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ANALYSIS OF INDIAN TEA INDUSTRY
WITH RESPECT TO
MICROECONOMICS : FIRMS, MARKETS and BEHAVIOUR
SCHOOL OF BUSINESS MANAGEMENT
NARSEE MONJEE INSTITUTE OF MANAGEMENT STUDIES
NMIMS UNIVERSITY
MUMBAI
Presented By:-
Raghav Bhardwaj (C014)
Mahesh BVS (C017)
Ekank Goel (C028)
Rohit Shaw (C051)
Peeyush Singhal (C054)
Shrey Srivastava (C057)
Ravi Thakkar (C058)
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ACKNOWLEDGEMENT
We would like to thank NMIMS, for providing us an
opportunity to study the subject of Microeconomics in our first
trimester, which is of utmost importance in today’s world. We
would specially like to thank our professor, Dr. Chandrima
Sikdar for giving us the guidance and imparting requisite
knowledge to complete our project work.
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Contents
Industry Review ........................................................................................................4
Market Dynamics....................................................................................................12
Government Regulations.........................................................................................16
References...............................................................................................................18
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INDUSTRY REVIEW
Supply Side (production side)
India is the second largest producer of tea in the world, and accounts for about 25 per cent of the
global tea supply.
Domestic production of tea in India in year 2011 stood at 988 million kg and is expected to grow
at 2-3 % y-o-y assuming weather conditions favourable to production of tea.
Regional concentration of production
Tea production is highly sensitive to variation in climatic conditions. Thus production and
quality of tea in the country differs across the months in a year. A good growing season for tea is
a combination of warm days, long sunshine hours, high humidity and adequate rainfall
preferably in the form of overnight showers. In north India, the peak season of production is
between June and October and in south India production peaks in the April-June period and
September and October period per relatively lower than that during the April-June period.
Tea production in India is largely concentrated in the north, with the region accounting for 75 per
cent of total domestic production. Of the total production, Assam accounts for the highest at 50
per cent followed by West Bengal at 24 per cent. In the south, Tamil Nadu has the highest share
at 18 per cent followed by Kerala (7 per cent) and Karnataka (1 per cent).
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.
Fragmented land holdings
The Indian tea industry is highly fragmented with approximately 159,190 tea estates (in 2007)
with average size of holdings as low as 3.63 hectares. The average size of estates has recorded a
sharp decline during the last 15 years. This is mainly due to the emergence of a significant
number of small growers.
Suppy Side Analysis
SHORT- RUN SUPPLY SIDE -
Production of tea depends on whims and fancies of climatic conditions as well as area under
cultivation .Factors affecting the yield are warm climate with plenty of rainfall, a temperature
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between -8 to 35 0C and slightly acidic soil.Thus in a particular season production is inelastic and
dependent on climatic conditions.
LONG- RUN SUPPLY SIDE - A tea bush yields most between age of 11-15 yrs . Hence
companies keep replacing old tea bushes by planting new ones. Area under cultivation has been
signifanctly increased ,making India next only to China to have such vast expense of land
dedicated to tea production .In year 2008 India had 580 thousand acres under cultivation
.Increasing profitablity has led to such an increase. Regulations have been favourable in
protecting domestic industry and subsidies are also provided under Special Purpose Tea Fund
(SPTF).This in long run production of tea can be changed by inceasing area under cultivation
,replacing tea bushes and changing government regulation thereby making demand elastic.
Industry segmentation
Planters: Planters are tea growers who primarily sell their produce at auctions. Apart from
auction sales, they are also into exports. Examples of these players are Mcleod Russel, Parry
Agro Industries, Warren Tea and AFT Limited.
Planters-cum-traders (Integrated): Apart from being tea growers, these players have diversified
themselves into the packaged segment. This forward integration is primarily to insulate
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themselves from the fluctuations in auction prices. These players are present throughout the
value-chain, right from estate operations, manufacture and processing of tea, blending, marketing
and sale in the domestic retail or export markets. Many of these players continue to sell a
significant part of their production at the auctions. Duncans Industries, Harrisons Malayalam
Limited, Goodricke Group Limited, Jay Shree Tea and Eveready Industries (India) Limited are
examples of such players.
Non-integrated players: These players do not own tea plantations and hence purchase tea either
at auctions, or privately and then blending, packing and marketing the same. Hindustan Unilever
Limited (HUL) is an example of such a player who is primarily dependent on the open market
for its purchases, although it has some plantations. Tata Tea (TTL) a similar player, hived off its
plantation business to Kannan Devan Hills Plantation Company (Pvt) Ltd. Retaining a 19 per
cent stake in it.
Apart from corporate players, other entities in the industry include:
Green leaf growers (GLGs)– These players undertake plantation activities and sell the final
produce to bought leaf factories (BLFs) and larger tea marketing companies.
BLFs– BLFs do not have owned tea estate operations but produce saleable tea from green leaf
purchases. These intermediaries accounted for approximately 58 per cent of India’s tea
production in India in 2006-07.
Market Players
The industry is characterized by the presence of a large number of unorganized players. The top
12 players accounted for only about 23 per cent of the total domestic production of 979 million
kg as of 2009. The balance is accounted for by integrated small and medium enterprises (SMEs),
bought leaf factories (BLFs), merchant exporters and regional retailers.
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Market Concentration
A concentration ratio is a measure of the total output produced in an industry by a given number
of firms in the industry. It also indicate market power of the firm.
4 Firm concentration ratios : It is calculated as the sum of the largest 4 firms in the market.
Largest firms as per market share are
Firms Market Share
Mcleod Russel India ltd 7.9
Jay Shree Tea and Inds ,Ltd 2.4
Goodricke Group Ltd 2
Harrisons Malayalam Ltd 1.7
Total Market Share 14
Ratio lies between 0 to 50 suggests that market has a structure similar to Monopolistic
competition.
Herfindahl–Hirschman Index: It is defined as the sum of the squares of the market shares of the
50 largest firms (or summed over all the firms if there are fewer than 50)[3]
within the industry,
where the market shares are expressed as fractions. The result is proportional to the average
market share, weighted by market share.
Firms Market Share Market Share^2
Mcleod Russel India ltd 7.9 0.006241
Jay Shree Tea and Inds ,Ltd 2.4 0.000576
Goodricke Group Ltd 2 0.0004
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Harrisons Malayalam Ltd 1.7 0.000289
Total Market Share 14 0.007506
The ratio of .007506 suggests the Monopolistic competition.
Characterstics of the market
Market Parameters Industry behaviour
No of firms in the market Large including regional players, low share of
total volume even by large players .
Product discrimination Product is different on the basis of finished
product – green tea, black tea ,white tea and
oolong tea. These tea differences are result of
different types of tea bushes from these are
made.
Entry /Exit barriers The industry has low entry and exit barriers
and government regulations mainly concerns
with tax collection and minimum support price.
Demand Elasticity Highly inelastic in short- run but elastic in
long- run .
However if we consider a particular variety of tea such as Green tea or Black tea , then market
follows the dynamics of perfect competition .
Tea Consumption (Demand side)
Tea demand is a derivative of population growth, trends in per capita consumption and export
prospects.
Domestic demand
Penetration levels of tea in India stood at over 90 per cent as of 2010. As a result, domestic tea
demand is largely dependent on two factors - growth in tea drinking population (defined by
CRISIL Research as population over 10 years of age) and rise in per capita consumption.
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Export demand
Indian exports account for approximately 11 per cent (2010) of the world tea exports. CIS, UK,
Pakistan and UAE are the key exporting countries for India, accounting for 52 per cent of its
exports. In 2010, Indian tea exports stood at 193 million kg, which constituted about 20 per cent
of total domestic tea production. Exports, which had touched a peak of 242 million kg in 1981,
subsequently fell due to several factors including the disintegration of the
erstwhile USSR, increasing competition from other countries such as Sri Lanka, Kenya and
China, and growth in domestic consumption, which led to a decline in exportable surplus.
Demand analysis
Domestic demand: Domestic demand depends on tea drinking population and per capita
consumption . The per capita consumption of the tea drinking population increased from 0.85 kg
in 2000 to 0.91 kg in 2010 at a CAGR of 0.7 per cent. Population of tea drinkers in India has
increased by CAGR of 3.3 % in the period from 2000 to 2010 and is expected to increase at 2 %
for next four years 2010 – 2014.
Export Demand: The international market has grown at the rate of .05% year on year with
exports reaching its peak in the year 2006 . From year 2007 India has witnessed a downfall in
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demand in the international market due to stiff competition from Kenya and China. The exports
also depend upon political scenario in target country and nature of relations of target country
with India.
Aggregate demand has risen year –on –year shifting the demand curve to right.
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MARKET DYNAMICS
( demand , supply and price )
P: Projected; Supply : Domestic production + Imports
The demand-supply dynamics in the Indian tea industry vary across different time horizons. The
short to medium term is dominated by supply-side issues, while the long term trend in the
industry is demand driven. The factors influencing tea prices and industry profitability in the
short, medium and long term are mentioned in the following table:
Short-term trends in supply and prices: Scenarios have been built on the basis of two varying
factors - domestic and global supplies. It has been assumed that demand at the global level would
not vary significantly. If we consider two scenarios of low production and high production in the
domestic as well as in the global market, four scenarios emerge, which have been elaborated in
the following table:
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North Indian tea auction prices depend largely on tightness in domestic demand supply, whereas
South Indian prices are determined by global demand supply. In case of North India, which
forms almost 75 per cent of overall tea production, tea auction prices largely depend upon the
domestic demand supply scenario, as 90 per cent of the production is domestically consumed. On
the other hand, 50 per cent of South Indian tea production is exported, and therefore, its prices
are largely influenced by the international market. These prices are directly correlated with
Kenyan tea prices, which like South India is predominantly a CTC tea producer and the
target destinations are also similar for both.
Over the years supply and demand of tea has increased thus following pattern has been observed.
Types of marketing channels
In India tea is primarily sold through two channels i.e auctions and direct sale (ex factory/ex
garden sale). Auction trading is a very important constituent of primary marketing channel of tea.
Primary marketing channels help in moving tea from the growers to the bulk tea buyers.
Source : Tea Board of India
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Prices
Auction prices of tea in Northern India is largely determined by demand and supply forces of
domestic market as 90 % of the production is consumed in India itself . The prices in southern
India is largely determined by global demand as 50 % of tea is sold in the global markets .
Profitability
Profitability of planters and planters cum brand owners is largely dependent on tea auction
prices. The operating margins of planters and planters cum brand owners increased from 9 per
cent in 2007-08 to 25 per cent in 2009-10. This increase was mainly due to a sharp increase in
auction prices from Rs 68 per kg in 2007 to Rs 107 per kg in 2009. In 2010, the auction
prices declined by 2 per cent to Rs.104 per kg. As a result, operating margin of players declined
during the year. Production volumes of these players grew by 4 per cent CAGR between 2006-
07 to 2010-11.
Operating Margins (2006-07 to 2010-11)
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GOVERNMENT REGULATIONS
This industry is highly regulated and influenced by government policies. This industry is also a
major source revenue and foreign exchange.
The domestic tea industry is governed by the Tea Act, 1953. The Tea Board, whose functions are
defined under Section 10 of the Tea Act, 1953, is the apex body in charge of the development of
the tea industry.
As a plantation industry, tea is governed by the following regulations:
Plantation Labour Act, 1951
Land Reforms Act, 1950
Forest Conservation Act, 1980
As a food product, tea is governed by the following Acts:
Essential Commodities Act, 1955
Prevention of Food Adulteration Act, 1972
Packaged Commodities Order
Regulations
Since tea bushes are most productive in 11- 15 th
yr, bushes have to be replanted or rejuvenated
as they cross their productive age to bring the production costs down. The government in an
effort to help overcome this problem has announced the setting up of a Special Purpose Tea Fund
(SPTF).
Under the SPTF, an area of 2.12 lakh hectares is being targeted for re-plantation/rejuvenation
over a fifteen year period commencing from 2007.
The cost of re-plantation / rejuvenation is to be financed in the following manner:
25 per cent of the cost would be borne by the government as a subsidy
50 per cent would be through a term loan to the tea planters
25 per cent would be borne by the tea planters themselves
To begin with, under the Phase-I of the program, a total area of 32,560 hectares for replanting
and 8,432 hectares for rejuvenation was estimated to be taken up for implementation during the
11th plan period (2007-12).
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Price sharing formula
Pursuant to the directive issued by the Tea Board, the price sharing guidelines came into effect
on April 1, 2004. According to the guidelines, every Bought Leaf Factory (BLF) purchasing
green leaf would have to share 60 per cent of the gross price of the tea manufactured by itself
with the Green Leaf Growers (GLG). The ratio is 52:48 for Himachal Pradesh and Uttaranchal
Impact
The guidelines will have a positive impact on the incomes of green leaf growers by way of fair
compensation for their crops. Further, the guidelines also provide incentives (higher retention
permitted when prices exceed the monthly averages) to the BLFs to try realising the best prices
possible. Integrated players and players sourcing from auctions will not be affected . This has led
to increase in supply side.
100 per cent FDI in plantation sector
As part of the ongoing liberalisation of the FDI regime, the Government, in July 2002, permitted
FDI up to 100 per cent in tea sector, including tea plantations. Proposals for FDI in tea sector
will require prior approval of the Central Government and would be subject to following
conditions:
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(i) compulsory divestment of 26 per cent equity of the company in favour of an Indian partner /
Indian public within a period of five years; and
(ii) prior approval of the State Government concerned in case of any future land use change
Taxation
This industry comes under purview of both central and state income tax acts. 40 % of industry
taxable income is subject to corporate income tax while the remaining is taxed as agricultural
income at much higher rates by the respective state governments.
References
Crisil Research - www.crisilresearch.com/
Capital line - http://www.capitaline.com/user/