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MUMBAI, July 8

THE Government decision to allow 100 per cent foreign direct investment (FDI) in tea plantations is unlikely to have any significant impact in the immediate future given that complex and labour intensive nature of tea cultivation that requires thorough knowledge of the local conditions, according to Mr K. Ramachandran, head of research, Tata TD Waterhouse Securities Ltd.

Commenting on the rationale of the Government in permitting FDI in tea cultivation, the expert said the current production and consumption pattern suggested that there would be shortage of tea over the next couple of years which may hamper export efforts.

"This explains Government's keenness to encourage tea production,'' Mr Ramachandran said.

Tea cultivation, particularly in northern India, is fragmented and small players are unable to employ the best practices leading to poor output growth as well as quality. Weak auction prices have rendered tea cultivation unviable for most planters with uneconomical sizes of estates.

"This is where a foreign player with large resources can make a difference,'' he observed. "However, tea cultivation is a complex, labour-intensive business that requires great deal of knowledge of the local conditions. Foreign companies have found it difficult to cope with the trying demands of the business leading to the exit of several so-called `sterling' (foreign) tea companies. It is unlikely that there will be many investment proposals following the move to allow 100 per cent FDI in tea plantations,'' Mr Ramachandran pointed out.

On the question of who would benefit from the recent decision, the FMCG specialist said the Unilever Group was the only entity that could be at an advantage given that Hindustan Lever Ltd (HLL), its affiliate in India, is already engaged significantly in tea cultivation (Doom Dooma and Tea Estates operation).

HLL grows about 15 per cent of the tea it sells. Unilever and HLL had together taken over Rossel Tea about a year ago.

The emphasis in recent times has been on the marketing side of tea rather than production. This is due to abundant availability of tea of nearly all varieties across the globe as well as the large value gap between commodity tea and tea brands. "The trend is evidenced by the mega acquisition of Tetley brand by Tata Tea,'' Mr Ramachandran said.

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