Guwahati, Sunday, July 30, 2006
EDITORIAL
Who has created the crisis in tea?
HN Das
A number of stakeholders of the tea industry have been badly affected by the fall in the prices at the auctions during the past few years. In 1990-91 the average auction price of tea at the Guwahati Tea Auction Centre (GTAC), which is the biggest auction centre in India, was Rs.42.16 per kg. Then it rose steadily to Rs.76.67 in 1997-98 and to a peak of Rs.79.03 in 1999-2000. It is from this price that the decline of tea prices is counted by the affected sections. Actually the average price fell to Rs.71.97 in 2000-2001, to Rs.63.17 in 2001-02, to Rs.64.04 in 2002-03 and to Rs.58.24 in 2003-04. It then rose to Rs.68.16 in 2004-05. In 2005-06 it was Rs.61.07. But in the first week of July, 2006 the weekly average rose to Rs.72.99 per kg. The movement of price over time in the other auction centres showed a similar trend. The averages
all India auction price was highest at Rs.72.80 per kg. in 1999-2000 after which it dropped to Rs.56.28 per kg. in 2003-04. Then it rose to Rs.65.50 per kg. in 2004-05. In 2005-06 there was a drop to Rs.58.67 per kg. However, during the period between 1999 and 2006 there has not been any fall at all in the retail price of tea which remained almost steady at Rs.100 to Rs.150 per kg. depending upon the quality of tea.
If at the auctions the ruling price is, say, Rs.58.24 per kg. (as in 2003-04) and the same tea is sold, say, for Rs.120 per kg. in retail the gross margin that is pocketed by the middlemen is Rs.61.76 per kg. which is a more than 100 per cent mark up on the auction price. Such a whopping mark up is not available to the middlemen of any other commodity. The middlemen in tea are the auction buyers, wholesalers and retailers. They have to incur the costs involved in transportation, marketing and other sales related operations. But by no stretch of imagination can all these together be anywhere near the Rs.61.76 per kg. mark up as shown above specially since all production costs including wages, maintenance, taxes and costs of estate and factory running as well as sale at auctions are provided from the auction price.
The biggest among the middlemen beneficiaries at GTAC are Hindusthan Lever, Tata Tea and Eveready Industries. These three companies buy 30.6 per cent, 7.2 per cent and 2.5 per cent respectively of the tea sold. They are also producers. Each own a number of tea estates in Asom and elsewhere. They are packeteers as well and each of them sell substantial quantities of branded tea. From production to auction and then to marketing and retailing they do everything. They, therefore, pocket all the margins, all the surpluses in respect of the huge quantity of tea under their control. They are the leaders of both the tea industry and the tea trade. The third big buyer, namely, Eveready, is actually a subsidiary of Williamson Maggor, one of the largest tea producers. The latter bought up Eveready with surpluses from tea industry.
Moreover the first 20 highest auction buyers at GTAC buy 58.32 per cent of the tea on offer. Naturally they have an enormous influence on the market and the price. Actually it is the market leader, Hindusthan Lever, who have a stranglehold on the market with their 30.6 percent control. Whatever price they fix no one else can challenge or better. Most of the sellers ( i.e. the tea producers ) are helpless because they cannot hold on to their stocks. If they did they would have to pay huge amounts in terms of bank interest, warehouse charges, brokers commission and other expenses. Once the tea has been catalogued and brought to the warehouses the producers do not dare to withdraw and take it elsewhere because that would involve extra transportation cost beside the costs mentioned above. So they have no alternative but to sell at whatever price is fixed by the big buyers.
This type of manipulations have caused degeneration of the auction system to some extent. However the auction system has many merits. Therefore, ever since the first consignment of Asom tea was auctioned at London in 1834 this system has been the preferred method of sale. In India we had the Tea Marketing Control Order,1984 (as amended from time to time) under which 75 per cent of the tea produced had to be compulsorily auctioned. There were exemptions in respect of packet tea, export tea, small producers tea etc. But the Order has been revoked recently. Towards the end of my 11 year tenure as Chairman of GTAC, when it had achieved the distinction of becoming the largest CTC tea auction centre in the world, I had led a delegation which met the then Union Commerce Minister, P. Chidambaram. We pleaded with him to retain the compulsory auction system. We submitted a memorandum. Earlier I had written articles in the newspapers giving potent arguments in favour of the auction system which is known for its transparency, cost effectiveness and easy transaction among the four segments of producers, warehouses, brokers and buyers. Chidambaram, however, did not agree with our views and stated that in a liberalized economy there was no place for compulsory auctions. The market should be free to determine the process of sale. He did not give any importance to the fact that in countries with whom India has to compete in export of tea such as Sri Lanka and Kenya 100 per cent of tea produced is sold by public auction. This has been the reason why Mombasa has beaten GTAC in the volume of CTC tea auctioned annually. This happened soon after I left GTAC. Colombo, of course, has always been the largest centre in respect of both CTC and Orthodox tea.
Chidambarams contention was strengthened by a section of tea producers led by the former Chairman of the Indian Tea Association, CK Dhanuka, who strongly pleaded for abolition of compulsory auction. Dhanuka had the active support of Suresh Bansal, Chairman of the Tea Association of India. But many tea producers including some big producers supported the auction system.
After the abolition of compulsory auction about half the quantity of tea is now privately sold. Such private sales generate black money according to media reports. This apprehension is based on the fact that the price realized and the quantity sold are not publicly known. There is also a feeling that sales tax (now VAT) is not being paid or not being paid fully in respect of private sales. This is quite possible because the actual sale price is known only to the sellers and the buyers at numerous private sales in hundreds of locations all over the country. After abolition of the 1984 Order the percentage of tea sold in auction in all the 8 Indian centres (Guwahati, Kolkata, Siliguri, Jalpaiguri, Coimbatore, Coonnoor, Cochin and Amritsar) which was 66.95 in 1990 had dropped to 50.61 in 1998. It rose slightly to 53.91 in 2003. In 2004 it was 51.06 and in 2005 it was 53.43.
How are the stakeholders affected by the situation described above? In my view each group of stakeholders are affected in their own different ways. The consumers go on paying high prices (Rs.100 to Rs.150 per kg. of tea) because these prices have not moved at all in response to the fall in auction prices.
The Central Government used to get excise duty on tea. This has been abolished. It gets income tax on 40 per cent of assessible income from tea. The realization has gone down. The state government gets agricultural income tax (agt) on 60 per cent of assessible income. It also gets cess and sales tax. The Asom Government got Rs.103.96 crores as agt in 1991-92. This was based on the income in 1990-91 when the auction price of tea at GTAC was only Rs.42.16 per kg. The total agt collection for Asom Government dropped to only Rs.4.08 crores in 2003-04 when the average price at GTAC was Rs.64.04 per kg. in 2002-03. How can this be explained? This needs to be enquired into. The cess collection was Rs.69.97 crores in 1993-94. It fell to Rs.33.96 crores in 1996-97. Then recovered to Rs.52.18 crores in 2005-06. In the case of sales tax the highest collection was Rs.30.11 crores in 2000-01. Then it fell to Rs.17.32 crores in 2004-05. It recovered slightly to Rs.19.60 crores in 2005-06. This shows that the Asom Government has suffered loss of agt, cess and sales tax on tea during the recent past.
The section of planters, including the local planters, who are not able to sell tea privately and whose costs are not covered by the auction price are reported to be in bad shape. Some of them have been compelled to sell their gardens and many are in debt. The green leaf prices for the small tea planters have also been reduced because the auction realization has gone down. They seem to be facing a financial crunch.
Tea estates have suffered because a high percentage of bushes have become old. There has been hardly any replantation and rejuvenation in recent years. The big planters have preferred to repatriate their surpluses for investment in other industries outside the state and are now looking to Government to provide them funds for replantation.
Large tea companies and many big planters have reduced the managerial compensations specially the perks which were available earlier. They have done it on the plea that tea prices have fallen. It is true that these companies and planters are now recruiting more local boys. But these new recruits complain of discrimination and are highly frustrated. If this trend of reduction of executive compensation in tea continues in these days of very high salary packages, particularly in the MNCs and in IT companies, tea will not be able to attract good managerial personnel in the future.
If at the auctions the ruling price is, say, Rs.58.24 per kg. (as in 2003-04) and the same tea is sold, say, for Rs.120 per kg. in retail the gross margin that is pocketed by the middlemen is Rs.61.76 per kg. which is a more than 100 per cent mark up on the auction price. Such a whopping mark up is not available to the middlemen of any other commodity. The middlemen in tea are the auction buyers, wholesalers and retailers. They have to incur the costs involved in transportation, marketing and other sales related operations. But by no stretch of imagination can all these together be anywhere near the Rs.61.76 per kg. mark up as shown above specially since all production costs including wages, maintenance, taxes and costs of estate and factory running as well as sale at auctions are provided from the auction price.
The biggest among the middlemen beneficiaries at GTAC are Hindusthan Lever, Tata Tea and Eveready Industries. These three companies buy 30.6 per cent, 7.2 per cent and 2.5 per cent respectively of the tea sold. They are also producers. Each own a number of tea estates in Asom and elsewhere. They are packeteers as well and each of them sell substantial quantities of branded tea. From production to auction and then to marketing and retailing they do everything. They, therefore, pocket all the margins, all the surpluses in respect of the huge quantity of tea under their control. They are the leaders of both the tea industry and the tea trade. The third big buyer, namely, Eveready, is actually a subsidiary of Williamson Maggor, one of the largest tea producers. The latter bought up Eveready with surpluses from tea industry.
Moreover the first 20 highest auction buyers at GTAC buy 58.32 per cent of the tea on offer. Naturally they have an enormous influence on the market and the price. Actually it is the market leader, Hindusthan Lever, who have a stranglehold on the market with their 30.6 percent control. Whatever price they fix no one else can challenge or better. Most of the sellers ( i.e. the tea producers ) are helpless because they cannot hold on to their stocks. If they did they would have to pay huge amounts in terms of bank interest, warehouse charges, brokers commission and other expenses. Once the tea has been catalogued and brought to the warehouses the producers do not dare to withdraw and take it elsewhere because that would involve extra transportation cost beside the costs mentioned above. So they have no alternative but to sell at whatever price is fixed by the big buyers.
This type of manipulations have caused degeneration of the auction system to some extent. However the auction system has many merits. Therefore, ever since the first consignment of Asom tea was auctioned at London in 1834 this system has been the preferred method of sale. In India we had the Tea Marketing Control Order,1984 (as amended from time to time) under which 75 per cent of the tea produced had to be compulsorily auctioned. There were exemptions in respect of packet tea, export tea, small producers tea etc. But the Order has been revoked recently. Towards the end of my 11 year tenure as Chairman of GTAC, when it had achieved the distinction of becoming the largest CTC tea auction centre in the world, I had led a delegation which met the then Union Commerce Minister, P. Chidambaram. We pleaded with him to retain the compulsory auction system. We submitted a memorandum. Earlier I had written articles in the newspapers giving potent arguments in favour of the auction system which is known for its transparency, cost effectiveness and easy transaction among the four segments of producers, warehouses, brokers and buyers. Chidambaram, however, did not agree with our views and stated that in a liberalized economy there was no place for compulsory auctions. The market should be free to determine the process of sale. He did not give any importance to the fact that in countries with whom India has to compete in export of tea such as Sri Lanka and Kenya 100 per cent of tea produced is sold by public auction. This has been the reason why Mombasa has beaten GTAC in the volume of CTC tea auctioned annually. This happened soon after I left GTAC. Colombo, of course, has always been the largest centre in respect of both CTC and Orthodox tea.
Chidambarams contention was strengthened by a section of tea producers led by the former Chairman of the Indian Tea Association, CK Dhanuka, who strongly pleaded for abolition of compulsory auction. Dhanuka had the active support of Suresh Bansal, Chairman of the Tea Association of India. But many tea producers including some big producers supported the auction system.
After the abolition of compulsory auction about half the quantity of tea is now privately sold. Such private sales generate black money according to media reports. This apprehension is based on the fact that the price realized and the quantity sold are not publicly known. There is also a feeling that sales tax (now VAT) is not being paid or not being paid fully in respect of private sales. This is quite possible because the actual sale price is known only to the sellers and the buyers at numerous private sales in hundreds of locations all over the country. After abolition of the 1984 Order the percentage of tea sold in auction in all the 8 Indian centres (Guwahati, Kolkata, Siliguri, Jalpaiguri, Coimbatore, Coonnoor, Cochin and Amritsar) which was 66.95 in 1990 had dropped to 50.61 in 1998. It rose slightly to 53.91 in 2003. In 2004 it was 51.06 and in 2005 it was 53.43.
How are the stakeholders affected by the situation described above? In my view each group of stakeholders are affected in their own different ways. The consumers go on paying high prices (Rs.100 to Rs.150 per kg. of tea) because these prices have not moved at all in response to the fall in auction prices.
The Central Government used to get excise duty on tea. This has been abolished. It gets income tax on 40 per cent of assessible income from tea. The realization has gone down. The state government gets agricultural income tax (agt) on 60 per cent of assessible income. It also gets cess and sales tax. The Asom Government got Rs.103.96 crores as agt in 1991-92. This was based on the income in 1990-91 when the auction price of tea at GTAC was only Rs.42.16 per kg. The total agt collection for Asom Government dropped to only Rs.4.08 crores in 2003-04 when the average price at GTAC was Rs.64.04 per kg. in 2002-03. How can this be explained? This needs to be enquired into. The cess collection was Rs.69.97 crores in 1993-94. It fell to Rs.33.96 crores in 1996-97. Then recovered to Rs.52.18 crores in 2005-06. In the case of sales tax the highest collection was Rs.30.11 crores in 2000-01. Then it fell to Rs.17.32 crores in 2004-05. It recovered slightly to Rs.19.60 crores in 2005-06. This shows that the Asom Government has suffered loss of agt, cess and sales tax on tea during the recent past.
The section of planters, including the local planters, who are not able to sell tea privately and whose costs are not covered by the auction price are reported to be in bad shape. Some of them have been compelled to sell their gardens and many are in debt. The green leaf prices for the small tea planters have also been reduced because the auction realization has gone down. They seem to be facing a financial crunch.
Tea estates have suffered because a high percentage of bushes have become old. There has been hardly any replantation and rejuvenation in recent years. The big planters have preferred to repatriate their surpluses for investment in other industries outside the state and are now looking to Government to provide them funds for replantation.
Large tea companies and many big planters have reduced the managerial compensations specially the perks which were available earlier. They have done it on the plea that tea prices have fallen. It is true that these companies and planters are now recruiting more local boys. But these new recruits complain of discrimination and are highly frustrated. If this trend of reduction of executive compensation in tea continues in these days of very high salary packages, particularly in the MNCs and in IT companies, tea will not be able to attract good managerial personnel in the future.
[The writer was Chief Secretary, Asom, during 1990-95.]
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