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Wage Hike of Assan Tea Estate Workers Will Increase the Production Costs

The West Bengal tea estates' profit margins would be severely impacted by the wage rise of the estate workers, which will result in a 16-rupee per kilogram increase in production costs.

Chintu Das
Tea Estate Workers
Tea Estate Workers

According to an estimate by ICRA, the wage rise for tea estate workers in West Bengal would raise the cost of production by Rs. 16 per kg and have a significant negative effect on the margins of tea estates in West Bengal, which provides around 37% of the output in North India.

Given the price premium they enjoy above the typical market realizations, however, the effect would be less severe for producers of high-quality tea.

Given the recent announcement made by the Labour Department, West Bengal, of an increase in the basic wages on an interim basis by 15% to Rs. 232/day from Rs. 202/day, ICRA has highlighted that the total wage rate per man day (including bonus, other cash components, and benefits) for tea estate workers in West Bengal is estimated to increase by 12% with effect from January 1, 2022.

In the past, the wages in Assam and West Bengal have fluctuated together. Following the announcement of the interim pay increase, West Bengal now has a basic wage rate of Rs. 232/day compared to Assam's Rs. 205/day. The disparity in basic pay rates suggests that Assam would likely soon revise rates.

The profitability of the entire North India bulk tea industry would be significantly impacted by any change in wage rates in Assam, the country's largest producer of bulk tea (contributing about 60% of North India's production and 50% of all-India production), absent a corresponding rise in tea prices.

Mr. Kaushik Das, Vice President and Co-Group Head, Corporate Sector Ratings, ICRA, commented on the recent announcement by the Labour Department of the Government of West Bengal, saying: "This interim wage hike is likely to result in a margin contraction of around 700 basis points on a YoY basis, for bulk tea players based out of West Bengal, at a steady state level of realisations.

Given the significant premium their product commands above market pricing, the effect is most likely to be less severe for bulk tea producers that are devoted to creating high-quality teas. According to an examination of the H1 CY2022 auction prices, the top 50 estates produced North India CTC (crush, tear, curl) teas at a price of Rs. 319/kg, which was 79% more expensive than the average auction price. This year's premium is higher than the 65% in CY2021.

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