BUSINESS: CIGARETTE SMUGGLING

Smoke Alarm

Contraband cigarettes invade India, burning holes in the pockets of the domestic industry and the Government

By Rohit Saran

Before you finish reading this sentence some 15 cigarettes would have been smuggled into India. That would be only a fraction of the 6.7 million cigarettes that are sneaked into the country each day. That's more than 200 million cigarettes a month. From the land, the sea and the sky. From the friendly borders of Nepal and the not-so-friendly borders of Bangladesh to the hostile boundaries of Pakistan. From the world's best-known brands to completely unheard of ones, foreign cigarettes of all shapes, sizes and origins are swamping Indian markets.

Their main weapon: price. Almost all smuggled brands are priced at Re 1 a cigarette and are of king size (above 80 mm in length). That's less than even the excise duty (Rs 1.45) on king-size cigarettes made in India. The cheapest Indian king-size cigarette is sold for Rs 2.50, two-and-a-half times more expensive than a smuggled one.

No wonder brands as obscure as Aziz Gold, Gold Leaf, Banani Gold and Royal Edinburgh are selling across the country. "Cigarettes from Bangladesh, Myanmar, Pakistan and other countries have flooded the remotest corners of India," said A.C. Sarkar, director, Tobacco Institute of India, in a letter to the chairman of the Central Board of Excise and Customs in May.

The cigarette industry has been protesting against smuggling for more than a year. But the Government thought of it as no more than a smoke screen for additional protection. That's because till March this year smuggling was restricted to premium global brands like State Express 555 (se 555), Benson & Hedges (B&H) and Marlboro Lights. Though high in value, the smuggling of these brands wasn't as visible because it catered to a tiny premium segment of smokers.

March 2001 changed the spectrum of smuggling completely. The 15 per cent excise-duty surcharge imposed on cigarettes in the Union budget drove most Indian tobacco companies out of the Re 1 filter cigarette market. Prior to the budget, Re 1 cigarettes (both filter and non-filter) commanded nearly a third of the market. Once Indian companies vacated this lucrative segment, the market was open for smuggled brands.

What compounds the damage is that all smuggled cigarettes are of king size, whereas the Indian Re 1 cigarettes are of less than 70-mm size (called regular filter). Which means a Bangladeshi king-size filter cigarette is cheaper than an Indian regular-size filter cigarette. This poses a direct threat to the filter segment, which is 69 per cent of the Indian cigarette market (see table).

To be sure, much of the import of cheap cigarettes is actually bootlegging. Cigarettes are purchased legally in neighbouring countries but are sold illegally (without paying customs duty) in India. But there is a more disturbing form of smuggling involving regular sale of large consignments of cigarettes in the black market without paying any taxes in either the country of manufacture (because they are shown as exports) or the country of sale (because they are smuggled in). There are allegations that cigarette MNCs are-directly or indirectly-smuggling their premium brands into India.

What gives credence to such allegations is the easy and widespread availability of foreign-made premium brands in India. Even the foreign brands manufactured in India-B&H and se555-are being smuggled in huge quantities and sold at the same counters as the Indian make. Both brands belong to the UK-based British American Tobacco (BAT) Group and are made in India by ITC, 31 per cent of which is owned by BAT. Though there is no proof of BAT's direct involvement in smuggling to India, there are documents and reports that hint at the company's intention to encourage illegal imports into Asian countries, including India.