Business: Tobacco; Sparking a Row

The Government's decision to allow 100 per cent foreign ownership in the cigarette manufacturing segment has the domestic industry up in arms.

Better roads or new cigarette blends, which should be the priority? The BJP-led Government thinks cigarettes score, at least that's what a recent policy announcement seems to suggest. Despite growing concerns over sluggish investment in core sectors and continuing confusion in areas such as aviation, Industry Minister Sikandar Bakht this month went ahead and allowed 100 per cent foreign equity in cigarette manufacturing, a non-priority sector.

But smoke suffocates. No sooner was the policy announced than the domestic players went up in arms. Besides going against the basic tenets of Saffronomics, the policy, it is feared, would enable tobacco multinationals to swamp the Rs 10,000 crore Indian cigarette market. The beedi industry would in turn be hit as these companies would formulate strategies to encourage beedi smokers to switch to cigarettes and there would be a revenue loss as the policy would also lead to large-scale smuggling of foreign brands with traders wanting to evade steep excise duties. "Why should foreigners be allowed? What good can they do?" argues Sanjay Dalmia, chairman, GTC Industries. "Indian talent and other resources are abundant in this industry." The Swadeshi Jagran Manch, a Sangh Parivar forum, too has been voicing similar concerns.

OBJECTIONS

A non-priority sector selected for 100 per cent foreign equity.

Runs contrary to the BJP's stated policy of protecting domestic industry.

MNCs could swamp the Indian cigarette market either by pulling out of joint ventures or floating new concerns.

Beedi industry likely to be hit. Jobs of 43 lakh workers at risk.

Smuggling of cigarettes may increase manifold from the current 1 per cent of the Indian cigarette market.

The Government has pointed out that permits will not be automatic and cigarettes will continue to be licensed sector. But what is fuelling this controversy is the fact that there was already a proposal by the tobacco giant. Six months ago Rothmans of the UK-based Pall Mall (International) filed an application with the Foreign Investment Promotion Board (FIPB) to set up a 100 per cent subsidiary in India. This followed three abortive attempts to enter into a joint venture. The company now proposes to bring in $150 million (Rs 638 crore) for the venture through which it will launch its international brands. It also wants to source Indian tobacco to support Rothmans' international global requirement projected at $70 million (Rs 298 crore) over the next seven years. While there is speculation over whether this proposal influenced the policy, the Government insists the decision is in consonance with its past policies of allowing full foreign holding in sectors like consumer durables and non-durables.

"The lack of transparency is what is worrying," says Suresh Tendulkar, well-known economist. "Very often it is not clear why the FIPB takes the decisions it does. It is undesirable." It was on the same grouse that the Tatas recently withdrew their application for a Rs 1,475 crore airline project with foreign institutional investors.

The latest decision on foreign cigarette ventures could set yet another precedent. Tobacco majors which already have joint ventures with Indian firms may wish to set up their own fully owned companies. These include the BAT-ITC, BAT-VST, Phillip Morris-Godfrey Phillips and R.J. Reynolds-Modipon ventures. There were many takers when the government began to permit 100 per cent equity in the consumable sector. For instance, Cadbury Schweppes opted to enter the Indian market to launch its soft drinks through a 100 per cent subsidiary despite the presence of Cadbury India. The same was the case with shaving products giant Gillette.

The larger presence of the MNCs would in turn activate the grey market. Though Rothmans has said it will not import raw material -- tobacco, paper, filter and board -- others may do it to conform to international quality. There would be a levy of customs duty on imported materials plus excise duty and luxury tax on the Indian-produced cigarettes. The cost of manufacturing these brands would thus be much higher than those made overseas. As a result, the margins to the manufacturer would be very low.

Currently, foreign cigarettes in the grey market account for about 1 per cent of the domestic consumption, equivalent to Rs 100 crore. As the Tobacco International Journal points out, "It is low." But with the Government unlikely to cut back on tariffs because of the high levels of duty it earns from cigarette sales, smuggling is bound to get a boost. In China, for instance, 99 per cent of foreign cigarettes are contraband, according to a study by the Asian Wall Street Journal. Other estimates say that of the total global market of 5,500 billion cigarettes manufactured per year, 10 to 15 per cent -- amounting to around $50 billion (Rs 2,12,500 crore) -- are traded illegally.

Multinational cigarette manufacturers are more than keen on the Indian market because markets in the West have begun to shrink following public protests against the hazards of smoking. Moreover, the Indian market is relatively undeveloped as cigarettes are a mere 15 per cent of the total tobacco consumption as against 90 per cent in the developed markets.

The resultant boost to smoking will naturally make a dent in the beedi industry, which provides employment to about 43 lakh workers. Many farmers may also suffer as it is not possible for them to grow tobacco varieties used for the making of cigarettes.

To counter the consequences, domestic players are demanding that high export obligations be imposed on the MNCs. According to them, these companies should be allowed only on the condition that 75-90 per cent of their production of value-added cigarettes are exported to overseas markets. In Thailand and Malaysia, the government allows 100 per cent FDI on the condition of 80 per cent export of manufactured goods. Interestingly, Rothmans has indicated that it is keen to export raw tobacco and not manufactured cigarettes.

The MNCs on their part maintain that their entry would greatly benefit India. For one, their investments would push up the country's foreign exchange earnings. The consumer too, they say, has been getting a raw deal in terms of product prices and quality. The bulk of the filter cigarette volume remains in the 11 mm filter plug sector, a phenomenon unique to India and other South Asian countries. The rest of the world uses 20-22 mm filters. "Lights" have a marginal presence in the market by name only. But with the latest technology transfer from these 100 per cent foreign subsidiaries, all this could change.

The MNC lobby argues that farmers too will stand to gain in that they will be exposed to the latest farming techniques that would help improve their yields. Currently, the average yield per hectare on Indian tobacco farms is half that of the US and Brazil. Some farmers in Gujarat and Andhra Pradesh have even come out in support of these MNCs.

While the debate on the prudence of allowing 100 per cent foreign equity in the cigarette manufacturing industry rages on, Rothmans' proposal awaits clearance. Commerce Minister Ramakrishna Hegde has called a meeting with the company brass to discuss the issue of export obligations. A decision is due to be taken early next month. And if Rothmans succeeds in its bid, many in the domestic industry will see this as their dreams going up in smoke.