Post-crisis rejuvenation for Indian tea

• India is one of the world’s largest producers, exporters and consumers of tea, but the sector has been facing sustainability issues of late. 
• While tea players were already grappling with challenges like stiff competition from countries like Sri Lanka and China, impact of climate change, rise in input costs and a nominal rise in international tea prices, COVID-19 has further enhanced the risks to players.
• On the demand side key markets for Indian tea are reeling under the economic repercussions of the pandemic. On the supply side, the lockdown has seriously compromised the quality of unpruned tea leaves as well as supply chain.
• Allowing dispatch of packed tea, movement of inputs, rethinking trade treaties and pooling resources for international tea promotion can help mitigate this brewing crisis.

Tea Plantation

All over the world, India has garnered a robust reputation as a provider of a wide variety of niche quality teas, including Assam, Darjeeling, Nilgiris, Sikkim and Kangra. Exporting 248.29 million kg of tea valued at Rs 5,610.65 crore during 2019 to over 30 nations of the world, the sector contributes 31% to global tea production.

The tea industry’s contribution to the Indian economy, too cannot be overstated. Offering direct employment to 1.2 million people and supporting more than 3 million dependents of tea garden workers, tea has been an important plantation crop for the country. However, the industry has been facing a spate of challenges of late, heightened by the outbreak of COVID-19.

Dual challenge of supply glut and high costs

The early signs of worry started to appear last year itself. A major problem that affected the sector was that supply of the tea leaf was exceeding the demand. This supply glut resulted in depressed prices for the drink, thereby impacting tea companies’ balance sheets. Besides these overall soft prices, India’s cost of tea production is among the highest in the world as it bears a lot of social welfare costs, apart from high transportation costs. According to industry insiders, in the last 6 years, production cost has increased at a CAGR of 10%, with the cost of labour accounting for 65-70% of the total cost of production. In addition, costs of inputs such as fertilizers, gas, coal, etc. have escalated as well over the years.

Further, the country’s organized tea sector has been facing stiff competition from small tea growers (STG) and bought leaf factories (BLF), whose share in the industry spiraled from about 20-25% to 50% approximately over the last decade. BLFs manufacture the leaves procured from STGs, at a cost which is nearly ₹80-₹90 a kg lower than that of the organized tea industry. This is owing to the fact that BLFs do not have to bear any social costs and only pay for machinery and labour.

Another issue that has been plaguing the Indian tea industry is the existence of high proportion of ageing tea bushes. This is effective for the purposes of quality control & improving productivity per hectare. Ideally, the age of tea bushes that is required for good yield of crops is 5 to 40 years. However, except in Darjeeling, around 70% of Indian tea bushes, on an average, are between 50 to 70 years old. This impacts both productivity as well as quality. What impedes the re-plantation exercise is the high cost of re-plantation, coupled with the time taken to undertake this exercise (5 years in the case of Assam).

Perplexing pandemic pandemonium

The onset of Covid-19 in India has led to a ballooning of problems for this centuries old labour- and capital-intensive industry. On one end, there has been a dip in demand for Indian tea in all major export destinations such as Commonwealth of Independent States countries, United States, Germany, United Kingdom, United Arab Emirates, Egypt, Iran, Russia, Pakistan and China. The proliferation of this health exigency is a major reason for this.

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International boundaries of all European countries and more than 100 other countries across the globe have been sealed to arrest the further spread of coronavirus. The International Monetary Fund has hinted at a sharp decline of consumption all over the world as more and more countries come in the clutches of this disease and the associated economic carnage caused by lockdowns. One consequence of this will be curtailing imports of consumer goods from developing countries. Indian tea exports may drop 6-8% this year owing to the Covid-19 pandemic, as per industry insiders. Further, the economy of Iran, a major export market is battered by the double whammy of ongoing sanctions and the crude oil crisis.

Cancellation of flights to affected countries means that foreign buyers cannot come and are unable to taste, select and buy tea of their choice. Premium quality tea growers are having a particularly tough time. “For the first time in over 45 years I really don’t know what’s coming, because we have never had a situation like this. For 3 months, we have not received a single order for our specialty teas,” explains Indi Khanna, founder of The Tea Studio.

COVID-19 has taken a toll on domestic consumption too. Dubbed as a rich man’s disease & a poor man’s burden, Covid-19 has seriously dealt a crippling blow to Indian economy. While the World Bank projects India’s economy to contract by 3.2% in the financial year of 2020-’21; the IMF projects India’s growth rate at 1.9% & the UN slashed India’s projected growth rate to slow to 1.2% in 2020. Further, the lockdown has impacted an array of industries negatively such as travel & hospitality sector, manufacturing, aviation, manufacturing, construction, IT, financials, realty and automobiles. As economic activity came to a halt, a number of businesses stared at the prospect of closure and millions of people were rendered jobless overnight. Those who were retained by their companies saw their disposable incomes contract as companies resorted to pay cuts. Thus, the pandemic burned holes in a lot of pockets and a lot of consumers became thrifty, spending only on bare essentials.

Findings from the Federation of All India Tea Traders Association (FAITTA) reveal that tea consumption in India during the lockdown period fell around 25-30%. This has been attributed to reduced availability of the beverage and a 40% decline in out-of-home consumption at roadside tea stalls, restaurants, cafes, hotels, offices and factories. According to Viren Shah, chairman of the Federation of All India Tea Traders Association, “The average monthly domestic consumption is 90 million kg. Of this, out-of-home consumption accounts for 36 million kg. In April and May, we have lost around 72 million kg of tea consumption.” There’s also an opinion in the industry that the hike in the retail prices of tea to compensate losses will lead to further deterioration of tea consumption.

On the supply side, the lockdown has seriously compromised the quality of unpruned tea leaves, which will affect their supply. Tea estates in Assam & West Bengal were closed for production for three weeks during the lockdown until April 12, with partial workforce utilisation. These overgrown tea bushes are now being skiffed in order to resume plucking operations. However, a spate of dry spell & a consequent low soil moisture is making skiffing difficult for these workers. As far as the tea factories are concerned, the tea growers who were largely dependent on the tea factories for the sale of the raw leaves were subjected to enormous losses. The leaves could not be sent to the factories at the right time and therefore, their quality was seriously jeopardised.

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According to industry estimates, the industry suffered production loss to the tune of 140 million kgs during March, April and May. This translates to a revenue decline of more than Rs 2,100 crore, based on last year’s north India auction prices. In terms of percentage, the production is estimated to have declined by 65% for the period of March and April and by 50% during May.

Further, owing to the pan-Indian lockdown and the consequent logistical barriers, the industry has been impacted by the challenges like difficulty in procuring raw materials. This has consequently inflated their cost. For example, while the cost of urea is said to have risen from Rs 266 to Rs 500; is MOP is now being sold at Rs 1200, and SSP is being sold at Rs 600.

Finally, another challenge that the industry is embroiled in pertains to the tea plantation workers. The contagion will disproportionately hit and reverberate across the country’s tea ecosystem, impacting everything related to the workers such as social protection, human rights, education, and in the worse cases, basic food security and nutrition. The labour system is quite archaic and infected by historical neglect. A report by the International Finance Corporation’s independent watchdog, known as the Compliance Advisor Ombudsman (2016), established a correlation between poor living conditions and workers’ susceptibility to disease. In other words, the study shed light on their susceptibility to diseases like anemia and infectious diseases, including tuberculosis and respiratory illness owing to poor personal and household hygiene, unsatisfactory sanitation and housing, and the absence of functioning toilets. Thus, COVID-19 threatens to exacerbate the health conditions of an already vulnerable population having compromised immune systems. These workers could prove to be the next big carriers of the disease in the country.

A post-pandemic eventuality:

The industry needs a structured strategy to cope up with the challenges that the sector is grappling with. According to the media reports, India announced it would distribute US$ 600,000 in subsidies to 1,344 tea ventures, including 1,091 small tea growers. Further, the the Tea Board of India is trying to increase domestic consumption.

Measures to ease access to working capital and credit, apart from relief in input costs will help the industry tide over the immediate impact. The lockdown severely impacted the ability of companies to deliver consignments, leaving an inventory backlog. It is necessary that this stock be cleared at the earliest to raise cash as well as ensure that the dispatches are as fresh as possible. Further, the country should also think about unilateral and bilateral agreements to secure the tea revenue with its major tea partners in the financial year 2020-21.

Further, the industry should also explore new ways of doing business. Kaushal Dugar, founder and CEO of Teabox, explains:

“Right now, a lot of people come to the country, taste the tea and buy it once everything is confirmed and ship it. This process entails the physical touch, feel and taste of the product. We’re selling B2C to the consumers; there’s no reason why the industry together could come together to create a platform where they get an opportunity to sell the product directly to buyers outside the country too.”

Pooling of resources in this manner will reduce costs and make all players stakeholders in boosting the brand equity of Indian tea. This will help target customers better appreciate the premium nature of the product, as well as the orientation of Indian tea companies towards promoting welfare of workers, whose efforts are pivotal in the delivery of the final product – an exquisite cup of Indian tea. Doing so over the long term will help boost value of both packaged and bulk tea and help the industry sustain.

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