Govt continues to subsidise high-cost plantation products

But the government thinks otherwise. Next week it is likely to approve a Rs 50 crore subsidy to cover re-plantation, in Kerala, of rubber in 33,500 hectares, along with a subsidy of Rs 476.10 crore for tea, Rs 180 crore for coffee and Rs 211.35 crore for cardamom. While some might argue that these subsidies will benefit small plantation owners, an economist will argue that given a boom, if small plantations are unsustainable let mergers and acquisitions lead to economies of scale. In this case, subsidies are only blocking a process that will create higher efficiency in the economy.

While it is a case of unwanted subsidies with rubber plantations, cardamom, tea and coffee are seriously sinking. They are sinking not because of droughts or natural calamities but because of market forces. “Cardamom prices have come down (due to a glut in the international market caused by Guatemalan cardamom), our exports are down and we are literally out of the international market while production costs are up,” summarises Spices Board of India director (development finance) P T John. According to John, subsidies must be given to keep up cardamom production because prices are not attractive and, hence, farmers are not willing to invest in re-plantation. Re-plantation is capital intensive, requiring about Rs 1.2 lakh per hectare and it takes at least two years of waiting before the plants start yielding, making cardamom an unattractive investment option.

It’s the same story with tea. “Production costs are easily around Rs 55-60 per kg while prices are only at Rs 45-47 per kg. Kenya and Sri Lanka have flooded the international market with cheaper tea and the duty free imports allowed for Sri Lankan goods have only made things worse,” says Rajesh Joseph, a large plantation owner. According to him, the tea industry is in such a bad shape that 11 out of 33 companies have closed and six are only scraping through. “These are the large organised companies; the small growers are not even operating anymore.” In such a scenario, producers do not want to invest in re-plantation without confidence of assured higher prices.

Sound like genuine cases for subsidies? Take another look.

In both cases, international players are producing these commodities at cheaper prices, implying that they are producing it more efficiently. Which is why India’s production costs are higher than the ruling market prices. Producers, by not investing in re-plantation, are acting like rational economic agents.