Indian Cigarette Economy Going Up In Smoke

India is a unique example of where legally produced and all taxes paid cigarettes constitute just about 10% of total tobacco consumption. Indians traditionally use tobacco in many other forms such as chewing the stuff, bidis and Khaini even while cigarettes happen to be the least injurious to health of all tobacco-related indulgences. What is happening in India is exactly the opposite of global experience of cigarettes having a share of 90% of tobacco use.

Thanks to cigarettes inviting a duty 55 times higher than other tobacco products, the share of legally produced fag in the country is down from 21% to 10% in the last three decades. During this period, however, the total tobacco consumption, including contraband cigarettes was up 33% to 538m kg. The country is worryingly seeing while the net tobacco consumption is rising, smokers continue to shift from legal to illegal cigarettes lured by price differences favouring contraband stuff. According to the GATT ‘global adult tobacco survey,’ while 28% Indian adults are using tobacco, the adult cigarette consumer base is 4%.

India being one of the signatories to the World Health Organisation (WHO) sponsored global treaty to curb smoking, it is only natural that the government would make it obligatory for companies to print large scary warnings on cigarette packets. Any move that will in any way make people quit smoking will be welcomed. Warnings on packaging are intended to make people aware of the grave health risks inherent in using cigarettes. But according to Sanjiv Puri, managing director of India’s largest tobacco group ITC, the large pictorial warning and also in words on packets and other stringent regulatory measures have actually helped smuggling and led to an “exponential spurt” in illicit cigarette sale.

No wonder then, the share of illegal cigarettes in total cigarette sales in the country is now over 21%. Cigarettes and other tobacco products combined remains the biggest offender among all the things which make their way in the country pulling the wool over the eyes of the authorities.  In the process, the government suffers an annual revenue loss of around Rs9,250 crore. The other similarly offending items are mobile phones and alcoholic beverages which between them dupe the exchequer by at least Rs13,000 crore a year.

Cigarettes leave New Delhi on the horns of a dilemma. High excise on the item will find justification on grounds of discouraging the people to smoke, which causes cancer, chronic obstructive pulmonary diseases and diabetes. According to Tobacco Institute of India, the government’s annual revenue from tobacco is “more than Rs34,000 crore,” in which the share of legal cigarettes though constituting barley 10% of total tobacco consumption is around 87%. What does the government do in a tricky situation like this? Common wisdom will prescribe moderation and stability in taxation so that there is no migration from revenue efficient legal cigarettes to cheaper, low quality and revenue inefficient forms of tobacco consumption. No doubt moderately taxed cigarettes will be a disincentive for smuggling since margins from the high risk bearing activity will thin. Haven’t we seen this happening with gold that whenever the government in attempts to curb imports would levy high customs duty, smuggling will spurt?

A tobacco industry official admits any government move to tinker with taxes on cigarettes to curb smuggling will run the risk of misinterpretation by NGOs as victory of subtle lobbying by the likes of ITC, VST and Godfrey Phillip. A dialectical challenge not easy to resolve. Referring to the Public Health Foundation of India study ‘Economic Burden of Tobacco Related Diseases in India, a Calcutta based anti-tobacco campaigner says: “This seminal work has found that the total economic costs attributable to all diseases emanating from tobacco use in 2011 was an enormous 1,04,500 crore ($22.4bn), including 16% direct cost. The study considered only people in the 35-69 age group. But cigarette and other forms of tobacco use by adolescents are widely prevalent in India, particularly in non-urban centres. Moreover, even while legal cigarette sale here has remained stagnant, the non-cigarette tobacco use is on the rise. Considering these two factors, the cost, as we move into 2019 is much higher than what was estimated for 2011.”

In the meantime, the Federation of All India Farmers Associations (FAIFA) has told the government that some foreign cigarette companies with no manufacturing base here – in any case New Delhi had scuppered several attempts by the US and Japan based groups to build factories in this country – are indirectly lending support to smuggling faced as they are with shrinking market in the US, the UK, France and several other developed nations. FAIFA is right. The US federal agency Centre for Disease Control and Prevention says the cigarette smoking rates are down to their lowest in recorded history with 14% of American adults found to be smokers in 2017 against around 42% in 1965. Cigarette smoking in the UK, which is among the pioneering countries to control tobacco use, is down to 16% of the population compared with 46% in 1974. Thanks to anti-smoking measures and better health awareness, around one million smokers in France kicked the habit in 2016 and there is progress since.

All this is good for the public health in developed countries. But cigarette companies there as a result have started facing existential issues. The reason for them to remain silent when their products stealthily move into countries like India. FAIFA general secretary Murali Babu says: “Around 25bn cigarette sticks are smuggled into this country every year. This amounts to Indian tobacco growers losing yearly a demand for 16m kg of their produce. As a result, farmers growing flue cured Virginia (FCV) tobacco have seen their earnings drop by more than Rs 3,650 crore in the last three years.” Election season is the only time when farmers’ voice is heard. Parliamentary elections being five months away, FAIFA is entertaining the hope that in order to protect the interest of local tobacco growing community and bolster its own revenue from legal cigarette sale, New Delhi will now “do something concrete to stop smuggling.”

The WHO protocol framed with the objective to prevent “illicit trade” in tobacco, promote law enforcement measures and provide legal basis for global cooperation should be of help if New Delhi launches a meaningful drive against cigarette smuggling. Let there be a highly effective global tracking and tracing regime that will allow governments to effectively follow up the journey of tobacco products from manufacturing point to the first of point of sale and their bulk movement beyond.


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