Current industry status
The tea industry has been undergoing very tough times in the past three years on account of sharp and sustained fall in prices. As a result, many tea plantations are in deep red, as the realisations are not enough to cover the increasing costs.
As a result, the government intervened and brought a new Tea Marketing and Control order (TMCO). TMCO envisages (a) a specified percentage of the total produce has to be sold through public auctions and (b) the tea sales and purchases by tea producers and buyers have to be reported on a periodical basis. These initiatives by the government are to eliminate the inherent weakness in the system of identifying tea prices. The buyers have been opposing the order, as they feel it is cumbersome, and interferes in their right to trade in the commodity.
Nevertheless, the order has come as a welcome breather to the industry, which has seen sharp rise in realisations, particularly since Jan'03. Also aiding the industry in improved realisations is the global shrinkage in production, and the off-season in the northern region.
The tea production fell by 3.2% in 2002 to 826.17 million kg from 853.71 million kg in 2001. The Orthodox tea production, however, fell marginally by 0.1% to 88.90 million kg, as the export potential of this variety is very good. On the other hand, the production of CTC, which is predominantly for domestic consumption, fell by 3.4% to 732.35 million-kg duing this period. The production of other categories of teas tumbled down by 27% to 4.91 million kg.
Prevailing tax rates and provisions
CTC tea : Basic Customs duty 100% and excise duty is Re 1 per kg.
Industry expectations
Removal of excise duty
The excise duty was reduced from Rs 2 per kg to Re 1 per kg in the Union Budget 2002. The industry expects the excise duty on tea to be removed completely. They opine that as major part of the tea produced is to be sold through public auctions in line with TMCO, the sellers donot have any control over prices fetched and are unable to pass on the excise burden to the buyers.
Analyst expectations
The TMCO is likely to be revised in line with suggestions from the buyers and sellers, to facilitate better price discovery. Further, given the precarious situation of the tea producers, the excise duty on tea may be waived or reduced, atleast temporarily.
Best Pre-budget Buys/Sells
Given the improved prospects of the industry on account of global and domestic shrinkage in production, and due to restricted supply due to end-session in Northern region, the tea prices are improving. Companies with greater thrust on packaged teas and with strong brands like Tata Tea are most likely to be benefited than others.
Summary
The tea industry is heaving a sigh of relief on account of improved realisations, after over three years of fall. With global and domestic production coming down, while the demand continues to grow at modest levels, the prices are likely to move up. Further, the country has increased exports to Iraq and other muslim dominated countries, which has arrested the fall in exports. Further, if the efforts to persuade Russia and other CIS countries to increase offtake succeeds, the Indian tea industry could recover from its worst.