Up in smoke!

The Union finance minister reportedly favours additional FDI in cigarette manufacture. Perhaps he has good reasons for pushing this business. His two predecessors clearly did

Mohan Guruswamy Delhi

The only good news from the cigarette industry in recent times has been that after decades of continuous growth, it recorded a decline of 4.1 per cent in sales volume in 1999-2000 over the previous year. We do not know if there was a corresponding decrease in the incidence of cancer and other smoking-induced ailments. That we will never know, because the government, presumably under pressure from the powerful cigarette industry, has not yet conducted a detailed study on this and the consequential cost to the economy in spite of a specific request from the revenue department to enable it to evolve a scientific basis for cigarette taxation.

Whatever be the drop in stick sales, it is evident that rupee sales and profits have not shown any decline. Industry bosses can, like the cigarette-smoking Dev Anand in Hum Dono did, continue to sing “barbadion ka jashn manata chala gaya, har fikr ko dhuein mein urata chala gaya!” (I celebrated every act of tragic destruction and blew my worries away in smoke.)

Objectively speaking, this is not a bad situation at all, and is proof that government policy, whether deliberate or accidental, is still halfway good. For, as far as this industry goes, a good policy will ensure that the State gets more revenues, the companies prosper but not by too much, while the consumption keeps dropping each year.

This decline is accompanied by another silver lining. The consumption of mini cigarettes has fallen sharply by 16.8 per cent. But this does not necessarily mean good news on the health front as dropouts may have switched to bidis. The consumption of regular cigarettes has more or less remained static, having fallen by only 1.7 per cent. Nevertheless, the decline in consumption, attributed by the industry to higher excise duties in each of the previous few budgets, means that the policy is in the right direction and there is a case for increasing the tariffs on cigarettes and bidis once again this year.

Despite this, the numbers are still pretty impressive. The number of cigarettes smoked in 2000 was 71,474 million. This was when India had a PPP per capita income of just $1,354. It is closer to $3,500 now, which suggests that the number of cigarettes puffed would have only gone up. Understandably, the cigarette industry is shy about revealing figures. But we have data from the FAO which clearly suggests this.

The Food and Agricultural Organisation (FAO) estimates that in 2000, total tobacco consumption was about 4,703,000 tonnes. This is projected to rise to 5,638,000 tonnes in 2010. This must be music to the ears of the tobacco industry bosses since manufactured and hand-rolled cigarettes (bidis) account for 85 per cent of all tobacco consumption. The FAO forecasts that in 2010 the share of tobacco consumption in developing countries will come down from 34 per cent to 29 per cent while poor countries will account for 71 per cent. It must be noted that all cigarette manufacturing in India is with MNC-dominated companies and it is the conscious policy of these MNCs to shift their markets to the least developed countries.

The cigarette industry will argue that it is not wise to kill the goose that lays the golden egg. In this case it is not a golden egg but a time bomb as each cigarette smoked now implies a future medical cost. Recently, the US government negotiated a $368 billion damages package from the US cigarette industry to pay for future health costs. In 1999, as the Union finance minister's advisor, I had recommended that the health ministry be asked to similarly estimate future health costs in India. It followed that excise duties should be determined with the idea of recovering these costs now.

I also advised that raising excise duties each year is a win-win situation. If consumption drops it means future savings. If in the process revenue does not go up it is still very good because it implies future savings. Even if revenue came down, the government should see this as an investment in the future. On the basis of this, the then revenue secretary asked for comments from the health ministry. I understand that the revenue secretary is still awaiting a reply. The excise duty on cigarettes did go up last year too, about five per cent, but it would seem that they went up more by force of habit. For the government too has a bad smoking habit!

It is not that the incidence of smoking is low in India, if we take into consideration the widespread bidi habit. The National Council for Applied Economic Research (NCAER) has estimated that 348 million people belong to households with an annual income of over Rs 12,500. Logic suggests that the vast majority of cigarette smokers must come from this segment. With current cigarette consumption of around 90 billion, we have a per capita consumption of around 90 per year. This is, by any standards, a very high and dangerous figure when you consider that cigarette consumption accounts for only about 25 per cent of total tobacco consumption.

Since thrice as many people consume tobacco either in the form of bidis or gutka, we should consider ourselves as fortunate if the equivalent per capita consumption is not around 400 cigarettes a year. When we relate this to the data gathered from a 1994 nationwide survey that revealed that the prevalence of tobacco use among all adult men was 25.7 per cent and 35.3 per cent, in urban and rural areas, this means even higher average stick consumption among tobacco users.

Another 1996 survey finds that 150 million males and 34 million females used tobacco in India. This survey estimates that 112 million persons smoked tobacco, while 96 million used it in its smokeless form. Both forms are just as dangerous and harmful. The National Sample Survey Organisation has estimated that when applied to the 1996 population, about 800,000 people died due to their tobacco habit. In the same year, medical cases due to tobacco-related ailments exceeded 8 million, of which 7.85 million pertain to coronary artery and chronic obstructive lung diseases. It need not be emphasised that these diseases entail higher medical costs and man-days lost than cancer.

In a research paper presented at a WHO conference in 2002, GK Rath and K Chaudhry have estimated the cost due to the treatment of tobacco-related diseases in 1999 to be around $6.5 billion. The FAO estimates that in 2010 India will lose close to 24 million man years due to tobacco-related diseases. This only means that our GNP could be 2.4 per cent higher but for tobacco-related diseases. In other words, a further loss of $24 billion. This translates into an annual loss of over Rs 120,000 crores, which is quite an astronomical figure.

In stark contrast, tobacco-related taxation in 2006 resulted in revenues amounting to Rs 8,234 crore. Of this, Rs 7,100 crore was from cigarettes. Clearly, there is a case for higher taxation on all tobacco products. The cost to the nation is not entirely due to cigarettes and this implies that there is a case for much higher taxation on other tobacco products.

There are several ways of doing this, apart from central excise. States could levy a production tax and state land revenue authorities should reinstate taxation on tobacco agriculture. Contrary to this, the government seems to be encouraging tobacco agriculture. It is true that bidi manufacture is a labour intensive business, but it would be easy to estimate that the benefits due to this are far outweighed by health costs, most of which are often borne by the State. In most developed countries, taxes account for 50-70 per cent of tobacco product sales prices. In India, it is still around 10 per cent. There is scope for more taxation. The World Bank, in a series of studies, has evidenced that a 10 per cent increase in tobacco product prices will result in an 8 per cent reduction in consumption.

Another point of concern is that several US Congressional investigations have revealed that cigarette companies routinely spiked tobacco with extra nicotine to intensify addiction. The Hollywood movie The Insider, featuring Russell Crowe, was based on a real incident that led to the unraveling of the cigarette industry's habit-inducing practices. It is rumoured that similar practices are widespread in India. There is, therefore, a case for pegging excise duties with nicotine content, which implies that the packs states details of the exact contents of the product.

One reason suggested for the drop in stick sales in the first half of 2000 was that smuggled cigarettes ate into the share of locally produced brands. Industry analysts estimate that of the $30 billion in worldwide cigarette sales, about $10 billion worth are for illegal exports. They are called illegal exports because though the exports are legal, they are meant to end up smuggled into countries that curb imports or have high tariffs. Thus, in the books of the manufacturer, they show up as exports. But these are not exports to distributors in consuming countries but to intermediaries who are smugglers. The port of Antwerp is the hub of the international cigarette smuggling business. Antwerp is to cigarettes what Dubai is to gold!

The Indian cigarette industry estimates that smuggled international brand penetration now accounts for 2 per cent of the market and some 30-40 per cent of the segment for king-size cigarettes. Brands like State Express 555, Benson and Hedges, Rothmans etc are manufactured in India under licence. Their sales are modest by all accounts. But, there is a reason for the manufacture of these brands in India. It is a collusive effort with Indian companies in which foreign players like BAT and Phillip Morris have large interests.

The fact that these brands are made in India gives the smuggled ones a fig leaf to hide under. Though the smuggled cigarette packs have to have country of manufacture specified on them, many are in-fact wrongly labelled to suggest that they have been manufactured in India. Even if marked correctly, when foreign-made brands occupy shelf space, it is difficult to tell them from similar Indian-made brands. From all accounts, the Indian cigarette companies don't like any part of this, but acquiesce to keep their foreign shareholders in good humour.

Many countries are attempting to take action against errant cigarette manufacturers who are actively involved in smuggling. High value litigations are pending against RJ Reynolds in Canada, BAT and Brown Williamson in Hong Kong, and Phillip Morris in Italy.

We need a policy that will not just address the issue of future health costs and reduce the incidence of smoking — it will also curb smuggling. One immediate step the government needs to take is to disallow the manufacture of international brands here. Sale of foreign brands must be banned and ways to deter their stocking and display must be evolved. Japan, for instance, has such a regulation in place. China, which goes out of its way to attract FDI and with much success, does not allow any foreign investment in cigarettes.

Now, it is being reported, that the present Union finance minister favours additional FDI in cigarette manufacture. It is not known if he has applied his mind to the issues involved. Perhaps he has some very good reasons for pushing this business. His two predecessors clearly did.