Souvik Nandy
Co-Owner, S N Enterpise
Effect of
demonetization on the Indian tea industry
India
is the second largest producer of tea in the world after China. The country is
also the largest consumer of tea, with the share of domestic consumption in all-India
tea production being 70% during the eighties and nineties and 81.68% during the
current decade [1]. The size of the tea industry is
estimated to be approximately 1 billion Rupees (1.5 million US dollars
approximately) [2].
Domestic Consumption v/s Export Trend. Let us now consider the domestic
consumption versus export share of the entire tea produce over the years (Table
1).
Table
1: Trends in Relative Share of Consumption and Exports in Production of Tea in
India
|
Year |
Percentage
Share of Domestic Consumption in Production |
Percentage
Share of Exports in Production |
|
Average
1950-60 |
32.06 |
67.94 |
|
Average
1961-70 |
46.01 |
53.99 |
|
Average
1971-80 |
58.97 |
41.03 |
|
Average
1981-90 |
66.92 |
33.08 |
|
Average
1991-95 |
76.66 |
23.34 |
|
Average
1996-2000 |
76.73 |
23.27 |
|
Average
2001-04 |
76.94 |
23.06 |
|
1996 |
79.28 |
20.72 |
|
1997 |
75.20 |
24.80 |
|
1998 |
76.25 |
23.75 |
|
1999 |
77.00 |
23.00 |
|
2000 |
74.78 |
25.22 |
|
2001 |
79.00 |
21.00 |
|
2002 |
70.75 |
29.25 |
|
2003 |
80.00 |
20.00 |
|
2004 |
78.00 |
22.00 |
Source:
Calculated from Tea Statistics, Tea Board of India, Various Issues.
Given
the above figures it can be clearly observed that there is a rising trend of
domestic tea consumption and falling exports. There are various causes behind
this. The rising factor costs over time in tea cultivation in India renders it less
competitive in the world market as compared with teas from Sri Lanka, Kenya,
Indonesia, Vietnam and few other tea producing countries. The rise in domestic
consumption is due to increase in awareness about the health benefits of tea
and increasing per capita income of Indians which makes them capable of
consuming more premium teas.
Black Market in Tea. The size of the black economy in India is estimated
to be 62% of the GDP, which is about 1.4 trillion US dollars at 2016-17 prices [3].
The cash trading component in the tea industry in India is very high. Where
100% cash transaction is not possible tea companies and trade houses adopt
other commonly used practices like under-invoicing[1],
partial billing[2]
and illegal transit of goods across state borders without documentation.
According
to the method of profit calculation mentioned in economist Arun Kumar’s
publication “Understanding the black economy and black money in India” profit
is equal to the revenue earned minus the cost incurred (Formula 1).
Profit
(P) = Revenue (R) – Cost (C) (1)
This
profit is split into two parts. One that is declared and the other that is not
declared in the books of accounts (Formulae 2 and 3).
White
Profit (PW) = Balance Sheet Profit= Declared R –Declared C (2)
Black
Profit (PB)= Off-Balance Sheet Profit= Undeclared R+ Overstated C
(3)
Overstated cost is the exaggerated cost that
companies show with higher cost of operations and larger number of employees
than actual.
Another popular practice among tea traders and
merchants is hawala, the literal
translation of which would be “trade
in the air”. It actually refers to a parallel banking channel which is outside
the regulation of the Reserve Bank of India. It is used to transfer funds both
within and outside India. This method is mostly adopted in case of
international trade of tea. In this method a purchase order is issued by a
fraudulent foreign buyer. Based on the purchase order all documentations are
done for export. The customs officers are bribed to issue bill of lading,
shipping bill, etc. proving that the goods have been dispatched out of the Indian
territory. The payment comes to the exporter’s bank account and the deal is complete,
except for the fact that no goods have actually changed hands. The entire
transaction is shown only on papers without anything happening in real. Based
on the documents the exporters even claim duty drawbacks, subsidies and other
government incentives. This is a heavy burden on the government which adversely
affects the honest tax payers out of whose money the government issues the incentives
and subsidies for exports. In case of fake import of teas into the Indian
territory the opposite method is followed and money is laundered out of the country
for foreign investments and to avoid paying taxes. This entire round-tripping
of money (hawala) is of serious concern to the government.
Demonetization and its Effects on the
Tea Industry. In order to
curb the black economy and cash trade in India the government undertook the
demonetization of 500 and 1000 rupees currency bills in November, 2016. Since
most of the black money is held in large currency bills the government thought
that this policy would abolish the cash trade by rendering the money useless.
It was expected that by eliminating the cash trade
businesses would be more accountable and the tax revenue would increase substantially,
which in turn could be used for the long term benefits of the lower-income
groups and the deprived sections of the population. However, this was the long
term vision, which severely clashed with the short term impacts of the policy.
The proportion of 500 and 1000 rupees currency bills
before demonetization was a staggering 86% of the entire liquid cash in circulation
in the Indian economy [4]. Abolishing these currency bills brought a severe
cash crunch in the market. The government banned the bills overnight, but it
was unable to issue equal amount of alternative currency bills in order to replenish
the dearth of cash. With shortage of liquid cash in the market the aggregate
demand for tea crashed. Tea companies went for a toss. Middlemen and commission
agents, whose incomes were solely or mostly in cash were paralyzed. Big tea
companies are dependent on these agents to sell their teas. Due
to the cash crunch the tea companies failed to pay them commissions and, as a
result, the agents stopped selling their teas.
On the production side, most laborers in the tea
plantations are informal sector workers who are paid in cash on a daily or
weekly basis. Due to the cash crisis tea companies could not pay them wages so they
refused to work and thus, production dropped drastically and in some cases even
came to a halt. Thus, aggregate supplies also dropped. Many traders and
merchants shut down their businesses because they did not have adequate
financial cushion to sustain through the crisis.
According to the Pew Research Centre, in 2015, only
22% of Indian adults had access to the internet. Only 17% of Indians have
access to smart phones and, as a result, to mobile phone banking. In a
population of 1.3 billion and growing, there are only 24.5 million credit cards
and 661.8 million debit cards [5]. Most businesses do not have card readers and
are not used to the account-to-account remittance methods. They still stick to
cash transaction practices.
Inference. In spite of all the given social, political and
economic glitches India was still growing at an impressive rate in recent
times. In such a state of affairs the demonetization policy was a major jolt to
the tea industry, and businesses as a whole in India. To attain recovery from
this blow might take months, or even years.
References:
1. Sushmita
Chatterjee, Domestic production, domestic consumption and exports of Indian tea:
Examining the interlinkages. http://www.isid.ac.in/~pu/conference/dec_11_conf/Papers/SushmitaChatterjee.docx.
2. Yashaswini
K., India’s tea market
estimated to be worth approximately Rs 10,000 crore. www.fnbnews.com,
Feb. 26, 2015.
3. Arun
Kumar, Understanding the black economy and black money in India. Aleph Book
Company. ISBN: 978-93-86021-57-1.
4. Sai
Manish, 86% of currency by value in India are of Rs 500 & Rs 1000
denominations. www.business-standard.com, Nov. 8, 2016.