FDI in tea sector
The apprehension that foreigners will grab substantial new lands for starting tea cultivation is misplaced. Large chunks of land are not available for tea expansion in the country. FDI could, therefore, flow into existing tea planting companies only and new cultivation ventures are unlikely.
A tea plantation in Kaziranga near Guwahati.
RECENTLY, THE Government decided to allow 100 per cent foreign direct investment (FDI) in the tea sector including plantations. The proposals will require prior approval of the Central Government and would be subject to conditions compulsory divestment of 26 per cent equity of the company in favour of an Indian partner/Indian public within five years; and prior approval of the State Government concerned in case of any future land use change.
At the outset, it is necessary to go into the historical background concerning plantations. Foreign investment in plantation companies is not a new phenomenon. It is well known that the British had done a pioneering work in this area. In the pre-independent India, several foreign companies, popularly known as `sterling companies' were engaged in cultivation, manufacture and marketing including export of tea and other plantations. Typically, most of these companies were registered in the U.K. and many had 100 per cent foreign shareholding.
Under the provisions of the Foreign Exchange Regulation Act, 1973, the overseas companies must register under the Indian Companies Act and that they should divest a prescribed percentage of the share capital in favour of Indian partner(s)/public. In the case of tea companies, those engaged in plantation activities were allowed to hold a maximum foreign share holding of 74 per cent and those engaged in trading activities 40 per cent. The valuation of the divestment was done under the FERA and repatriation of foreign exchange was allowed. Thus started the process of `Indianisation' of tea companies. Over a period, however, most of the erstwhile sterling companies were completely Indianised.
Now, history repeats, though there is a subtle difference. In the past, only existing sterling plantation companies were permitted to continue operations with a maximum of 74 per cent foreign shareholding, but no new venture was permitted. In the present case, theoretically new ventures are also permitted.
Plantations tea, coffee, rubber and cardamom have always been treated as a separate entity within the agricultural sector for two major reasons: First, these are the only four agricultural crops where the State governments have granted exemption from land ceiling, thereby facilitating corporatisation of cultivation and second, all the four crops have been declared as `industry' by Parliament. Equally important is the fact that special labour welfare measures for this segment are exclusively covered under the Plantations Labour Act, 1951.
Many questions are now asked about the implications of the policy just announced, especially its timing. Many ask who will be the taker at a time when the domestic tea plantations have been reeling under crisis due to sharp and unprecedented fall in prices. A counter question will serve as an answer to this: who will be the giver at a time when the going is rosy?
We should remember that it is just a policy announcement and is going to stay. This policy will remain when the industry is not doing well as also when it is doing well. In fact, it is not as if the Government has announced the decision overnight; the thinking had started three to four years ago. FDI, in any industry, can flow both when the industry is doing well and also when it is not doing well. It is the vision of the Investor that influences the decision.
We need not be unduly apprehensive of any massive `takeover'. Tea is largely corporatised and the companies have come of age; whether or not to allow FDI is an option left with the companies. The small grower segment need not worry as enough safeguards have been provided and the Central Government can always reject any FDI proposal in the segment of small growers holding small acreage and selling the green leaf.
Also, the apprehension that foreigners will grab substantial new lands for starting tea cultivation is also misplaced. Large chunks of land are not available for tea expansion in the country. In fact, there has been very little expansion in the tea area, except in respect of the small holders; FDI could, therefore, flow into existing tea planting companies only and new cultivation ventures are unlikely. Of course, FDI could flow into tea trading companies too.
Views have been expressed in certain quarters that the complex and labour intensive nature of tea cultivation that required thorough knowledge of local conditions may act as a deterrent for FDI inflow. It is not as if the overseas investor has himself to run the tea plantations; he would use the existing Indian expertise for this purpose. In fact, this was the scenario in the case of sterling companies in the post-Independence era, though there were still a handful of foreigners managing tea estates.
Further, the present emphasis on the tea sector is on the marketing front, and not on the quantum of production. India produces enough to fully meet the home demand of about 6.50 lakh tonnes and exports two lakh tonnes a year. The major issue that has been agitating the minds of the producers is: how to get a remunerative price for the product. Especially, a new challenge has been thrown after the opening up of imports under the WTO Agreement. We cannot be complacent on the ground that imports for domestic consumption are still negligible. This is because of the fairly high prevalent import tariff that could be reduced gradually to the global level of 3 to 4 per cent in course of time.
Rather than starting an entirely new venture, the investors are likely to partner existing plantation or trading companies. FDI will help accelerate various developmental activities such as replanting, rejuvenation and R&D that require huge funding. It may also help the much needed upgradation, modernisation and automation of tea factories.
Indian producers can no more be content by being mere sellers of the commodity through public auctions at throwaway prices, even while retail prices continue to remain high. FDI may help towards value-addition to the product, packaging, direct domestic marketing and export.
The domestic market itself has a vast untapped potential and the present per capita tea consumption is just 700 grams. Enormous funds are needed to venture into a promotional campaign for this purpose, which is another area into which FDI can flow. Large sized companies can also plan for joint ventures and tieups with overseas companies for setting up tea packaging units in India or abroad, branding and marketing.
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