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Domestic tea sector cries foul over India's move to allow duty-free imports

Nitin Gogoi in Guwahati

There is confusion at the governmental level and it's the tea industry that is suffering. The Commerce Ministry has been exhorting the tea industry to attain production of 1,000 million kg of tea by 2003. The Prime Minister's Office (PMO) and the External Affairs ministry on the other hand have unilaterally taken a decision to allow duty-free import of tea from Sri Lanka and Bangladesh, thereby forcing the domestic producers to face unfair competition.

More significantly, the decision to allow free import of tea from countries affiliated to the South Asian Association for Regional Co-operation, or SAARC, countries comes without any reciprocal arrangement.

This means that the government has let tea producers in Bangladesh and Sri Lanka gain an unfair advantage, without giving the domestic tea sector the opportunity to derive any benefits.

The Consultative Committee of Plantation Associations, or CCPA, and the Indian Tea Association, or ITA, say, "A level playing field is essential to meet the challenge of competition. The removal of all duties, combined with the lack of competitive restrictions, will mean creating unfair, unequal and unfavourable competition."

The ITA says that the impact of this decision on the domestic tea industry will be telling. It would lead to:
· Cheaper tea of lower quality entering the Indian market;
· A disastrous affect on the domestic industry's financial health;
· One million direct jobs and 10 million indirect jobs being imperilled;
· Sri Lankan tea enjoying competitive advantage due to its lower social overheads, lower tax incidence and aggressive export policy; and
· Fund-crunch will impair the domestic tea sector's ability to re-invest in plantation and welfare projects.

A section of the analysts tracking the industry feels that this could be construed as raising undue alarm by a Rs 40-billion industry, which produces close to 865 million kg of tea. As opposed to this, Sri Lanka produces just 277 million kg of tea annually.

However, divergent opinions exist on the issue. Other experts say that taken in the context of the peculiarity of the global tea trade, the fears expressed by the domestic industry are valid and real.

India is the largest producer of tea in the world. But because of the size of its domestic market -- over 660 million kg of tea out of 865 million kg produced in the country is consumed locally -- India can export only about 24 per cent of its production.

Sri Lanka exports over 90 per cent of its tea crop. Consequently, India's share of the worldwide export market is a mere 14 per cent as opposed to over 20 per cent each by Sri Lanka and Kenya.

Keeping in mind the large-scale domestic consumption, the central government had removed the excise duty on tea in 1993. In June 1998, Finance Minister Yashwant Sinha reintroduced excise duty on packaged and branded tea.

This step, says the Tea Packeters Association of India, has led to an 8.3 per cent slide in the packaged tea market.

As if reimposition of excise on tea was not enough, the government has now gone ahead to allow Sri Lankan and Bangladesh free access to the Indian tea market.

But what has led the government to permit duty-free imports from Sri Lanka and Bangladesh?

Tea industry sources say that geo-political reasons, rather than commercial viability, seem to have dictated the government's decision.

In August 1998, a notification by the Union Commerce Ministry removed all quantitative restrictions from some 2,000 items that could be freely imported from SAARC nations. Tea also figured on the list. The notification was issued under the Free Trade Agreement that the SAARC nations had agreed upon.

Alarmed by the decision, CCPA and ITA wrote to the government pointing out the disastrous consequences this bore for the domestic tea industry.

"The government must completely remove central excise duty on tea and examine the possibility of removing the commodity from the list of freely-importable items from SAARC countries. If total removal of quantitative restrictions on imports is not feasible, then the customs duty -- basic plus countervailing -- should be raised to ensure level playing field for the Indian tea industry," the industry wrote in its letter to the government.

However, the government did not react to the tea industry's plea and yet, in January this year, decided to allow Sri Lankan tea to be imported into India without any duty. This was a complete reversal of the current policy: a move dictated by non-commercial reasons.

"In its efforts to keep the neighbours, the government has totally neglected the disastrous consequences that the tea industry will face, especially in sensitive regions like Assam," a leading planter in the state said.

Pradip Bhattacharyya, adviser to the Assam branch of the ITA in Guwahati, says: "Import of cheaper teas will lead to a depression in prices, affecting the ability of the industry to re-invest. This will lead to retrenchment and may adversely hit Assam's already-turbulent economy."

Assam Chief Minister Prafulla Kumar Mahanta has now written to Prime Minister Atal Bihari Vajpayee voicing his concern over the move. "The viability of the tea sector is linked to the progress and well being of Assam. Historical neglect, low investment levels and inadequate industrial infrastructure have led to growing socio-political tensions in Assam. Any move that threatens the tea industry will aggravate the state's problems," Mahanta wrote, asking the government to reverse its decision.

These concerns are not unfounded. Tea is the backbone of the state's economy. About a million workers are directly employed in the state's 900-odd tea estates. Many townships in the state, built around tea estates and dependent upon the money pumped in by the industry, would suffer. The 20,000 small tea-growers, who currently produce close to 15 million kg tea, would not find any buyers for the green leaf, it is feared.

The scenario is grim, but is the tea industry ignoring the realities in the context of the new World Trade Organisation, or WTO, regime?

H P Barooah, noted Assamese planter, said: "Maybe the move has come four years too early, but we cannot afford to operate in isolation any more. This will give us the opportunity to be more efficient." That's a pragmatic way to look at the future, which even Monojit Dasgupta of ITA admits is the right approach.

"The industry is aware that by 2003, there would be no protection once the WTO rules are implemented, but our objection is to the arbitrariness of the move. The industry is already tightening its belts, increasing productivity and trying to get ready for the free trade regime. But to spring such a surprise, without any reciprocity, is inexplicable," say industry leaders.

The future now looks grim for the tea industry. Within the industry itself, big players like Brooke Bond-Lipton India, or BBLI, and Tata Tea may not be averse to cheaper tea imports. About five years ago, too, Hindustan Lever Limited had plumped strongly for allowing tea imports.

BBLI's logic is simple. Since it controls over 80 per cent of packaged tea market, it would be cost-effective for the company to get tea at lower rates for blending and then re-exporting teas. BBLI, which lifts nearly 60 per cent of teas auctioned in the world's largest auction centre in Guwahati, would reduce its offtake thereby depressing the prices all over, if this happens.

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