Sushmita Chatterjee

7/23/2019 Sushmita Chatterjee

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Domestic Production, Domestic Consumption and Exports of Indian

Tea: Examining the Interlinkages

Sushmita Chatterjee

11 Introduction

Until recently, India has been the largest producer of tea in the world, accounting for 29% of world tea

production in the nineties and 27.6% in the current decade. The country is also the largest consumer of

tea, with the share of domestic consumption in allIndia tea production being 7!% during the eighties

and nineties and "#.6"% during the current decade. $oweer, our teae&ports performance has been

unimpressie, with growth rates in terms of e&port olumes turning negatie in the past and absolute

olumes of e&ports fluctuating and stagnating around 2!! million 'gs. since many decades. (lthough

this itself is not necessarily a cause of concern since this could be due to a change in the outputmi& and

the e&port bas'et with the deelopment of the economy. $oweer, this does raise the )uestion as to

why e&port olumes are stagnating. *ossible reasons can be high domestic demand +umar and -ittal,

#99/ -isra, #990/ *ai, #99#/ -itra, #99#/ 1andopadhyay, #9"2, competition from other e&porters

+3harma et al., #99/ umar and -ittal, #99/ *ai, #99#/ 4ass, #99!/ 1andopadhyay, #9"2/ 5osta,

#96" or shift in the demand of foreign consumers +umar et al., 2!!". 3ince the reasons can emanate

from both the supply and the demand side, we e&amine the interlin'ages between production,

consumption and e&ports of tea and thus proide a methodology to estimate the e&ports function for

Indian tea.

-ost of the studies estimate teae&ports as a singlee)uation model with e&planatory ariables

li'e relatie prices and world income +umar, 1adal, 3ingh and 3ingh, 2!!"/ utty, #999, 4utta, #96

or club together both supply and demand side factors +umar and -ittal, #99/ umar and umar,

#990/ -isra, #990/ 4ass, #99!. et others li'e Islam and 3ubramaniyan +#9"9, 1ond +#9"7 and

oldstein and han +#97" specify both e&port supply and demand relationships separately for

agricultural e&ports, primary commodity e&ports#and industrial e&ports respectiely. $oweer, the

e&port supply specifications in Islam and 3ubramaniyan +#9"9 and 1ond +#9"7 are a bit simplistic in

# In 1ond +#9"7, primary commodities include food, beerages and tobacco, agricultural raw

materials, energy and minerals.


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that the effect of the domestic factors on the supply of e&ports is captured using trend as a long run

impact ariable and supply and demand shoc's as the short run impact ariables. 8hile it is o'ay to

include such e&planatory ariables for e&amining the short and long run supply elasticities, it may not

be ade)uate. In order to obsere the true impact of the supply side ariables on e&ports, we deelop an

economic model for tea output, which is based on the short run haresting and the long run inestmentdecisions of a perennial crop producer, thereafter we put forth a consumption model based on a

standard utility ma&imiation e&ercise for a consumer, and finally we introduce an e&ports model for

tea, which is a ariant of Thirlwall:s e&ports model. 8e then estimate output, consumption and e&ports

;ointly using the seemingly unrelated regression e)uations +3U and #.0 elaborate the output, consumption and e&ports model for tea respectiely.

3ection #. discusses the data and the methodology. 3ection #.6 discusses estimation results. 3ection

#.7 concludes the paper.

1! The "utput #odel

Tea is a perennial crop and is characteried by both deelopment and productie phases. The

deelopment phase is the one during which the producer has to underta'e certain inestments, also

'nown as sun' costs. ?or instance, starting a new tea estate re)uires clearing and terracing the land,

planting and nurturing the bushes, building access roads, and also constructing a factory nearby, all of

which are part of the sun' cost which the producer has to underta'e before he can reap any output.

@nce the bushes are planted, there is a gestation lag of fie to si& years, after which the bushes become

productie and can yield output in four phases during the year, starting from -arch to Aoember +the

first flush being harested between late ?ebruary to mid(pril, followed by a second flush harest

between -ay and Bune, a rain flush during Buly and (ugust and finally an autumn flush harest

between the months of 3eptember and Aoember2barring the dry winter months. The productie

phase of the crop lasts as long as the crop yields output. $oweer, the bushes are considered economic

between ! years of age, after which the productiity of the bush falls drastically.

2 4uring the harest season, eery bush is pluc'ed at an interal of 07 days.


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3ince tea production incurs a sun' cost, that itself creates a barrier to entry and e&it>, and

therefore producers who inest in tea cannot shift to another crop in response to a short term change in

the relatie price of tea. $oweer producers do respond to a change in the relatie price of tea by

changing the yield of the crop in the mediumlong run by planting high yielding tea bushes,

replacement of old or uneconomic bushes, infilling of the e&isting area under tea

0

etc. (lso, the shortrun measures would include adoption of improed cultural practices li'e manuring, intensie

cultiation ia proper use of fertilisers and pesticides, timely pruning of tea bushes, as also the pluc'ing

style adopted.Thus, with tea, shortrun acreage changes are not possible but yield changes are

possible. 5hanging the acreage is not an easy option.6


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typically, a structural model must be deeloped to highlight the inestment and haresting decisions of

the perennial crop producer. $oweer, the final supply e)uation in 8ic'ens and reenfield +#97> is a

function of past prices and lagged output which is the same as what can be obtained using the

Aerloian approach.

8e follow a intage production function approach similar to ('iyama and Triedi +#9"7 toe&plain a simple twofactor production function and then put forth a simple model of output which is

guided by the different 'inds of decisions that a competitie tea producer needs to ma'e. 8e propose

that a tea producer faces a intage production function

( )vtq ,where t refers to time and refers to tea

bushes of a certain intage. Get

( )vtk ,denote Hcapital: which means homogenous land owned by the

producer planted with tea bushes and( )vtl ,

denotes all ariable inputs used in fi&ed proportion to

capital in the production process. 8e assume that output is produced only by the matured intages 9and

is homogenous. (ggregate tea output of the economy is gien by

( )tQand is defined as the summation

of all indiidual output, i.e.

( ) ( )=i

i vtqtQ ,

+#

where

( ) ( ) ( )[ ]vtlvtkfvtqi ,,,, = +2

The yield per unit of capital or aerage productiity is gien by

( )( )

( ) ( )vtvtvtk

vtq== ,

,

,

, which

implies that the productiity depends upon the age of the bushes, denoted by t-vand not upon the time

when they are planted. This e&plains the gestation lag inoled between planting a bush and reaping its

output.

1efore we pose the producer:s problem, we may distinguish between e&tensions +meant for

future new plantings, replantings, replacement plantings and uprootings +or remoals of intage

9 -atured intages refer to tea bushes aged between ! years of age during which the bushes are

considered economic.


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capital in period t +denoted by

( ) ( ) +,, tRPtRtE and

( )tU respectiely. Extensionsmean e&tending

further to e&isting land +for possible inestments in the future, replantings mean additions to the

capital stoc' by planting new seedlings on currently uneconomic area under the same crop#! and

replacement plantingsare new plantings on land which has been obtained by clearing forest area and

burning trees. Uprootingor remoal is practiced when the productiity of the bush falls drastically and

it becomes uneconomic for the producer to maintain the bush. Thus, the actual bearing acreage under

tea, which is determined by the leels of

( )tRand

( )tRP

,is some fraction of the total acreage under tea

at time t. The rest of the area is the nonbearing acreage which can be subsumed under the error term as

follows.

ttt uBAA += +>

wheretA

refers to the total acreage,tBA

refers to the bearing acreage under tea andt

refers to the

nonbearing area which may include a part of the uprooted area that is not replanted.

8e define the total feasible or potential output,

P

tQ

by

( ) ( ),,, vtKvtQv

P

t =

v

. +0

$oweer the actual output or

( )tQis to be distinguished from the potential output because in eery

period, the producers: optimiation inoles the choice of a subset of mature intages which are

economic and earn nonnegatie profits. This choice inoles choosing the leels of

( ) ( ) ( )tUtRPtRtE ,+,,and

( )vtL ,which are in turn ;ointly determined by e&pected future profitability

and past inestment decisions. Thus, in the short run, producer decisions are guided by ariables which

bring about a change in the yield of the crop. $oweer, in the long run, producer decisions are guided

by ariables which bring about a change in the bearing acreage of the crop.

#! enerally, Huprootings: or remoal of old tea bushes precedes replantings. 8hereas in case of1angladesh and 3ri Gan'a, data reeals how much area is uprooted and how much is replanted/ in

India, information on uprootings and replantings are not separately aailable. Thus, one can only tell

from the data on replantings that atleast as much or maybe a greater area is uprooted.


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The actual output thus, is gien by

>2

#

#

itte

t

tt XBA

P

PQ

=

+

wheretP

is the current price of tea,

e

tP

is the e&pected price of tea and

e

t

t

PP

refers to the relatie price

which guides the haresting decisions of the producer in the short run.#tBA

is the actual bearing

acreage at time t#, which reflects the past inestment decisions of the producer## anditX

is a ector

of ariables such as labour, price of inputs and yield ris'. Aow, e)n. + contains two unobserable

ariables, i.

e

tP

and#tBA

, which we will estimate. To estimate

e

tP

,we ta'e a moing aerage of the

auction prices preailing in the past fie years. Thus,

I

#

=

=i

itt PP

is used as a pro&y to represent

e

tP

. Ae&t, to estimate#tBA

,we assume that the producers: desired acreage under tea is a function of the

preious period:s total acreage, e&pected profit#2and the desired ad;ustments in the current period. The

desired ad;ustments can be in the form of e&tensions, replantings, replacement plantings and remoals.

8e may write this relationship as

## 8e use oneperiod lagged acreage to aoid the problem of simultaneity between current output and

current acreage. Using lagged acreage as an instrumental ariable helps to deal with the same.

#2 8e would hae used relatie e&pected profits if it were possible for the tea producer to shift in and out of tea production.

(ll other crops that the producer may choose to produce along with tea are produced on a small scale for home consumptionand hence cannot be considered as substitutes for a tea producer. ?or instance, in erela, rubber, pepper, bananas, ginger,

lemon grass, mangoes, ;ac'fruit, coconut etc. are grown along with tea because the latter does not re)uire labour all around

the year and this enables the small growers to grow a part of the food that they consume. Thus, such crops cannot be treated

as substitutes of tea from the producer:s point of iew. ?or a discussion, see 4wibedi $.A. D*roduction of Tea in IndiaE, *1agchi F 5ompany, 5alcutta.


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ttttt

e

tt

t URPREAA #60>2##! +++++++= +6

8e may further hypothesie that the change in acreage between periods occurs in proportion to the

difference between the desired acreage for the current period and the actual acreage in the preious

period, i.e.

( ) tt

ttt AAAA 2## += ,

#! 60>2##! +++++++= +"

wherettt 2#>6600>>22##!! //////#/ +======+==

+9The reduced form area e)uation is a general model which can be modified according to country

specific information. In the Indian case, we can omit the ariable U+t because part of the uprooted area

is replanted +and is reflected in


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it in lieu of e&pected profit or

e

t

in +".#>

?urther, by regressingtA

on the righthand side ariables in +", we obtain the estimated alue of the

dependent ariable, i.e.tAIand use it as a pro&y for

tBAfrom +.#0

Therefore, we estimate the following model for teaoutput.

#>#2#!I

I +++

+= itt

t

tt XA

P

PQ

+#>

If the relatie price of tea rises, then it is lucratie for the producer to harest the crop and thus raise the

current leel of output. @n the other hand, if there is a fall in the relatie price, then the producer would

rather postpone his haresting decision to the ne&t period. Thus, in eery period, the producer forms

new price e&pectations and compares the actual price with the e&pected price. 4epending upon whether

there is a rise or fall in the relatie price, the outputresponse is positie or negatie respectiely. The

second regressor is the oneperiod lagged bearing acreage +or#

ItA

under tea. ( rise in the bearing

#> ?or estimating +#2, we need to specifyp,"and q. @n the basis of arious stationarity tests, we first choose "##$

Ae&t,allowingpJK#,2L and qJK#, 2L, we estimate a ariety of models and choose the best combination +p%q by considering theinertibility criterion, the significance of the (


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acreage will hae a positie impact on current as well as future output of tea, thus implying that output

is positiely related to acreage.

The other regressors which hae an influence on output are denoted by the ectoritX

in our

model and include labour, price of inputs and yield ris'. The most significant input in tea production is

labour. Gabour is re)uired for a ariety of fieldtas's all throughout the year and is essential to raise the

current and future output from tea. @utput is thus positiely related to labour. #*rice of inputs is

another crucial ariable affecting tea output. 3ince tea cultiation is labour intensie with hardly any

usage of other inputs such as diesel and electricity, we simply use the absolute price of fertilisers to

represent the price of inputs. 8e define this ariable as the aerage allIndia price of urea, 4(* +di

ammonium phosphate and -@*#6+muriate of potash. $igher the price of fertilisers, higher is the cost

of production and lower the response of output. *roducers would try to substitute cheaper inputs for

relatiely e&pensie ones but beyond a point, production might be hampered. 8e thus e&pect a negatie

relationship between price of inputs and output. ( third ariable in the list of other regressors is yield

ris'. *art of the ariations in yield which are beyond the producer:s control can be due to a ariation in

rainfall from its long run aerage. 8e capture the yield ris' due to abnormal rainfall by ta'ing the

coefficient of ariation of the deiation in rainfall from its long run aerage oer three preious

periods, where the long run aerage is computed as the aerage rainfall of the last >! years.#7 The

higher the yield ris', the smaller is the output produced.

1$ The Consumption #odel

# Gabour is re)uired intensiely for fertilising, pruning and haresting +or pluc'ing. ?ertiliser

application is a manual operation wherein the more productie fields re)uire additional roundsinoling more labour. *runing is important to maintain the tea bush in the right form and height for

growing and pluc'ing. It also inoles remoal of dead or decayed branches so as to ensure a clean and

healthy plant. Unli'e other field actiities, pruning is mostly done by men wor'ers. 3ome actiitiesli'e weeding earlier re)uired intensie use of labour but with introduction of chemical weeding, the

wor'force inoled in this actiity has shrun' oer time. (s regards pluc'ing, in some areas,

mechaniation is being tested in the form of shear haresters, but the results do not compare )uality

wise with hand pluc'ing. @ther actiities such as new plantings, infilling, and especially replantingwhich inoles uprooting old bushes, rehabilitation of soil, planting tea bushes and maintenance of

young bushes are oerwhelmingly labour intensie.

#6 -@* or muriate of potash is potassium chloride, which is used as a fertiliser.

#7 8e first compute the deiations in rainfall from the long period aerage rainfall for three preiousperiods. Get the deiations be denoted by where is the actual rainfall in year t and is the long period

aerage rainfall in year t +i.e. the aerage of preious >! years. 8e measure the yield ris' or the

coefficient of ariation as the standard deiation of diided by the mean of.


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8e derie the consumption function for tea by resorting to a standard utility ma&imisation e&ercise for

a typical consumer who consumes n goods. The first order conditions obtained from such an e&ercise

can be soled to get a system of n-arshallian demand e)uations in terms of income and prices as

follows.

( )p&ccii ,=

+#0

(ssuming that indiidual consumption for a particular good can be summed oer the entire population

+let us say population sie is m to get the aggregate consumption for that good, we can write the

aggregate consumption of tea as

( )=

=m

'

' p&c(#

,

+#

where&is domestic per capita income andprefers to a ector of prices which can include the ownprice of tea, price of its substitutes and price of its complements. 8e too' coffee as a substitute

commodity, and mil' and sugar as the two complements of tea. ?urther, to obsere the impact of Htastes

and preferences: of consumers on consumption of tea, we include a trend ariable in the consumption

function +e). #6.#"Thedemand model for tea is thus gien by

2620#>2#! +++++++= )ren"&PPPP( ((so +#6

where

oP

is own price of tea,

sP

is the price of substitutes of tea,

#(P

is the price of sugar,

2(P

is the

price of mil' and)ren"

is the trend ariable, which ta'es a alue of # for #97!7#, 2 for #97#72 and

so on. 5onsumption of tea is negatiely related to its own price and the price of its complements, and

positiely related to price of its substitutes and income. The impact of the trend ariable is an empirical

issue, depending upon whether the changing tastes and preferences of consumers hae had a positie or

negatie impact on consumption of tea.

1% The Exports #odel

#"


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Using a ariant of Thirlwall:s e&ports function +Thirlwall 2!!>, #979,#9 we propose the following

e&ports function for tea.

( ) ( ) ( ) ( ) 0>2# *+,&PPX -=

+#7

where

Xis e&ports of tea,

-P

is the international price relatie which is defined as the Indian tea e&port price relatie to

the foreign price of tea in the competing tea e&porting countries/

P

is the domestic price relatie, defined as the ratio of

the e&port price and the domestic price of Indian tea/ I- is income of all those countries which import tea from India, and

M is the e&change rate olatility. The period of late #9"!s +early #9" onwards is mar'ed by the gradual collapse of the

3oiet Union or the U33< into independent nations. 2#!

. ++++++++==

*ars,U..R,.*+,&PPXiitt-

+#"

#9Thirlwall:s e&port function is based upon his 1alanceofpaymentsconstrained growth +1*5 model +Thirlwall 2!!>/Thirlwall #979. The 1*5 model, which has been applied e&tensiely in the conte&t of the deeloped and the deeloping

world,

2!

2#


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wheret,.

is the dummy for disintegration of the U.3.3.

The third regressor, i.e. per capita income of the tea importing countries +

t+,&

is

e&pected to affect the demand for Indian tea e&ports positiely. To capture this ariable, we use a

weighted aerage of the real per capita 4* of all those countries which import tea from India, with

the weights being the share of each country:s per capita 4* in the sum total per capita 4*.

The impact of e&change rate olatility on e&ports is largely an empirical issue. 3ince e&change rate is

agreed upon at the time of the trade contract, and payments are made in future when the actual deliery

ta'es place, there is an uncertainty associated with the profits to be made, which may lead ris'aerse

traders to indulge in less foreign trade. @n the other hand, some traders can anticipate moements in

the e&change rate based upon their 'nowledge and past e&perience in trade. 3o, if they hae better

'nowledge than the aerage mar'et participant, then they can ma'e profits which might offset the ris'

22

2>


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due to e&change rate olatility +1ailey and Talas, #9""/ Talas and 3wamy, #997. 20 8e represent

e&change rate olatility for a year +t by ta'ing the coefficient of ariation of the real effectie

e&change rate +tR

differentials from the trend +tRI

oer the current and last two years +i.e. t2, t#, t,

where the trend is first estimated for the entire period.2 1& The Data Set and #ethodolog'

Mariables of the output, consumption and e&port function are e&pressed in natural logarithms.

=stimation is conducted at the allIndia leel for the period #97!C7# to 2!!2!!6. 4ata on all the

ariables has been accessed from the Tea 1oard of India and online databases of arious

organiations.26?or price ariables appearing in the output function, we hae used wholesale or auction

prices whereas for those appearing in the consumption function, we hae used retail prices as far as

possible. 3ince it was difficult to procure retail prices of complement products such as mil' and sugar,

we hae instead used the wholesale price indices to represent these ariables. 4omestic per capita

income is represented by the per capita net national product at constant prices. To represent

actual profit, we simply deducted the total wage bill from reenue.27 The means, standard

deiations and units of the ariables +untransformed to be used in the analysis are reported in Table

#.#. Ta(le 11

-eans and 3tandard 4eiations of Mariables, #97!C7# P 2!!C!6

Mariable +Units -ean 3tandard 4eiation

Q +million 'ilograms 679.#6 #0".!2

( +million 'ilograms 069.20 #62.!Mariable +Units -ean 3tandard 4eiation

X +million 'ilograms #9".7 #7.0"2

t

t

P

P

I+ratio

#.22 !.2#

#ItA +estimated alue of log +area

from e)uation +#7

!.!# !.!#

20

2

26

27


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tL

+number966"0".7 #66979."

t-ER)PR +2

!

#!

>!

2"

29

>!


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+#9where

=X

(

Q

+

,

=

xmxx

clcc

qkqq

xxx

xxx

xxx

X

..#

..#

..#

2#

2#

2#

,

=

#

#

#

#

xt

ct

qt

t

u

u

u

u

,

=

>

2

#

t

,

is the firstdifference

operator andt is the ector of disturbance terms from the three e)uations.

#! ,and

2are the

parameter ectors. In other words,+

is the ector of dependent ariables,X

is the ector of

e&planatory ariables of the three e)uations, and#t

u

is the ector of lagged error terms obtained from

the @G3 estimates of the three e)uations. The appropriate lag length for the e&planatory ariables of the

=5-s is chosen by loo'ing at the residuals from each e)uation. ( lag length of ero indicates the

eidence of no serial correlation at conentional leels of significance and the Bar)ue1era +B1 statistic

is also insignificant, which means that the residuals are normally distributed. >#The 4oladoBen'inson

3osilla2reeals that log +Q, log+(, and log ++,& are integrated of order 2/ log + #ItA ,

log +L, log +

/

tP

and log +* are integrated of order !/ all other ariables are integrated of order #. >>

8e thus first difference I +2 ariables once and then estimate the errorcorrection model.>0

1) Estimation *esults

The estimation results of our 3U. The hypothesis that the U33#

>2

>>

>0

>


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highly responsie to the international price relatie and income ++,& in both periods but remained

responsie to the domestic price relatie only in the postU33< period. Get us e&amine the regression

results in detail.

1)1 Output Response

@utput is positiely and significantly related to bearing acreage and the relatie error of price

e&pectation, with 9% confidence interals of +!.26, #.77 and +!.!0, !.#2 respectiely. The estimates

show that a #% increase in the bearing acreage would increase output by #.!2 % +significant at the #%

leel whereas a #% increase in the relatie error of price e&pectation would increase output by !.# %

+significant at the # % leel. ?ertilier price is found to be statistically significant, with the

corresponding coefficient being !.!> +significant at the % leel and a 9% confidence interal of +

!.!0, !.!! which lies close to !. ?urther, output is found to be unresponsie to labour. >6Gagged output

is positiely and significantly related to current output with a coefficient alue of !.07 and 9%

confidence interal of +!.2>, !.72. ?inally, the error correction term is found to be negatie significant

+#.9 with a large confidence interal +9% confidence interal being +2.!2,#.#6, which implies

that a long run e)uilibrium relationship e&ists between the ariables of the output function. The

standardied beta coefficients + of the relatie error of price e&pectation and lagged

bearing acreage are almost e)ual in magnitude +J!.>> and !.> respectiely, thus implying that the

shortrun haresting decisions and the longrun inestment decisions are both e)ually important in the

determination of tea output. ?urther, the coefficient of lagged output is also e)ual to !.07 which means

that persistent effect is also high, or in other words, last period:s output is an important determinant ofcurrent output. @ur output model thus highlights the importance of the shortrun and the longrun

decisions of a tea producer and in that sense, scores oer the published literature on perennial crop

output models +.>7

1)! Consumption Response

The estimates of the consumption function reeal that consumption of tea is responsie to its own

price, domestic percapita income, price of sugar and the trend ariable. (lthough the estimates are

e&tremely small in alue +own price elasticity of demand J !.!!7/ income elasticity of demand J !.!0,

cross price elasticity J !.!!" and trend coefficient J !.!!!!79, they are statistically significant.

$oweer, the 9% confidence interals for the aboe estimates are +!.!#, !.!!, +!.!!, !.!6, +!.!#,

>6

>7


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!.!! and +!.!!, !.!! respectiely.>" (n argument in faour of the small elasticity coefficients is that

bul' of the demand is already being met by the domestic mar'et, and hence further changes in income

or prices do not eo'e much response in domestic consumption. @neperiod lagged change in

consumption is found to be statistically insignificant. The error correction term is negatie significant +

!. at conentional leels of significance with a 9% confidence interal of +!.#2, !.06 which islarge. The standardied beta coefficients indicate that income is the most important ariable in

determining consumption, followed by price of sugar and the trend ariable. The ownprice of tea is the

ariable of least importance in determining consumption of tea. The related literature reports ery high

income elasticities>9and ery low +and een insignificant in some studies price elasticities 0! +3ingh,

#99#/ -isra, #99!/ 5osta, #96". Gow price elasticity, which is a common finding in this study and in

other studies, indicates that price does not play a ery significant role in determining consumption of

tea. Unless suitable measures are ta'en, such as creating awareness amongst consumers regarding the

health benefits of tea or inenting newer products li'e flaouredCspecialty teas0# and conenient

products li'e instant teas for the domestic mar'et, the tea industry would increasingly lose out to other

competing beerages. This is also eident from the trend ariable, which captures the aderse impact

on consumption due to a change in the tastes of consumers oer time. 02

1)$Exports Response

In the postU33< period, a #% rise in the international price relatie leads to a !.7% fall in e&ports.

The coefficient is statistically significant at the #% leel with a 9% confidence interal of +!."9,

!.26, which is )uite large +Table #.2. This implies that a rise in the price of Indian tea isiscompeting countries: tea price will ma'e Indian tea comparatiely less competitie thus leading to a

fall in demand for Indian tea e&ports.0>5ontrary to the negatie coefficient obtained in the postU339

0!

0#

02

0>


18/37

upon faourable terms of trade between the two, een with a rise in the international price relatie

+which made Indian tea comparatiely less competitie, India was assured a certain leel of e&ports

and so, oerall tea e&ports did not fall. $oweer, after the disintegration of U337. The 9% confidence interal for the

estimate is +!.!6, !.6", which is )uite large. The positie sign of the domestic price relatie indicates

that greater is the margin between the e&port price and the domestic price of tea, greater is the incentie

to e&port.0 *er capita income of the tea importing countries + +,& is found to be

negatie significant in the postU33< period and positie significant in the U33< period with

corresponding elasticities being 2.#2 and #.76 respectiely. The estimates hae large confidence

interals +9% confidence interals are +>.>0 and !."9 and +!.07, >.! respectiely in the post

U33< and the U33< period. 8hereas 8ere, Adung:u, eda and aringi +2!!2 reeal an

insignificant coefficient for income in the estimation of enyan coffee e&ports, and a negatie

significant coefficient of the same in case of tea/06income elasticity of tea e&ports is positie significant

+J!.> in 4utta +#96 and +J!.70 in umar and umar +#990, gien that both studies coer only up

till the U33< period. Thus our income elasticity estimates are comparatiely much higher.07 (n

argument in faour of the negatie coefficient of income in the postU33< period is that a rise in the

income of tea importing countries was perhaps associated with a shift towards better )uality teas

e&ported by other competing countries or towards other beerages. =&change rate olatility +*

has been found to be negatie significant in the postU33< period and positie significant in the U33


19/37

positie coefficient +J!.0> and has a significant leel effect on e&ports +statistically significant at the

#% leel. The 9% confidence interal of +!.#9, !.67 is also )uite large. This means that the U33 of the second dummy ariable +t,.

, which isstatistically significant at the #% leel with a 9% confidence interal of +!.2!, !.!. Thus, U33


20/37

Mariable

AoteQ The

ariables are

@utput +R,

5onsumption+5, =&ports +S,

>

+!.!2#

t-ER)PR !.!26OO

+!.!##

#tQ !.077OOO

+!.#20

#ctu !.0OOO

+!.#00

/

tP !.!!7O

+!.!!0

#(

tP !.!!"OO

+!.!!0

t&

!.!0OOO

+!.!#

t)RE0 !.!!!!79O

+0.9#=!

#t( !.#7

+!.##

#xtu !.9OOO

+!.2!#-

tP !.7OOO

+!.#6!

tP !.>7#OO

+!.#"

t+,& 2.#2OOO

+!.62

t* !.!02OOO

+!.!#7

Mariable @utput 5onsumption =&ports

#tX !.!99

+!.#20

tU..R !.0>0OOO

+!.#22-

tP

OtU..R

!.07#OOO

+!.#7

tP

O tU..R

!.22>

+!.#7"

t+,&

O tU..R

#.760OOO

+!.69

t*

O tU..R

!.!"OOO

+!.!20


21/37

U33< + t,.

, and the lagged error correction terms +

#qtu

,#ctu

and#xtu

. (ll ariables, e&cept the dummies are innatural logs. 3tandard errors are reported in parentheses below corresponding coefficient estimates.

OOO, OO and O indicate significance at the #%, %, and #!% leels, respectiely.

Ta(le 1$: Standardi-ed .eta/Coefficient Estimates of Seemingl' +nrelated *egression Euations

#odel: "utput, Consumption and Export euations

Mariable @utput +R 5onsumption +5 =&ports +S

#qtu!.9!2OOO

+!.2#"

t

t

P

PI

!.>>6OOO

+!.!22

#ItA

!.>!OOO

+!.>"0

tL!.#76

+!.!2#

t-ER)PR !.2!"OO

+!.!##

#tQ !.077OOO

+!.#20

#ctu !.0OOO

+!.#00

/

tP !.2>>O

+!.!!0

#(

tP !.29>OO

+!.!!0

t& !. 0OOO

+!.!#

t)RE0 !.279O

+0.9#=!

#t(!.#7

+!.##


22/37

#xtu!.07OOO

+!.2!#

-

tP

#.!#OOO

+!.#6!

Mariable @utput +R 5onsumption +5 =&ports +S

tP !.OO

+!.#"

t+,& !.9"9OOO

+!.62

t* !.090OOO

+!.!#7

#tX !.!99

+!.#20

tU..R >.7>OOO

+!.#22-

tP

OtU..R

!.76#OOO

+!.#7

tP

O tU..R

!.29>

+!.#7"

t+,&

O tU..R

!.760OOO

+!.69

t*

O tU..R

>.72OOO

+!.!20

t,. !.>#OOO

+!.!>"

5onstant!.0

+!.29>

!.!!!2

+!.!!#

!.2!6OOO

+!.!">

8ald

2

+

!+ =tcoefficienslope

+palue

".#2

+!.!!

>!.2#

+!.!!

".#

+!.!!

palue + tU..R

and

interactionsJ!

!.!!

palue + interactionsJ! !.!!

AoteQ The ariables are same as in Table #.2.


23/37

OOO, OO and O indicate significance at the #%, %, and #!% leels, respectiely.

10 Concluding note

This paper focused on the interlin'ages between production, consumption and e&ports of tea in India

and thereby proided a sound methodology to estimate the e&ports function for Indian tea. The

published literature on tea e&ports does not consider the mutual interdependence between production,

consumption and e&ports of tea, thereby leading to improper theoretical models and untenable

empirical results. In the light of these studies, we use the 3U


24/37

after, was a difficult one, because with the disintegration of the U33


25/37

U33< period dummy. @n the contrary, the results obtained from the simultaneous e)uations model can

be substantiated by economic theory. Thus, the fact that the 3U


26/37

60

80

100

120

140

160

180

20 40 60 80 100 120 140 160

CO

P

C

Y

(# 1 Gagrange multiplier test of serial correlationQ =5- +=)uation +#9

(u&iliary =)uation

+4ependent Mariable

2+ Rpn 5ritical 5hi3)uare +%

qtI !.>0 >."0#

ctI 2.#"0 >."0#

xtI !.#7# >."0#

InferenceQ 3ince the computed chis)uared statistic is less than the tabulated alue at the chosen leel of significance, we

cannot re;ect the null hypothesis of no serial correlation.

(2 Bar)ue1era 3tatistic for the residuals of the =5-s +=)uation +#9

>>

5onsumption e)n. #.99 !.>6"

=&ports =)n. !.76 !.709

InferenceQ


27/37

?igure 2

-0.2

0.0

0.2

0.4

0.6

70 75 80 85 90 95 00 05

Rel. Error of Price Expectation

13.5

13.6

13.7

13.8

13.9

14.0

14.1

70 75 80 85 90 95 00 05

a!o"r

-0.01

0.00

0.01

0.02

0.03

0.04

70 75 80 85 90 95 00 05

#earin$ %crea$e


28/37

?igure 2 +contd.

-1

0

1

2

3

70 75 80 85 90 95 00 05

&ertili'er Price

-3.6

-3.2

-2.8

-2.4

-2.0

-1.6

70 75 80 85 90 95 00 05

Yiel( Ri')

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

70 75 80 85 90 95 00 05

O*n Price of +ea


29/37

?igure 2 +contd.


30/37

-0.2

0.0

0.2

0.4

0.6

0.8

70 75 80 85 90 95 00 05

Price of ,"!'tit"te' coffee

2.5

3.0

3.5

4.0

4.5

5.0

5.5

70 75 80 85 90 95 00 05

Price of Co/ple/ent' ,"$ar

2.5

3.0

3.5

4.0

4.5

5.0

5.5

70 75 80 85 90 95 00 05

Price of Co/ple/ent' il)


31/37

?igure 2 +contd.

4.0

4.2

4.4

4.6

4.8

5.0

5.2

70 75 80 85 90 95 00 05

o/e'tic Per cap. nco/e

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

70 75 80 85 90 95 00 05

nternational Price Relatie

0.0

0.1

0.2

0.3

0.4

0.5

70 75 80 85 90 95 00 05

o/e'tic Price Relatie


32/37

?igure 2 +contd.

9.8

10.0

10.2

10.4

10.6

70 75 80 85 90 95 00 05

pc of +ea /portin$ Co"ntrie'

-7.0

-6.5

-6.0

-5.5

-5.0

-4.5

-4.0

-3.5

70 75 80 85 90 95 00 05

Excan$e Rate olatilit


33/37

.i(liograph'

(dler -.?. HThe >#9, #97!.(dy *. H3upply ?unctions in Tropical (griculture: Bulletin of t1e /xfor" Universit2 ,nstitute of

Economics an" .tatistics, Mol. >!, Issue 2, pp. #7#"", #96".

('iyama and Triedi HMintage *roduction (pproach to *erennial 5rop 3upplyQ (n (pplication to Tea

in -a;or *roducing 5ountries:3ournal of Econometrics, Mol. >6, Issue #2, pp. #>>#6#, #9"7.

(rie (.5., @sang Thomas and 4aniel T. 3lott;e H=&change 7, Issue >, #9"2.

1ateman, -. B. H(ggregate and "00!#, -ay #96.

1aum 5.?., 5aglayan -., and A. @'an HAonlinear =ffects of =&change .

5offee 1oard of India HAttitu"es to4ar"s (offee rinking: 2!!7.


34/37

5offee 1oard of India H(offee .tatistics, arious issues.

4ic'ey 4.(. and 3. *antula H4etermining the @rder of 4ifferencing in (utoregressie *rocesses:

3ournal of Business an" Economic .tatistics, Mol. , 006#, #9"7.

4olado, B., T. Bensinson, and 3. 3osilla.

=ngle


35/37

Bar)ue, 5arlos -. and (nil . 1era H=fficient tests for normality, homoscedasticity and serial

independence of regression residualsQ -onte 5arlo eidence:Economics Letters, Mol. 7, Issue 0,

pp. >#>P>#", #9"#.

alaitandona'es and 3hon'wiler H3tate3pace (pproach to *erennial 5rop 3upply (nalysis:

American 3ournal of Agricultural Economics, Mol. 70, Ao. 2, #992.iptui -. 5. 4oes =&change 0,

Issue >0, #999.

-c 5ombie, B.3.G. and (.*. Thirlwall =ssays on 1alance of *ayments 5onstrained

rowthQ Theory and =idence, 7, !, #99#.

-oreno1rid, B. 5. and =. *ere HTrade Giberaliation and =conomic rowth in 5entral (merica:

(epal Revie4 "#, pp. ###6", 2!!>.

Aarayana, A.3.3., and irit 3. *ari'h H=stimation of ?arm 3upply


36/37

Aerloe, -. The 4ynamics of 3upplyQ =stimation of ?armer:s , pp. 7!>7!", #9"7.

*achecoGope, *enelope HThe Impact of Trade Giberalisation on =&ports, Imports,the 1alance of *ayments and rowthQ the 5ase of -e&ico:3ournal of Post

Ke2nesian Economics, Mol. 27, Issue 0, pp. 96#9, 2!!.

*ai M.3. HIndian Tea IndustryQ 3trategic Implications for 9!:s: Pro"uctivit2, Mol. >2, Issue #, (pr.Bun

#99#.

*erraton, Bonathan H1alance of *ayments 5onstrained rowthQ (n =&amination of Thirlwall:s

$ypothesis:,nternational Revie4 of Applie" Economics, Mol. #7, Ao. #, pp. #22, 2!!>.

*oo, 3usan H5onditional =&change


37/37

Thirlwall (.*. Trade, the 1alance of *ayments, and =&change .

Thirlwall, (. *. HThe 1alance of *ayments 5onstraint as an =&planation of International rowth 0, Ao. >. pp. 09"#!, Aoember, #9"2.

UA5T(4, (ommo"it2 Price Bulletin, arious issues.

UA5T(4, @nline 3tatistical 4atabase +www.unctad.org.

8ere, -., Adung:u, A.3., eda, (., and 3. A. aringi H(nalysis of enya:s =&port *erformanceQ (n

=mpirical =aluation: I**6", #962.

ellner (. H=stimators for 3eemingly Unrelated

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Sushmita Chatterjee