Marketing Efficiency of Tea Auction Markets in India: An Application of Error Correction Methods

Article excerpt

The marketing efficiency of tea auction market in India is investigated through the cointegration and error correction methods framework. The study found that eastern Indian markets were spatially cointegrated. There was no integration found in the south Indian markets. Though the eastern markets are cointegrated, they support only weak form of market integration. Therefore, the tea markets in India appear to be operating inefficiently. This is a major cause of concern to tea growers and traders, because due to lack of market integration, they are not being able to take the full advantage of global market.

JEL Classification: D44, E39, C22

Keywords: Auction markets, Co-integration, Time Series, Price fluctuations


Tea industry, one of the oldest and well-organized in India, has been of considerable importance in national economy. India remains one of the largest producers, consumers and exporters of this category. The country earns a significant per cent of foreign exchange through the overseas tea exports. Again being labour intensive, tea industry provides direct and indirect employment for millions of persons in the economy.

However, the export of tea has been stagnant for years. During 1980, the quantity of export stood at 224.78 thousand quintal and in value terms it was [INR] 4325461. As it is evident from domestic consumption, production and export that the general trend of domestic consumption has been one of increase. As also the production of tea experienced an increasing trend. But in face of wide swing in production and rising domestic consumption, India's tea exports have remained stagnant at around 200 million kilograms for many years. Exports have trailed behind the target.

But the positive fact is that during the last few years (since 2006) the average price of tea sold at auction markets has been rising steadily, after having been experienced a discouraging domestic and international price situations. Now the question arises: Do all the domestic auction markets enjoying the benefits of price rise? Are all the auction markets efficient enough so as to transmit the price movement from one market to another?

The issue of market integration in agricultural commodity prices has been studied extensively by numerous researchers both at the national and international levels. Intodia (2005) had shown that the eastern Indian tea auction markets were statistically cointegrated but not the south Indian markets during the period 1999 to 2003. Basu and Dinda (2003), applying the error correction method, have shown the interdependence and high level of efficiency in the potato auction markets in West Bengal. In another study, Behura, Debdutt and D.C. Pradhan (1998) have studied the spatial integration in shrimp markets in Orissa. At the international level, George and Piero (2003), Line L. K. and T. Helene Ystanes F (2010), Crina Viju, James Nolan and William A. Kerr (2006) etc. are some of the recent studies of application of time series econometrics to look into the spatial market integration. However, there is dearth of literature of studying the market efficiency and integration of agricultural commodity markets in India in recent past.

Under this backdrop, this paper analyses the extent of market efficiency in the tea markets in India. There are six auction markets in the country viz. Kolkata, Siliguri, Guwahati, Coonoor, Cochin and Coimbatore. Out of these six markets, the first three markets belong to east India zone and the rest three belong to the south India zone. A fundamental issue when analyzing the market efficiency is the extent to which price movements in one market respond to changes in price movements in other markets. Price transmission from one market to other market is central in understanding the extent of the integration of economic agents into the market process. It essentially means that price movements in various markets are transmitted to other markets effectively. …