To Ban Or Not To Ban
Rise in illicit cigarette trade and losses to tobacco farmers have led to a high decibel demand for a complete ban on FDI in the tobacco sector
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WARNING: Foreign direct investment in the tobacco industry is injurious to farmers’ economic health. Just as the warning on cigarette packs is intended to make people think twice before lighting up, this one by the tobacco farmers, who are calling for a ban on FDI in the sector, has put the central government in a quandary.
At the heart of the matter is the declining income of tobacco farmers who blame their plight on the higher taxation on cigarettes and a concomitant increase in illegal trade as well as shrinking export of tobacco on one hand, and tobacco MNCs setting shop in India on the other.
The central government seems to be caught between a wall and a hard place, as its growth strategies since it assumed power in 2014 have hinged on attracting more and more foreign direct investment (FDI) and driving domestic consumption by raising farmer’s income. To ban FDI or not is the key question.
To begin with, the tobacco industry is one of the most regulated and taxed sectors in the country. Currently, although FDI is prohibited in manufacturing of cigars, cigarettes and tobacco substitutes, it is permitted in technology collaboration in any form, including licensing for franchise, trademark, and management contracts in the sector.
Facing stricter legal norms and health compliance pressure in developed countries in North America and Europe, some of the biggest multinational tobacco firms like Philip Morris, British American Tobacco and Japan Tobacco Inc., among others, have been looking to enter and expand in developing nations.
The Indian market provides an attractive opportunity for these global giants. India is not just the second largest tobacco growing country in the world with an annual production of around 800 million kg but is also accounts for only 2 per cent of the world’s consumption of cigarettes. In fact, the per capita annual consumption of cigarettes in India is just 96, amongst the lowest in the world.
Leading the anti-FDI brigade are over two-dozen tobacco farmer organisations, mainly concentrated across Andhra Pradesh and Karnataka, who want a complete ban on any form of FDI in tobacco. Their logic: Higher taxation on cigarettes is leading to a rampant increase in the availability and sale of smuggled cigarettes, which account for a massive 25 billion sticks. This, in turn, has forced the legal cigarette industry to cut production, which, in turn, has translated into a loss of demand for tobacco to the tune of 16 million kg per annum, thereby hurting farmers, says a report.
According to Javare Gowda, President, Federation of All India Farmer Associations, the domestic legal cigarette industry volumes have gone down from 109 billion sticks in 2007 to 82 billion sticks in 2017 resulting in a drop in the earnings of FCV (flue cured virginia) tobacco farmers, which have shrunk cumulatively by more than Rs 3,650 crore in the last three years.
There are an estimated 26 million-plus tobacco farmers in India who depend on better returns at the auctions. However, due to the increase in contraband cigarettes and decrease in demand for Indian tobacco blend in countries like Russia, Brazil, Venezuela, among others, tobacco farming is under threat.
Says P.S. Murali Babu, General Secretary, Kondapi Tobacco Growers Association (KTGA): “If the Indian government is able to curb the smuggling of illicit cigarettes through a complete ban on FDI in the tobacco sector and other measures, India will be richer by at least Rs 10,000 crore of additional revenue every year and the tobacco farmers will be able to sell 25 million kg more of our tobacco annually and earn about Rs 350 crore more every year.”
Industry insiders say there may be a direct linkage between allowing FDI in tobacco and the rise of smuggled cigarettes. “Take the example of Russia. Once FDI in tobacco was allowed there, almost 50 per cent of the Russian cigarette market was accounted for by smuggled cigarettes. Before the FDI nod, it was less than 5 per cent,” says a tobacco trader.
According to Babu, farmers from India used to export around 40 million kg of tobacco every year to Russia. But with the advent of MNC cigarettes brands, the demand for Indian tobacco blends has slowly tapered off. The possibility of MNCs using the Indian blend of tobacco is marginal and negligible, says Babu, while calling for a complete ban of FDI in tobacco.
The Virginia Tobacco Farmers Association (VTFA) from West Godawari district in Andhra Pradesh wants the government to plug the loopholes in the existing laws to protect the interests of the Indian tobacco farmer. “The unethical business approach of the multinational companies in this industry is a threat to Indian tobacco. The domestic cigarette industry has declined in the past three years, while the volume of smuggled brands has more than doubled during this period. At least 25 per cent of the Indian cigarette market is flooded with illegal brands causing an estimated loss to the Indian exchequer to the tune of Rs 14,000 crore,” says S. Venkat Rao of VTFA.
But organised player like Godfrey Phillips India (GPI) -- promoted by Krishan Kumar Modi, President of Modi Enterprises -- and US tobacco major Philip Morris are against any move to ban FDI in technology collaboration in any form in the tobacco sector. “The level playing field should remain. There’s no need for a change in policy. Most large companies are already here. If you ban a few more, there is not going to be a change in the ground reality. It will only perpetuate monopoly,” says Modi.
“We are major exporters of tobacco and cigarettes globally and any change in the policy will cause exports to fall,” Modi adds. GPI, retailer of Marlboro brands, is the second largest player in the domestic market. Homegrown FMCG major ITC controls about 78 per cent of the cigarette market and is said to be in favour of a complete FDI ban.
The issue of FDI ban assumes significance when one looks at the sheer number of people associated with tobacco cultivation and trade. It is estimated that about 46 million people depend on tobacco and tobacco products in India for their livelihoods. Tobacco in India is consumed in 19 different forms, like bidi, hookah, khaini, guthka / zarda, snuff, cheroot, chuttas, dhumti, chillum, pipes, cigar, pan masala, mishri, mawa, gul, bajjar, gadakh, bittle quid with tobacco and cigarettes/illegal cigarettes.
Besides, India accounts for 94 per cent of the world’s consumption of smokeless tobacco. As per Global Adult Tobacco Survey India II, 2016-17, there are 266.8 million tobacco users in the country. Of these, 199.4 million use smokeless tobacco and 99.8 million smoke. Of those who smoke, 71.8 million smoke bidis and the balance 37.5 million smoke cigarettes (both figures include dual users). Effectively only 4 per cent of the adult population smoke cigarettes. Smokeless tobacco product users and bidi smokers are six times and three times, respectively, the number of cigarettes smokers.
But here is the catch.
Cigarettes account for 87 per cent of the revenue from tobacco taxation, while the contribution to tax collections from the other two tobacco segments is insignificant. In fact, a majority of the tobacco industry is not taxed.
In a strongly worded letter written to Ramesh Abhishek, Secretary, DIPP, D.S. Rawat, Secretary General, Associated Chambers of Commerce and Industry of India said: “Although, the government of India has banned FDI in ‘manufacture of cigars, cheroots, cigarillos, and cigarettes of tobacco or tobacco substitutes” vide Press Note 2 (2010 Series), there exists a huge opportunity for foreign multinationals to open subsidiaries using the available loophole in FDI policy (in wholesale trading) to continue creating brand salience, marketing and develop distribution of their products. Foreign players are using this opportunity to grow their business in India and it is alleged that some of their products find their way as smuggled cigarettes in India. It is therefore critical that FDI is banned in all forms so that such channels are blocked and tobacco control measures deliver full objective for the country.”