T C A Srinivasa-Raghavan: A bitter brew

OKONOMOS/ Indian coffee is in deep trouble and subsidies are the way out. Really?

A finance minister once told our reporter that after reading this newspaper he was unable to enjoy his morning coffee.

Never a slouch at a good riposte, our reporter advised him to have the coffee first but added that reading this newspaper first was indicative of better taste.

Taste aside, the markets for coffee and pink newspapers in India both seem to be suffering from the same malady: an oversupply characterised by dubious quality.

A recent study* by Hari Nagarajan and Sonal Vats of the National Council of Applied Economic Research (NCAER) says that "coffee output is growing faster than demand and that the crisis has been aggravated by the entry of new coffee-producing countries like Vietnam, now the world's second largest coffee exporter, into the international market."

The question is how India should respond. Nagarajan and Vats are very clear: coffee growers have to improve the cost efficiency of production. If they don't, they may as well get out of the way. They have, therefore, examined the cost structure and the efficiency of coffee farming. Both, it turns out, are in need of urgent attention.

No one really knows how coffee came to India but it seems a fellow called Baba Budan in the 17th century brought back seven coffee seeds from Yemen.

These seeds were planted in the hills of Chandragiri in Chikmagalur. And there it stayed for 200 years until another fellow called Jolly of Parry and Co. decided to make money out of it.

But money is one thing and flavour another. Indian coffee didn't quite make it to the top of the charts. Compared to the South American stuff, it was too thin and light but its aroma was not bad.

One major problem is that coffee growers use different techniques. But "these variations might not be the optimal variations because they do not always lead to efficiency in production."

Thus, say the authors, in the case of Arabica, contiguous zones like Chikmagalur and Hassan show different efficiencies but North Coorg seems to be quite similar to Chikmagalur.

They also find that "Shevaroys is using relatively less of certain factors of production compared to other zones, it seems that the managerial practices adopted and the input mix used is not optimum."

But where Robusta is concerned, there is a great deal of similarity between Wynad and South-Coorg. However, technical efficiency seems to be quite low.

All in all, coffee production in India is in a poor state and the government needs to do something. The authors have a number of solutions to offer.

First of all, they say, policies need to be specific to an agro-climatic zone. The age of the plantation plays a major role across all zones and can affect technical change as well as technical efficiency. So "a replantation subsidy must be timed according to the specific agro-climatic zone in question."

Input usage is wide, so extension services have to be made more effective. But given how lax our state governments are, this is probably a pie in the sky.

Farm size is critical. "Given the preponderance of smallholdings, the Board must start taking measures to address this problem. Some form of consolidation of land holdings is in order."

This is true not just for coffee but for farms generally but for coffee the problem is more acute "in the context of the interaction between farm size and time. On average, larger farms with slightly older plantations can still manage to produce near optimal yields compared to smaller farms with older plantations."

Eventually, though, given how the real market for coffee probably lies abroad, Indian coffee has to become internationally competitive. This requires a sustained effort at improving technologies, which in turn requires subsidies. "The state and the Union governments need to seriously look into the provision of the above subsidies."

Equally important is the need to ensure that the price signals are right because otherwise farmers respond by taking up faulty techniques of production.

The governments also need to provide proper infrastructure for the efficient functioning of the existing markets and for the new markets to emerge.

*A Study on the Cost of Cultivation of Coffee, NCAER, June 2004