Indian tea after 'Sri Lanka effect': Challenge will be to focus on quality

Exports gained when production in troubled island nation dropped sharply in 2022; to maintain that momentum as its competitor bounces back, domestic industry's challenge will be to focus on quality

Foreign buyers have just about started putting out feelers for the new season orthodox tea that are now out in the Indian market. The economic crisis in Sri Lanka – the world’s largest supplier of the variety – had translated into a bit of a bonanza for the Indian producers last year with prices touching an all-time high. Will this year be a repeat? The industry is trying to read the tea leaves.

Orthodox tea refers to loose-leaf tea produced using traditional or orthodox methods such as plucking, withering, rolling, oxidation and drying. And its first batch at the Kolkata auctions got off to a good start on Wednesday with an average price of Rs 245.65 a kg for orthodox, 30 per cent higher than last year. But it’s early days.

“We have been talking to the consuming nations, they are interested. Russia is facing a shortage, but they want tea at reasonable prices,” said Himanshu Shah, chairman, M K Shah Exports, one of India’s largest orthodox producers.  

Iran – which buys the premium second flush – would come into play after June, he added. “There is a natural demand for Indian tea due to lower production in Sri Lanka; till August, we don’t see a drop in demand.”

Sri Lanka accounts for about 50 per cent of global orthodox trade. But the struggling island nation saw a 15-17 per cent year-on-year (YoY) drop in 2022 production, according to information available on Tea Exporters Association Sri Lanka website; exports from January to December stood at about 250 million kg (mkg), a 12.6 per cent drop YoY. That opened a window of opportunity for India.

Typically, Sri Lanka’s top five buyers are: Iraq, Turkey, Russia, the UAE and Iran. Some of these are also major markets for India – UAE, Russia, Iran, Iraq – and they stepped up buying accounting for 52.42 per cent of the country’s total tea exports during January to December 2022, according to provisional export data from Tea Board India (in 2021, the share stood at 44.55 per cent).

The UAE, a major re-exporting hub, took the top slot with a whopping 146 per cent increase. But it is widely known that teas from different origins are blended and packaged in Dubai for catering to the CIS and MENA – the top two tea consuming regions in the world. Overall tea exports from India saw a spike of about 15.49 per cent to 226.98 million kg (mkg) during January to December 2022.

Tea Board India, however, said that the increase of Indian tea exports cannot entirely be attributed to the vacuum created by Sri Lanka, as it continued to hold a share of around 14 per cent in the world export market in 2022. The Board attributed the growth in exports to consolidation of India’s traditional markets, as well as new markets such as Malaysia, Ireland, Turkey.

But the industry largely sees the gains as the “Sri Lanka effect”. Now, the big question is, would Indian producers be able to hold on to it once the island nation stages a comeback? The answer may largely depend on when Sri Lanka would recover from its losses.

Cumulative production in Sri Lanka over January and February 2023 totalled 37.96 mkg, down 3.02 mkg; exports at 36.11 mkg saw a drop of 4.42 mkg with some of its traditional markets like Russia, UAE, Iraq buying less.

“Once tea bushes get a shock, it is difficult to regain the lost crop without a proper rehabilitation programme,” Shah pointed out. At least that’s what happened in Darjeeling which is still reeling from the aftermath of a 107-day shutdown in 2017 during the Gorkhaland agitation.

But regardless of the situation in Sri Lanka, India needs to carve its place as a reliable orthodox supplier in the world market. “Orthodox tea commands a larger share of the global tea market and augmenting orthodox production is crucial to boosting exports,” Arijit Raha, secretary general, Indian Tea Association, said.

The orthodox incentive scheme provided by the government of Assam has helped in augmenting orthodox production over the last three years, he added.

Though tea is under the control of the Union government, the Assam government was generous with an incentive scheme in 2020, which has increased since and now stands at Rs 12 per kg.

Still, in the overall scheme of tea production in the country, orthodox is a small part. In 2022, the share of orthodox was at 9.56 per cent in the overall production of 1365.23 mkg, CTC (crush-tear-curl) was at 89.03 per cent and green tea at 1.41 per cent.

“Orthodox is more like an adjunct in Indian tea production largely dominated by CTC, which is what the country consumes. But if India has to step up exports, it needs to establish itself as a reliable supplier of orthodox tea in the world market; Sri Lanka has delivered on that count,” Kaushik Das, vice president, Icra, said.

But the problem is that only a handful of players would have the strength to produce orthodox in an industry marked by financial stress (the cost of production for orthodox is about Rs 25 a kg higher than CTC with soaring energy prices over the past year).

Structurally, too, India and Sri Lanka are different. Sri Lanka is focused on exports, typically accounting for more than 95 per cent of production. In contrast, Indian tea exports are at about 17 per cent.

But the Tea Board has set a target of achieving 300 mkg of exports by 2025. Achieving it would depend on a host of factors, some of which are extraneous like the demand in importing countries, pricing of competing countries, among others.

What does the industry need to do? The Tea Board believes that it should focus on quality of teas, new market exploration, product-mix and improve export of value-added teas.

Icra’s Das adds that serious marketing and promotion at an institutional level are required. Over the years, India lost some of its share in traditional markets to the cost-competitive Kenya in CTC and the Sri Lankan orthodox. Will it find its place in the sun? It’s an open question right now.