Lockdown effect: Domestic tea prices rise even as global prices at multi-year low

The Wholesale Price Index (WPI) for tea rose by 79% on an annual basis in the month of August. This is the highest rise in tea prices under the current WPI series. Wholesale prices for tea have has risen by over 130% since March this year. To be sure, the rise in retail prices has been much lower. However, a future rally cannot be ruled out, given the massive hike in wholesale prices.

According to tea producers, the hike in tea prices is mainly due to the drop in production for nearly a month (from March end to early May) during the Covid -19-induced national lockdown apart from extended rainfall this year. They stated that the imposition of lockdown caused a disruption in the tea supply chain which has affected tea auctions as well.

“This year, from April-end till now, we have sold around 49 million kg whereas last year we had sold nearly 63 million kg during the same period,” said Priyanuz Dutta, secretary of Guwahati Tea Auction Centre (GTAC). Tea producers see the recent increase in prices in the domestic market as a positive development for the industry.

“The current rise in prices have come as a boost to the tea industry as the industry was in dire straits due to lower prices in the last few years,” said Kamal Kishore Tiwari, chairman of Siliguri Tea Auction Committee. SK Saria, Managing Director of Songachi Tea Estate, said that the current rise in prices will help tea planters recover some of the losses that they incurred on account of lower production this year.

The domestic price rally in tea comes even as tea prices in the global markets are at a multi-year low. Data from International Monetary Fund (IMF) commodity portal shows that tea prices in the international markets are at a six-year low. The World Bank, in its latest report in April 2020, had predicted tea prices to drop by 10% in 2020 due to weak demand.

Will high prices lead to an import surge?

Tea leaf has a weight of 0.96 in the CPI basket which is almost the same as potatoes (0.98). If growing wholesale prices percolate into retail markets, they will add to the already worsening inflationary pressures in the economy. Retail inflation has been above 6%, the upper limit of Reserve Bank of India’s (RBI) comfort level, for five consecutive months now. Food inflation has been even higher. It grew to 9% in August. If tea prices continue to increase sharply, the demand for imports as a counter-cyclical measure could grow.

Data from the commerce ministry shows that India is a net exporter of tea. The exports which had fallen in the month of March and April were at 11 months high in the month of July. The data also shows that tea imports have increased in the last two months. Imports worth 11.2 million USD were made in July 2020 which is the highest in the last five years.

Tea imports in India have a 100% duty at present; while it is nil for re-exports. In mid-August, the Consultative Committee of Plantation Associations (CCPA), the apex body of tea associations in India, had urged the Union commerce minister not to reduce import duty on tea, as such a move would lead to the erosion of domestic prices and subsequently affect the economic viability of the tea gardens and the livelihood of lakhs of people, as per a PTI report.

Viren Shah ,Chairman of Federation of All India Tea Traders Association (FAITTA), said that tea imports have increased in recent months mainly for re-exports. “If the prices stay this high, the imports in domestic market could increase even after import duty,” he added.

With inputs from Utpal Parashar and Tanmay Chatterjee

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