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Tea Board's cup of woes

Print edition : Dec 20, 2002 T+T-

Faced with a slump in the domestic market, the tea industry looks to recapture exports, particularly in Russia, through brand-building and quality checks, besides revamping the auction system.

WHEN the internationally reputed consultancy firm Accenture was surveying the Russian market for Indian tea, a senior Tea Board official had occasion to visit a Russian household. To his surprise, he was served Sri Lankan tea. Why not Indian tea, he asked. The family replied that though they themselves drank Indian tea, they served guests the Sri Lankan variety as they considered it to be of better quality. The official narrated this anecdote to a group of reporters in Kolkata on condition of anonymity to indicate that quality was a factor in the decline in Russian import of Indian tea. It is a problem Indian tea faces in most other world markets, too.

Unscrupulous exporters, restrictions on exports, and the stress on mass production under the `1,000 million kg production plan' pursued until the mid-1990s, have all contributed to the fall of Indian tea in the preference of international consumers.

The good news is that agencies connected with the tea trade and industry are finally taking concrete steps to overcome the problems plaguing the Rs.6,000-crore industry. Tea prices have been on a steady downswing since 1998, when they peaked. Auction sales, including domestic and export markets, show that prices have come down from the average of Rs.76.43 a kg in 1998 to Rs.61.71 in 2000 and Rs.61.66 in 2001. The medium varieties were hit the most; they were sold at 25 to 40 per cent discount. The prime varieties, however, fetched decent prices.

The export situation is far worse. In rupee terms, exports declined by around 30 per cent, from Rs.2,309 crores in 1998 to Rs.1,604 crores in 2001. The decline in the value of exports - to an average of Rs.89.24 a kg from Rs.109.80 a kg in 1998 - was more than that in the domestic market. However, in the hope of better days to come, producers did not cut down production, which was 853 million kg last year. As a result for the last one and a half years, a large number of gardens have been operating substantially below production cost. This has led to a number of closures and has put lakhs of jobs at stake. The tea industry, considered to be the second-highest employer in the country - the railways being the first - has a total permanent workforce of over one million. An additional one million people depend on it indirectly.

While working out a crisis management strategy in end-2000, the Tea Board, taking its cue from earlier studies conducted by Price WaterhouseCoopers and various committees of the industry itself, sensed faults in the basics of the tea trade. It assigned the consultancy firm A.F. Fergusons to study the primary marketing of tea in India and the system of auctions, and Accenture to recommend a medium-term export strategy.

The Fergusons Report opened a can of worms. It brought out the deficiencies in the existing auction system and showed where it lacked vis-a-vis Sri Lanka and Kenya. Following the Fergusons recommendations, in September this year the Tea Board sought the Union Commerce Ministry's approval to implement a host of measures. On the top of the new agenda is the routing of most of the tea trade through auction centres and the revamping of auction norms. For this purpose, the Board favours compulsory sale of tea through auctions, much in the line with the provisions of the erstwhile Tea Marketing Control Order (TMCO), and allowing private parties to set up auction centres. To make the entire sale process more accountable, the Board has proposed the registration of buyers. In other words, producers can sell only to a registered buyer.

Insofar as auction norms are concerned, the Board wants the existing system of price discovery through multiple upward bidding by voice to be replaced by electronic bidding, allowing only one bid per lot per buyer. The identity of the buyer will not be revealed so as to protect the interests of the smaller buyers. Other suggestions include reducing the printing time, that is, the time taken from arrival to sale in auctions. By introducing these changes, the Board hopes to bring about a certain level of accountability among the buyers, and thereby clip the wings of unscrupulous traders.

To safeguard the interests of the sellers, a system of buyers depositing caution money is also being contemplated. The measures are also expected to get rid of unethical practices such as misuse of the samples that the sellers offer to the buyers, and the sharing and fragmentation of lots. The main idea is to ease out non-serious buyers from the auction centres. Measures are also being considered to resolve issues such as non-payment of dues by sellers to warehouses. According to highly placed sources in the industry, these changes will undoubtedly strengthen the auction system and eliminate corrupt practices to a large extent.

THE Reserve Bank of India has also set up a working group to look into the problems of the tea industry. Its recommendation for relief include: lowering of interest rates, conversion of seasonal deficits into term loans, rescheduling the repayment of existing term loans, and extension of time to liquidate working capital dues of the previous season. The working group is of the opinion that a lower interest rate at this moment of crisis can make tea companies competitive.

Structural changes are also being implemented with regard to overseas trade. Until the 1960s, tea in India was an export-oriented industry, with 60 per cent of the produce going out of the country. However, with the domestic market increasing by leaps and bounds, by the mid-1990s exports fell to 25 per cent. India lost its market to established competitors Kenya and Sri Lanka. However, the domestic market did not grow fast enough to cover the excess production or to pay as much as the erstwhile Soviet Union did. The market in the United Kingdom, which was a major importer from India, was lost to Kenya as its tea was considered better suited for use in tea bags, which had become popular. India is also losing its market in Egypt to Kenya. Both Kenya and Egypt come under the Common Market for Eastern and Southern Africa (COMESA), which allows massive import duty concessions to member-countries. As a result, Egypt gets Kenyan tea at 3 per cent import duty, while Indian tea attracts 30 per cent import duty. "Our cost of production has gone up compared with other countries. Bushes in Kenya and Sri Lanka are younger, with higher productivity. They can give the same kind of tea at a cheaper price," said a high-level source in the industry.

In its attempt to tap the export market, the Tea Board assigned Accenture to chalk out a strategy. In its report, submitted in December last year, Accenture recommended a medium-term strategy of export expansion and consolidation of the existing markets, and a major thrust on improving quality. The consultancy firm has also been appointed to implement its recommendations, and will work in coordination with 10 industry task forces set up by the Tea Board. The Accenture report stressed the need to promote a single logo for Indian tea to stand for the country of origin, quality and other specific attributes. It suggested a target expenditure of at least Rs.30 crores annually over the next five years over logo promotion.

Market portfolio diversification is also considered essential to improve the dwindling export market for Indian tea. Apart from Kenya and Sri Lanka, which are considerably ahead of India in exports, Accenture has identified Indonesia, Malawi and Vietnam as emerging competitors to India's export market. India also faces a threat, though to a lesser degree, from Argentina, China, Bangladesh, Rwanda and Burundi. The export target has been set at 270 million kg and among the potential foreign markets that have been identified are Saudi Arabia, Pakistan, Iraq and Egypt. The major bulk of exports is still expected to be to Russia, with a target of 102 million kg in 2006.

Between October 2002 and February 2003, the Tea Board plans to invest Rs.8 crores for the generic promotion of Indian tea in Russia. Of this amount, Rs.5 crores is expected to be spent by the end of this year. A large part of the money will be spent in promoting Indian brands through the print and audio-visual media. The advertising house HTA has been assigned the job. Exports to Russia in the first half of this year were 14 million kg lower than the 34.93 million kg exported in the same period last year. In the next three years, the Tea Board along with the Government of India plans to invest Rs.50 crores to promote Indian tea in the Commonwealth of Independent States (CIS) countries.

Unlike its main competitor Sri Lanka, India does not have any powerful brand to support its promotion drive in the foreign market. The established Sri Lankan brand, Dilmah, is popular not just in Russia but in other markets of the world where Indian tea has not made its presence felt. The last time an Indian brand was promoted, though unsuccessfully, was the Nargis packet tea through Project India Blend Ltd., promoted by Tata Tea, Williamson Magor, Goodricke and Rossel industries.

To win back the confidence of Russian consumers, Accenture has identified the need to revitalise the image of Indian tea in that market. The Government of India has sanctioned Rs.6 crores as market accessibility fund and, according to the Tea Board Chairman, has allotted Rs.4 crores to the Board for promotional activities. The campaign will include developing an Indian tea logo and making six Indian brands acceptable in the Russian market. Further, an inspection agency will be appointed to keep a quality check on the tea that is exported.