestic market attracts basic import duty of 100%, plus a special additional duty of 4% on basic duty as well as a surcharge.

However, a concessionary rate of 7.5% basic duty plus other normal surcharges apply to imports from Sri Lanka up to a volume of 15 million kg per calendar year under Indo-Sri Lanka FTA.

TDB: Since FY2010, overall tea production volume has gone up by 21.95%. While production in North India has gone up significantly, production in South India is barely increasing. Why?

SKS: A majority of the increase comes from small tea growers sector, which is growing in North, whereas new planting isn’t really happening in the South due to limited availability of land. The increase of production in organised sector is not significant. In FY2014-15, the total tea produced in India was 1,197 million kg, out of which 20.16% came from South India, and 79.84% came from the North.

TDB: In the last five years, tea exports from Sri Lanka and China – the two biggest exporters of tea – have increased by 17.74% and 62.3% respectively, while India’s tea exports growth has been erratic. What do Sri Lanka and China have that we don’t?

SKS: The marketing of Indian tea in export markets has started gaining momentum only over the last two decades. Moreover, there are others factors that put India at a great disadvantage in comparison to the two major tea exporting countries viz. Kenya and Sri Lanka, which have little domestic demand for their produce. India is pre-dominantly a CTC (crush, tear, curl) tea manufacturer, while demand trend in international markets is primarily geared toward orthodox tea and green tea. There is also low export focus by the industry due to large domestic market size, which is growing at a healthy rate. Furthermore, unlike competing countries, 74% of Indian tea industry comprises large producers with a high-cost structure against the well-organised, low-cost, high quality small-holder sectors in Kenya, Sri Lanka, Vietnam, Indonesia, and Malawi. Additionally, unlike these countries, it’s not a year-round harvest in India but in 5-6 flushes.

Quality of the produce also depends on the agro-climatic conditions, resulting in inconsistency in quality across the country, unlike Kenya, which has no climate-induced variations in quality due to its geographical location. As mentioned earlier, we face higher inland transport costs compared to other competing countries. 75% of the tea is cultivated far away from the ports – from production or processing regions to auction centers, an exporter faces two types of challenges i.e. sourcing of quality tea and damage or pilferage during transportation. And from auction centers to the port, he incurs warehousing cost and port charges. The geographical location of the major ports is also such that the mother vessel cannot reach these ports. So, there is a long lead time before the consignment is actually shipped out of the country. This also means additional cost for exporters.

Increasing exports in value terms – both high-value tea as well as tea in value-added form – is an important challenge to face during the 12th Plan period. Instead of merely chasing volumes without giving any thought to product mix our planning should be in sync with consumer requirements in key export markets. For instance, as per the latest trend in the international market, at an aggregate level, while shares of CTC and orthodox teas in the global tea market have declined over the last decade, green tea’s share has increased substantially.

Keeping in view the said objectives, a comprehensive export strategy, encompassing added focus on creation of common facilities and sustained promotion in the focused markets, has been envisaged for implementation. The objective is to improve greatly on export volumes and unit price realisation during the coming decade.