India Today Business

India Today issue dt December 6, 1999
Dec 6, 1999

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Faces of the Millennium

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Going Up In Smoke

High excise duty, rampant smuggling and the ban on smoking have dented cigarette sales. But Indians are not consuming less tobacco.

By Rohit Saran

The cigarette industry in India is suffering from a health hazard. Its sales are going up in smoke. Between April and October 1999 the combined sales of the three major cigarette manufacturers -- ITC, Godfrey Phillips India and Vazir Sultan Tobacco -- were down by 7 per cent (or 344 crore cigarettes) compared to the sales during the same seven months of 1998.

The worst hit are the micro-cigarette sales. Less than 60 mm in length, (cigarettes are normally 74-80 mm in length) micro cigarettes were introduced in the late '80s for poor smokers. These cigarettes were intended to wean smokers away from the cheaper -- but more toxic -- bidis. But after the initial boom in the mid-'90s, sales of micro cigarettes plummeted by a hefty 20 per cent in the first seven months of this financial year.


83% increase in excise duty on micro cigarettes since 1997

Smuggling of over 150 crore cigarettes every year

Ban on smoking/cigarette advertising in seven states

Luxury tax of 15% to 20% on cigarette sales in some states

Growing prevalence of smoke-free offices

What has triggered such a steep fall in cigarette demand in a country of over 200 million tobacco users? The question should worry the industry as much as the Government. After all, the cigarette industry is the largest contributor to the exchequer, accounting for about 10 per cent of total excise collections of the government. In 1998-99, the industry contributed Rs 5,500 crore to the Centre's revenues. This year's fall in cigarette sales has already dented revenue collections, which are so far about 1 per cent less than last year.

Apparently, the government has itself killed the golden goose. Starting from the budget of 1997-98, excise duty on micro cigarettes has been raised from Rs 60 to Rs 110 per thousand sticks. In addition, several states have imposed a luxury sales tax on cigarettes, ranging from 15 to 20 per cent of the price.

Consequently, the price of these cigarettes has doubled from Rs 1.50 for a packet of 10 in 1995 to Rs 3 a packet now. Remarks Ram A. Poddar, chairman, Tobacco Institute of India and CEO, Godfrey Phillips: "The prices of cigarettes have reached prohibitive levels and are out of reach of the common man." That would have been good news if those quitting smoking were also giving up tobacco consumption. But the smokers of micro cigarettes have merely switched to cheaper options like bidis or chewing tobacco.

Cigarettes make up for only 19 per cent of tobacco consumption in India while bidis comprise the lion's share of 54 per cent and oral intake, the remaining 27 per cent. In most developed countries, more than 90 per cent of the tobacco consumption is through cigarettes.

It was to correct the skewed nature of tobacco consumption in India that in 1995 excise duty on micro cigarettes was slashed from Rs 120 to Rs 60 per thousand sticks. As a result, micro cigarette sales soared from 51.4 crore sticks in 1994-95 to 176 crore sticks in 1997-98. Much of this growth was at the expense of bidi sales, though the precise volume of fall in their sales is not known. However, the reversal of tax policy since then has also reversed the sales pattern in favour of bidis.

While high taxes are extinguishing the price-sensitive lower segment of the cigarette market, rampant smuggling of foreign-made brands has burnt a hole in the premium section of the market. Last year an estimated 150 crore cigarettes were smuggled into India, and the rate of smuggling is rising at 20 per cent a year. At Delhi's Indira Gandhi International Airport alone, the monthly sale of contraband cigarettes is about 82 lakh. Or more than three cigarettes sold every second.

Not all these sales are illegal. Every Indian returning from abroad is allowed to bring in 200 cigarettes duty free. But such imports are only a small proportion of the thriving smuggling in cigarettes, which is best manifest in the widespread availability of major global brands like Marlboro, Benson & Hedges and Camel in the open market. In fact, so cheap are the imported cigarettes that they have begun to hit the sales of popular Indian brands like Wills Navy Cut, Charms and Four Square. Says Kurush Grant, head of the tobacco division at ITC: "Intensified smuggling is eating into both premium and medium segments of the cigarette market."

Just like high excise duties, the heightened smuggling too has prompted smokers to opt for foreign brands in place of Indian cigarettes. So, the drop in sales of Indian-made cigarettes does not mean that Indians are kicking the habit. But, there are a few developments which hold out hopes for a genuine decline in smoking. The increasing popularity of smoke-free offices and the bans on advertising and public smoking in some states. The smoke-free office is still an urban-centric phenomenon and its impact on cigarette sales and smoking will depend on how fast the concept spreads to work places around the country. Right now, the ban on public smoking or advertising imposed by seven states -- Assam, Delhi, Goa, Himachal Pradesh, Jammu & Kashmir, Kerala, Meghalaya and Sikkim -- has a greater potential of reducing incidence of smoking.

Barring Kerala, though, none of the states have been able to enforce the ban effectively. In Kerala too, the ban imposed was far too impractical to have had a lasting impact. For instance, the state prohibited smoking even on highways and public parks, both of which are not easy to monitor. No wonder after an initial dip in cigarette sales in the state earlier this year, the demand has recovered in recent months. Similarly, the ban on cigarette sales on railway platforms imposed last year did not have a lasting effect. Passengers simply started buying cigarettes before entering railway platforms.

So far, the falling cigarette sales have bled both the industry and the exchequer, without making Indians any healthier. In any case, as Dr J.N. Pande, head of general medicine at the All India Institute of Medical Sciences, Delhi, points out, "It takes up to 20 years for any significant impact on health to show up after a reduction in tobacco consumption in any society." Since the fall in cigarette sales is not due to reduction in tobacco consumption, to dwell on any health gains right now would be far-fetched.

And that's an irony. India could drastically reduce the health hazards of smoking by simply encouraging existing smokers to shift from more toxic forms of tobacco consumption to less toxic options: mainly discouraging consumption of bidi and raw tobacco and providing incentives for filterisation of cigarettes. Concurrently, efforts will have to be stepped up to prevent younger ones from taking up smoking. But this rather simple-sounding task requires the Government to do something it has never done before -- formulating a national tobacco policy. Suggests Grant: "The country needs to have an integrated approach to issues such as the skewed pattern of tobacco consumption, revenue dependence of the government, the interests of tobacco growers and public health."

Already, the absence of a tobacco policy has resulted in kneejerk and conflicting government responses. The instances of such reactions are galore. The initial reduction and subsequent hike in excise duty on micro cigarettes is one instance. The permission to foreign investors in cigarettes manufacturing is another. A recent example is the grant of an excise-duty holiday to new cigarette manufacturing units in the north-eastern states.

Till such confused policies continue to govern the fate of tobacco consumption in India, any temporary fall in cigarette consumption will only be a smokescreen.

- with Subhadra Menon


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