India’s tea industry needs policy liberalization for rejuvenation

The current tea auction model, which forces transportation of tea to a limited number of tea auction centres and subjects each lot to numerous cumbersome processes, has also outlived its utility.
The current tea auction model, which forces transportation of tea to a limited number of tea auction centres and subjects each lot to numerous cumbersome processes, has also outlived its utility.


Supply-side restrictions need to be cast aside and demand needs stimulation for this industry to grow and fulfil its potential

The Indian tea industry is big. It is the second-largest producer of tea in the world (with more than 1.3 million tonnes of tea production annually) and the third-largest exporter (earning about $1 billion a year). But despite consuming about 85% of its tea domestically, India’s per capita tea consumption, at around 800gm per year, is among the world’s lowest.

India has grown tea for more than 180 years, but is not the oldest tea producer globally. It was Chinese tea sold in Britain’s American colonies that had created the 1773 storm in a teacup known as the Boston Tea Party, which contributed to US independence. India is also not a producer of newer categories of tea, like the Kenyan yellow tea that is becoming a new craze.

The government has encouraged small tea growers (STGs), who number a little over 200,000 and have an average tea-growing area of about 2 acres, with promotional schemes and incentives. Consequently, India’s tea production has grown at about 4% per annum in the last 15 years. However, as tea consumption has grown by less than 2.5% per annum during this period and exports are static, the tea industry has encountered downward price pressures.

The number and acreage of large regulated tea growers (RTGs), with a count of about 230 in all, have remained static or declined. From 60%, the market share of RTGs has come down to less than 50% now.

The Indian tea industry, in general, is in a spot of bother; RTGs, especially.

Reforms imperative: There are four major reform imperatives to sustain the Indian tea industry and make it flourish.

The highly-regulated RTG tea-estate model is anachronistic. The statutory requirement to provide labour housing, schooling and numerous other facilities on the estate itself is neither necessary nor economical, as all villages and habitations are now connected with all-weather roads and there is good public schooling, health and other facilities available everywhere.

The current tea auction model, which forces transportation of tea to a limited number of tea auction centres and subjects each lot to numerous cumbersome processes, has also outlived its utility. Besides wasting time, it unnecessarily adds about 7-10 per kg of cost to the tea sold. Still, it generates large unsold odd-lots. In any case, only about 40% of the tea gets sold through tea auctions.

There is also a tremendous lack of standardization and classification of tea in India. There are reportedly about 800 types of tea manufactured or sold in India, whereas the industry estimates that there are essentially only about 25-30 major tea varieties.

More than supply, it is demand that needs our attention. Tea needs to be promoted as a good health drink.

Certain ideas are simply not workable: Some tea industry interests have proposed making it mandatory to sell 100% of the tea through auctions and providing a minimum floor price guarantee for all tea produced at cost plus a 50% profit margin.

The idea of cost plus 50% profit is borrowed from the system of minimum support prices (MSP) for foodgrains. The MSP system, however, works only in the case of bulk commodities such as rice; that too, only when there is assured procurement by the government. The market price for the foodgrains procured rarely equals their MSPs. The cost plus 50% profit system will never work in the tea industry with no government procurement and the prevalence of price differentials of 5-10 times for different varieties.

Similarly, the idea to mandate 100% tea sales through the country’s limited auction-houses is completely impractical and unworkable. This will only burden the entire tea industry with unnecessary costs and single-handedly make Indian tea globally uncompetitive.

The right solution: This involves addressing reform imperatives. It is high time that the Indian Tea Act 1954 is transformed into a developmental and facilitative legislation from a regulatory one. All the mandates (compulsory labour housing and provision of other facilities, 50% mandatory sales through tea auction houses, etc.) simply need to be done away with.

The Tea Board should be converted into a consumption and export promotion body with no regulatory authority. Existing tea auction houses can be converted into industry-managed voluntary tea auction centres, where interested tea producers may sell their tea voluntarily on payment of a fee.

The new Tea Act should give birth to agencies tasked with the development and codification of standards for the tea industry along the lines of the Indian Standards Institution (ISI) and promotion and certification on the lines of the Agricultural and Processed Food Products Export Development Authority (APEDA).

Indian tea, in standard market lots, should be allowed to be freely sold through any of the marketing channels available in the world today—direct sale, e-commerce, tea auction houses, commodity exchanges or others.

This much-needed liberalization can ensure that the Indian tea industry grows well, tea-estate workers benefit from higher volumes, productivity and prices, and the country is able to establish itself as the tea producer of the world.

Subhash Chandra Garg is chief policy advisor at Subhanjali and former finance secretary, Government of India

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