The tea plantation industry in India has been undergoing a transformation over the past few decades. Back in the 1990s, there were about 24 prominent corporates in the sector in the North that contributed to three-fourths of the total tea production. However, at least five of these players are now out of the plantation or have a negligible presence in the market. The biggest player in the sector, McLeod Russel, is now in bankruptcy court. While restructuring is not uncommon in any industry, the organised plantations, also known as tea estates, are facing a more significant problem.
The creation of the plantations by the British was to maximize export opportunities using labor cost arbitrage. Today, the tea tribes form the mainstay of tea labor in the North. However, policies such as forced migration of poor tribals from central India to work for minimal pay were continued till the 1970s. The relevance of tea as a forex earner started declining after liberalisation, and the traditional tea export markets in the Russian block collapsed.
To create a wider domestic market and expand job opportunities, the government pushed for capacity expansion, leading to the growth of small growers. Between 2012 and 2019, average tea prices at the country’s largest auction centre in Guwahati hovered around Rs 140 a kg. Remaining outside the compliance net (applicable to tea estates) helped small growers keep costs low, leading to pressure on prices.
The increase in competition from cheaper tea plantations worldwide, limited export opportunities, and growing awareness and competitive politics regarding tea wages have put a strain on the tea plantation sector. The situation has led to flat tea prices, a three-fold rise in wages in a decade, and a cost-push in other inputs such as energy and fertilisers. While everyone is feeling the heat, large players are at a greater disadvantage and trying to survive by cutting corners.
Hindustan Unilever was the first significant company to exit the tea plantation business back in the 1990s, and the trend has become clearer over the past 10-15 years. Despite the weak fundamentals, some buyers, such as exporters, have acquired estates for backward integration. However, this is an outlier. Most buyers would have to sacrifice returns or suffer some cash burn. The situation has created a market acquisition strategy that demands a deep pocket. The parallels are similar to real estate, and some see it as a parking opportunity for ill-gotten wealth.
The tea plantation industry is facing challenges that are leading to its transformation. The sector’s traditional players are either out of the market or struggling to survive. The rise of small growers, the decline of tea as an export earner, flat tea prices, a rise in wages, and cost-push are some of the significant factors affecting the industry. Despite the challenges, some buyers are acquiring estates, and the industry remains an attractive investment option for some.
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