In the verdant landscapes of India, the tea industry stands as a testament to the country’s rich heritage and economic prowess. However, recently, the industry has been stirring the pot with its clamour for a floor price system linked to the Cost of Production (COP) and profit margins. While the intent behind this demand may seem commendable, it is imperative to critically evaluate the potential pitfalls associated with such a floor price.
The call for a floor price, though well-intentioned, is fraught with challenges and potential unintended consequences. The implementation hurdles, coupled with the risk of incentivizing poor-quality production and the failure to address supply-demand imbalances, make it a less viable option. The industry also needs to be cognizant of consumer behaviour and market dynamics that may not favour an artificial price floor.
Firstly, the floor price demand does not adequately address the supply-demand imbalance that is crucial to the industry’s health. The 2020 lockdown served as an eye-opener when prices surged due to supply shortages. Notably, this spike in prices did not translate into profitability across the board. It was evident that some tea estates reaped the benefits while others did not. This disparity emphasizes the importance of tackling the root cause of supply-demand imbalances rather than relying solely on floor prices as a solution.
Another layer of complexity arises from regional variations in tea production. India is home to a diverse range of teas, each having unique characteristics and costs. For instance, South India’s CTC teas trade at around Rs 90 per kg, while the finest Assam CTCs fetch around Rs 450 per kg. Implementing a floor price on a regional or estate-specific basis is a significant challenge, given these variations. Moreover, determining individual or regional minimum prices becomes logistically unfeasible. A blanket minimum price, if considered, would be a cumbersome process, prone to errors and potential manipulation.
Furthermore, linking the floor price to COP and profit margins could inadvertently incentivize the production of poor-quality teas. With such a system in place, there is a risk that producers may focus on quantity over quality to ensure they meet the minimum price thresholds. This could result in an influx of lower-quality teas into the market, which could further aggravate the supply-demand equation. Moreover, this scenario could warrant government intervention to sustain the program, placing an additional fiscal burden on the government and, ultimately, the taxpayers.
A significant concern is the assumption that an increase in tea prices will not impact demand. However, recent data contradicts this assumption. Despite an approximate 22% increase in tea prices from pre-Covid levels, there has been a decline in tea consumption by 2-3% between May and October 2021. This trend is not limited to India; globally, tea consumption is on a downward trajectory as consumers gravitate towards alternative beverages. This indicates that the floor price proposal may not account for the elasticity of demand.
Additionally, India’s tea market operates through various channels, including auctions, spot markets, and direct sales. The geographical spread of tea gardens and buyers makes enforcement challenging. For instance, the Tea Board’s existing mandate to sell 50% of teas through auctions has been difficult to enforce. Expanding this mandate or implementing a floor price could further strain the system and place the organized sector at a competitive disadvantage.
In the broader context, it’s worth considering how other industries, such as the sugar industry, handle pricing mechanisms. While the sugar industry has periodic Fair Remunerative Price (FRP) announcements, the tea industry lacks similar provisions under the Essential Commodities Act. This disparity raises questions about the practicality and necessity of a floor price in the tea industry.
Instead of focusing solely on a floor price, the tea industry should consider a multifaceted approach that includes market-driven solutions and sustainable practices. This approach should involve diversifying product offerings, optimizing costs, improving quality, and exploring new markets. It is also essential for the industry to engage in dialogue with stakeholders, including the government, to develop policies and frameworks that are pragmatic and conducive to long-term growth and sustainability.
Contributing to the tea industry’s non-profitability are outdated cultivation methods, supply chain inefficiencies, and overproduction. Small-scale farmers often lack modern agricultural know-how and market access. Labour costs and ensuring fair wages add financial burdens. Additionally, global competition and changing consumer tastes, with a tilt towards alternative beverages, affect demand. Addressing these issues call for modernizing agriculture, optimizing supply chains, diversifying products, and exploring new markets, rather than solely implementing a floor price.
As the Indian tea industry navigates through the stormy waters of market challenges and competition, it must steer clear of the rocks and shallows that a floor price system may present. The journey ahead requires a steady hand, a clear vision, and a commitment to adaptability and innovation.