MICRO

ECONOMICS

Estimation of Demand Function for

Product TEA in India

Group 2 | Abhinav Vyas 13P182, Aditi Rathi 13P187, Archit Arora

13P198, Rajesh Nair 13P227, Sudeep Khare 13P211, Sahil Vij 13P233

Table of Contents
INTRODUCTION ............................................................................................................................................. 3
DEMAND FUNCTION ..................................................................................................................................... 4
GLOBAL STATISTICS ....................................................................................................................................... 5
INPUT DATA for REGRESSION ANALYSIS ....................................................................................................... 6
REGRESSION ANALYSIS 1st Iteration .............................................................................................................. 9
REGRESSION ANALYSIS 2nd Iteration ........................................................................................................... 11
ANALYSIS of the estimated DEMAND EQUATION....................................................................................... 13
References .................................................................................................................................................. 15

INTRODUCTION
Tea is an aromatic beverage commonly prepared by pouring hot or boiling water over cured leaves of
the tea plant, Camellia sinensis. Tea is globally one of the most popular and lowest cost beverages, next
only to water. Tea was first introduced into India by the British, in an attempt to break the Chinese
monopoly on tea. The British brought in Chinese seeds to Northeast India but the plants failed, they
later discovered that a variety of tea was endemic to Assam and Northeast region of India and used by
local tribes. Using the Chinese planting and cultivating techniques, British launched a tea industry by
offering land in Assam to any European who agreed to cultivate tea for export." Tea was originally only
consumed by anglicized Indians, it was not until the 1950s that tea grew widely popular in India through
a successful advertising campaign by the India Tea Board.
Tea is indigenous to India and is an area where the country can take a lot of pride. This is mainly because
of its preeminence as a foreign exchange earner and its contributions to the countrys GNP. In all
aspects of tea production, consumption and export, India has emerged to be the world leader, mainly
because it accounts for 31% of global production. It is perhaps the only industry where India has
retained its leadership over the last 150 years.
India is the world's largest tea-drinking nation, although the per capita consumption of tea remains a
modest 750 grams per person every year.
Tea Industry is an agro-based labor intensive industry, providing direct employment to over a million
persons, and another 10 million persons derive their livelihood though various forward and backward
linkages. Women constitute 51% of the workforce, making the tea industry one of the largest employers
of women among the organized sectors of India.
PRODUCTION IN INDIA

DEMAND FUNCTION
We derive the consumption function for tea by resorting to a standard utility maximisation exercise for a
typical consumer who consumes n goods. The first order conditions obtained from such an exercise can
be solved to get a system of n Marshallian demand equations in terms of income and prices as follows.

ci ci M , p
* In microeconomics, a consumer's Marshallian demand function specifies what the consumer would
buy in each price and wealth situation, assuming it perfectly solves the utility maximization problem.
Assuming that individual consumption for a particular good can be summed over the entire population
(let us say population size is m) to get the aggregate consumption for that good, we can write the
aggregate consumption of tea as
m

C c j M , p
j 1

where M is domestic per capita income and p refers to a vector of prices which can include the own
price of tea, price of its substitutes and price of its complements. We took coffee as a substitute
commodity, and milk and sugar as the two complements of tea. Further, to observe the impact of tastes
and preferences of consumers on consumption of tea, we include a trend variable in the consumption
function. The demand model for tea is thus given by

C 0 1 Po 2 Ps 3 PC1 4 PC 2 5 M 6Trend 7 IMC 8 SPTF 2

where Po is own price of tea, Ps is the price of substitutes of tea, PC1 is the price of sugar, PC 2 is the
price of milk and Trend is the trend variable, which takes a value of 1 for 1994-95, 2 for 1995-96 and so
on. IMC and SPTF are Policy Changes in the Indian Tea industry for the year 2003 and 2006 respectively.
Consumption of tea is negatively related to its own price and the price of its complements, and
positively related to price of its substitutes and income. The impact of the trend variable is an empirical
issue, depending upon whether the changing tastes and preferences of consumers have had a positive
or negative impact on consumption of tea.

GLOBAL STATISTICS
GLOBAL STATISTICS
WORLD PRODUCTION ( in M.KGs )

WORLD DEMAND AND SUPPLY FOR TEA ( in M.KGs )

TEA PRICES

INPUT DATA for REGRESSION ANALYSIS

Consumption of Tea

Tea Prices

Estimates of (Internal) Consumption and Per Capita

Consumption of Tea in India

Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Domestic
Consumption (in
M.Kgs)
550
562
580
597
615
633
653
673
693
714
735
757
771
786
802
819
837
856
873

Per Capita
Consumption
(Grammes Per
Head)
608
610
617
625
633
642
652
654
663
672
681
691
693
696
701
706
711
718
727

Tea Prices

Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Avg. Tea Price per Kg

38.18
47.99
47.73
65.47
76.43
72.79
61.71
61.66
55.96
56.03
64.54
58.05
66.01
67.27
86.99
105.6
104.66
104.06
121.81

India Population

Per Capita Income

Sugar Prices
Year
Sugar Avg Price (Rs)
1994
12.26244444
1995
13.15021739
1996
13.61020833
1997
14.82808511
1998
14.24375
1999
14.67770833
2000
14.46979167
2001
14.06085106
2002
12.75066667
2003
14.85166667
2004
17.59042553
2005
18.98674419
2006
15.02791667
2007
15.33033333
2008
22.50232558
2009
31.27844444
2010
32.01666667
2011
31.76333333
2012
36.244
* all prices are Rs/kg

Coffee Prices
Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Coffee Avg Price (Rs)

129.23511
134.63330
140.70000
176.52411
184.00250
164.00000
149.00000
120.00000
115.00000
125.33330
136.25000
168.45210
184.00000
200.00000
230.40000
269.23770
288.27000
400.05210
395.66660

Milk Prices
Year
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

Milk Avg Price (Rs)

10.64440
11.71670
11.35830
12.23330
13.67500
14.70000
16.67500
16.34170
17.58330
17.05000
18.68330
18.00830
19.25830
20.96670
22.34170
24.68330
28.06250
32.64770
35.10000

Government Policies
1) IMC : Indian government took cognizance of the changed tea and coffee market and set up an InterMinisterial Committee (IMC) to look into their problems in late 2003. The IMC has recommended that :

Government share the financial burden of plantation industry on account of welfare measures
envisaged for plantation workers mandated under the Plantation Labour Act 1951.

To introduce means so that the agricultural income tax levied by the state governments can be
slashed and the tea industry be made competitive.

Sick or bankrupt plantation estates should be provided with analogous level of relaxation for
similarly placed enterprises/estates as are available to industries referred to BIFR (Board for
Industrial and Financial Reconstruction)

2) SPTF : The Cabinet Committee on Economic Affairs set up the Special Purpose Tea Fund (SPTF) under
the tea Board on December 29, 2006.
Aim: To fund re plantation and rejuvenation (R&R) programme. A cover of 2.12 lakh ha over a 15 year
period of time
8

REGRESSION ANALYSIS 1st Iteration

Domestic
Consumption
Year

(in M.Kgs)

1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

550
562
580
597
615
633
653
673
693
714
735
757
771
786
802
819
837
856
873

Avg.
Tea
Price
per Kg

Avg.
Coffee
Price
per Kg

38.18
47.99
47.73
65.47
76.43
72.79
61.71
61.66
55.96
56.03
64.54
58.05
66.01
67.27
86.99
105.6
104.66
104.06
121.81

129.23511
134.63330
140.70000
176.52411
184.00250
164.00000
149.00000
120.00000
115.00000
125.33330
136.25000
168.45210
184.00000
200.00000
230.40000
269.23770
288.27000
400.05210
395.66660

Avg. Sugar
Price per Kg
12.26244444
13.15021739
13.61020833
14.82808511
14.24375
14.67770833
14.46979167
14.06085106
12.75066667
14.85166667
17.59042553
18.98674419
15.02791667
15.33033333
22.50232558
31.27844444
32.01666667
31.76333333
36.244

Avg. Milk Per Capita

Price per Income in
Kg
Rupees
Trend
10.64440
11.71670
11.35830
12.23330
13.67500
14.70000
16.67500
16.34170
17.58330
17.05000
18.68330
18.00830
19.25830
20.96670
22.34170
24.68330
28.06250
32.64770
35.10000

8884.00
10180.00
11641.00
12729.00
14682.00
15887.00
18450.00
19040.00
20989.00
24143.00
27123.00
31198.00
35820.00
40605.00
46492.00
54835.00
53331.00
54527.00
55432.00

1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0

IMC

SPTF

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

1.0

0.0

1.0

0.0

1.0

0.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

1.0

Regression Results
Regression Statistics
Multiple R
0.999976952
R Square
0.999953904
Adjusted R Square
0.99991293
Standard Error
0.923230695
Observations
18

ANOVA
Regression
Residual
Total

df
8
9
17

SS
166411.4399
7.671194246
166419.1111

MS
20801.42999
0.852354916

F
24404.65772

Significance F
1.36964E-18

Coefficients
Intercept
Avg. Tea Price
per Kg
Avg. Coffee
Price
per Kg
Avg. Sugar
Price per Kg
Avg. Milk
Price per Kg
Per Capita
Income in
Rupees
Trend
IMC
SPTF

P-value

533.8928994

Standard
t Stat
Error
1.597845901 334.1329092

Lower 95%

Upper 95%

9.80515E-20

530.2783209

537.507478

-0.02063442

0.036325879

-5.680365568

0.000301726

-0.288519123

-0.124169427

0.011985751

0.011042696

1.08540075

0.305960242

-0.012994563

0.036966064

-0.039492280

0.140014969

-2.82057559

0.020028178

-0.078186939

0.711658667

-0.060062740

0.256240725

-2.343996658

0.04373305

-1.180284196

-0.020970613

0.000312169

0.000163769

1.906150751

0.005008146

0.000682641

5.83029E-05

20.127353
4.136183733
-3.411265659

0.488844374
1.169174925
1.569815352

41.17333575
3.537694526
-2.173036246

1.46527E-11
0.006336978
0.057826806

19.02151075
1.491326307
-6.962434695

21.23319635
6.78104116
0.139903376

Eliminating the factors, least affecting the consumption of Tea :

SPTF
Average Coffee Price per Kg

Measures taken by IMC board in 2003, were found to have taken care of the problems in the Tea
Industry. And thus, the SPTF parameter can be removed to gauge the demand for the tea, better.
Though Coffee is a complementary product for Tea, increase or decrease in the price of coffee, makes
only marginal decrease or increase in the demand for tea.
Weaker world growth outlook, continuing high tea prices, and recent sharp decline in coffee prices will
result in marginal decline in India's tea exports from 193 million kgs to 180 million kgs in 2012.
-

Economic Times : August 8, 2012

10

REGRESSION ANALYSIS 2nd Iteration

Year

Domestic
Consumption
(in M.Kgs)

1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012

550
562
580
597
615
633
653
673
693
714
735
757
771
786
802
819
837
856
873

Avg. Tea
Price per
Kg
38.18
47.99
47.73
65.47
76.43
72.79
61.71
61.66
55.96
56.03
64.54
58.05
66.01
67.27
86.99
105.6
104.66
104.06
121.81

Avg. Sugar
Price per Kg
12.26244444
13.15021739
13.61020833
14.82808511
14.24375
14.67770833
14.46979167
14.06085106
12.75066667
14.85166667
17.59042553
18.98674419
15.02791667
15.33033333
22.50232558
31.27844444
32.01666667
31.76333333
36.244

Avg. Milk
Price per Kg
10.64440
11.71670
11.35830
12.23330
13.67500
14.70000
16.67500
16.34170
17.58330
17.05000
18.68330
18.00830
19.25830
20.96670
22.34170
24.68330
28.06250
32.64770
35.10000

Per Capita
Income in
Rupees
8884.00
10180.00
11641.00
12729.00
14682.00
15887.00
18450.00
19040.00
20989.00
24143.00
27123.00
31198.00
35820.00
40605.00
46492.00
54835.00
53331.00
54527.00
55432.00

Trend

IMC

1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
17.0
18.0
19.0

0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0
1.0

Regression Results
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations

0.999960897
0.999921795
0.999879138
1.087731671
18

ANOVA
Regression
Residual
Total

df
6
11
17

SS
166406.0963
13.01476207
166419.1111

MS
27734.34939
1.183160188

F
23440.90823

Significance F
6.30476E-22

11

Intercept
Avg. Tea Price
per Kg

Coefficients
534.8956715

Standard Error
1.262291318

t Stat
423.7497824

P-value
1.58748E-24

-0.020044886

0.037505344

-5.344541329

0.00023577

-0.282997565 -0.11790015

Avg. Sugar
Price per Kg

-0.0508935634

0.142004721

-3.583934602

0.004288974

-0.19638535

Avg. Milk
Price per Kg

-0.0543306705

0.191626462

-2.835238416

0.016219445

-0.965073703 -0.12153971

Per Capita
Income in
Rupees

0.000535271

0.000109941

4.868736795

0.000495707

0.000777249

0.00029329

20.394826

0.349171848

58.40913757

4.57783E-15

19.62630443

21.1633485

5.06697137

1.250221416

4.052859201

0.001906245

2.315252588

7.81869015

Trend
IMC

Lower 95%
532.117387

Upper 95%
537.673956

0.82148592

Demand Function :

C 534.8956 0.0200Po 0.050893PC1 0.054330PC 2 0.0005M 20.3948Trend 5.0669IMC 2

12

ANALYSIS of the estimated DEMAND EQUATION

Price Elasticity (-0.020044886)
Negative price elasticity reflects, a decrease in the demand for tea, with increase in its price.
"Earlier I used to drink 4-5 cups of tea daily but now I have cut it down to 2-3 cups as the tea leaves have
become costlier and the tea vendors have increased the prices. Now I have to drink less tea," said
Rizwan Khan, a consumer.
-

News One India.com, 2009

Cross Price Elasticity of Sugar (-0.508935634)

Negative cross price elasticity represents increase in the demand for tea, with a decrease in the price for
sugar and vice versa

Cross Price Elasticity of Milk (-0.543306705)

Negative cross price elasticity represents increase in the demand for tea, with a decrease in the price for
milk and vice versa
Milk price hike ups tea, coffee prices in hotels
-

The Hindu, January 13, 2012

* Increase in the price of prepared tea, would lead to a decline in its demand, affecting the overall
demand for tea ( raw ) product.

Income Elasticity (0.000535271)

An increase in the income of the people, leads to increase demand for tea.

Trend and IMC ( Dummy Variables )

Trend factor, depicts the changes in the lifestyle of the people, the innovation in the market, changed
taste and preferences etc, which affect the demand for tea as a consumable product.
Underscoring the need to protect the domestic market for tea, Bhanu said that in the current digital
age, where information is available at the click of a button, the opportunity to taste new beverages is
more. Compared to the past, consumers shifting to other drinks is higher, - Tea Board Chairman
M.G.V.K. Bhanu
-

Business Line

13

IMC Government Initiative towards the Tea Industry has also worked in its benefit. The government
also has a policy for automatic approval upto 100% foreign equity and overseas corporate bodies in tea
industry.

Future Predictions
Stagnant production and increase consumption led to low inventory level which is impacting prices and
the increase will continue throughout the year and in 2014 as well, - Kamal Baheti, CFO, Mcleod Russel
-

Vision Commodities.com

Future Tea Consumption :

Future Tea Prices :

14

References

Journal : The Marshallian Demand Curve - Milton Friedman

www.wikipedia.com
www.indiatea.co.in
www.stir-tea-coffee.com
www.economictimes.indiatimes.com
www.thehindubusinessline.com
www.dianateacompany.com
www.careratings.com
in.reuters.com
www.indiabulls.com
www.livemint.com
www.tea2030.com
www.businessstandard.com

15