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| India Infoline Sector Database | Wed, 18-Feb-2004 17:23:16 IST (GMT+5:30) | |
| Tea | ||
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Indian scenario The world leader India is the largest producer and consumer of tea in the world. India also leads in global R&D in tea industry. India is the largest manufacturer and exporter of tea machinery. Other major tea producers (also developing nations) source equipment and technology from India. The tea plantations were started in the middle of the 19th century under the British management. The farm ownership, however, is fragmented. The listed companies account for about 40% of total tea production. Also, there are a large number of small players. Some 80% of the farms are of the size less than 8 hectares and contribute only 10% of the production. The annual per capita consumption in India is low at 650gm compared to other countries like Pakistan (950gm), Sri Lanka (1.2kg), UK (2.5kg) and Ireland (3.16kg). Industry growth The annual tea production has been around 800mn kg for the last 2 years. The tea production grew at an average annual rate of 2.3% during last four decades and at 1.4% pa in the last decade. For the first 10 months of 2000 the production has increased by 6% on yoy basis. The consumption is currently around 600mn kg. But over last one year the consumption growth has slowed down, this coupled with falling exports has led to surplus supply and falling prices in the market. Tea plantations in India are concentrated in the North-East (Upper Assam, West Bengal) and the South (Kerala, Tamil Nadu). The North-Eastern region with 82% of area accounts for 76% of total tea production. In the North East, the yield is lower but quality of tea is superior.
* Approx; E : Estimated Target Source Industry, Tea Board, CMIE
Exports to Russia: After break up of USSR the major problem confronting Indo-USSR trade was that of rupee debt repayment. The trade with Russia has been done through rupee payment since 1953 but earlier the trade used to take place through state trading corporations but after the break up and after ushering in of liberalization there was utter confusion and so the trade between the two countries got affected. In mid 1990s it was however agreed upon by two parties to make the debt repayment by 2005. Presently of the total exports to Russia major chunk comes from tea but in 1999 the tea exports to Russia declined by 17% on yoy basis. Indian trade with Russia since break up of USSR so far has been on the debt repayment funds scheme which is going to get over by 2005 this has made Indian tea 15-20% cheaper than teas from other countries. So the fundamental question confronting the industry is exports beyond 2005. Another issue confronting the industry is that of differential import duty on bulk and branded tea. customs duty on bulk tea is 5% while that on packaged tea is 20%. This differential duty has led to drop in export of quality packaged teas on which the margins are lower and also this in overall terms has led to fall in exports value Moreover this differential duty has led to surge in imports of foreign tea as well as lower quality tea in bulk form which is being packaged in Russia and is sold under Indian brand names. This has negatively impacted the image of Indian tea as a result the exports have dropped. So chances of Russia remaining biggest tea export market for India beyond 2005 is bleak. Unique Indian Darjeeling Tea India's Darjeeling Tea is unmatched in terms of its aroma and quality. However, Darjeeling gardens produce only 12mn kg. The domestic consumption is 2-3mn kg, exports are around 20mn kg (which includes non-Darjeeling tea blends). The cost of production is very high as productivity is low. Average yield in Darjeeling is only 500 kg per hectare as compared to all India average of 1700 kg. Darjeeling tea fetches a premium of 70-80% on an average. Most of Darjeeling gardens are loss making. Dooars and Nilgiri teas (some varieties) fetch high prices. Regional variations Consumers in different parts of the country have heterogeneous taste. Dust tea is very popular in the south. In the western states, good quality loose tea is preferred in Gujarat, whereas in Maharashtra, consumers provide a large market to packet as well as unbranded tea.. The eastern states of West Bengal and Orissa consume CTC broken. Among the northern states, CTC fannings is liked in Rajasthan and CTC broken in others states of the North. The Central India is predominantly a dust market. Tea production:
Source: Teaauction.com Figures for 6 months (Jan- June) in mn Kgs Government targets - neither feasible nor desirable The Government has set a target of 1bn kg of production by 2003. This would require additional land of 50,000 hectares and replantation of 200,000 hectares. Given the gestation period of 5-7 years, the target is impossible to achieve. The production growth is estimated to be 1.5-2% pa. Even if targets were achieved, it would do more harm than good to the industry. The domestic demand of 600mn kg will rise at 1.5-2% pa. Indian tea in international market will remain price uncompetitive due to high production costs. Available surplus for exports will dampen prices. Packet tea: growth after decline Tea consumption in the country grew by 4.5% pa in the mid eighties which has dropped to 2% in last 2-3 years. The entire growth was in the loose tea segment. This resulted in the share of branded tea to decline from 44% in 1970 to 25% in 1985. But since 1985 the branded tea segment too has registered good growth and its share in total tea market is currently around 37%. The decline during the period 1970-85 was due to excise differential coupled with high inflation compelling consumers to switch to loose tea. The trend changed with introduction of polyester pouch packaging by Tata Tea. The polypacks took 12% share from the loose tea market and account for almost half of the branded segment. The polypacks besides being cost effective, retain freshness and reduce lead time to reach consumers. Hindustan Lever Ltd with a market share of 45% is the leading player in the packet tea business. But overall slow down in the demand for tea has impacted the growth in branded tea segment. In 1999 the share of branded tea segment in total tea market in the country, fell to 32.5%. Taxation - an issue Income tax liability for tea companies is calculated differently. It is deemed that 60% of the pre-tax profits is agricultural income, which is taxable by the states. The remaining 40% is taxable as corporate income by the Centre. The state tax rate is higher and is around 50-70%. The corporate tax rate is 35% for domestic income and export is exempt from taxation. Also, 20% of total profit is tax exempt, provided the funds are deposited with NABARD and used for capital expenditure after a year. Tea Marketing Control order requires all the manufacturers to sell 75% of tea (excluding exports and packet sales) through auction houses. Tea is politically sensitive. Imports are not allowed for domestic consumption. CTC exports were banned for a brief period in 1977 and 1984. Global competitiveness Paradoxically, India is not globally competitive in production of tea, which is labor intensive. Competing countries like Kenya and Sri Lanka are also under-developed/developing and have comparatively lower labor cost. The labor laws are less stringent in these countries giving the producers the flexibility during bad times. In India, large capital investment, long gestation, stringent labor laws and restrictive land ownership laws prevented Indian entrepreneurs from expanding. The high average age of tea bushes effects productivity and cost adversely. Indian producers became complacent with the lucrative USSR market. Although, Indian producers have made significant progress in developing non-USSR markets during the last 4-5 years, countries like Kenya will still have a competitive advantage in increasing production and exports.
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