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Fears over spurt in contraband sale -- Fresh debate on FDI in tobacco begins

Our Bureau

KOLKATA, July 2

FEARS over a big spurt in movement of contraband cigarettes, following the recent disclosures by an international study, naming Dhaka as the new hub for ``umbrella operations'' (legally importing small amounts into a country to cover for much larger amou nts that are smuggled) by global tobacco majors, have forced the Finance and Commerce Ministry mandarins to go into a huddle.

Highly placed Finance Ministry sources confirmed that a few rounds of discussions have already taken place between the Commerce and Finance Ministries over the issue of FDI in tobacco sector, and its likely negative fallout, if allowed.

The Commerce Ministry, on the strength of a recent expert study on `FDI in tobacco', has also taken note of the bad experience of several other countries, including China, which relaxed FDI regulations on tobacco, and still failed to attract significant investments in new manufacturing operations.

On the contrary, a big surge in sale of contraband cigarettes (from five per cent to almost 35 per cent) was witnessed. Allowing FDI in tobacco, it is feared, may allow MNCs to establish their own marketing and distribution network, and thereby gain cont rol over trade. Impetus to contraband sales is seen as a good market-entry strategy for the global brands of MNCs.

As per the information available, the Commerce Ministry has already alerted the Revenue Department of the possibility of a big jump in contrabands (poaching on Government revenues), if FDI in tobacco is allowed, and its revenue implications. A perceptibl e decline in the overall cigarette market, mainly on account of bans on smoking in public places by a number of State Governments, has led to fresh fears over a drop in excise revenue from tobacco products (mainly cigarettes), sources point out.

According to the Tobacco Institute, emerging consumption trends of tobacco products too have contributed to these general concerns. For instance, cigarette consumption has now dropped to 16 per cent from the 19 per cent an year ago, only on account of th e smoking bans, it maintained. Sources say that while bidi consumption has dropped from 54 per cent to 46 per cent, use of chewing tobacco has jumped from 27 per cent to 38 per cent.

Market sources point out that contraband cigarettes and chewing tobacco are at the two ends of the spectrum, and both are perceived as the two immediate direct threats to the cigarette sector, and which also indirectly affect excise collections.

The menace of contrabands has now spread to all segments of the cigarette market -- king size, regular and even micro -- and once FDI in the tobacco sector is allowed, the big players may take firm control over the legal distribution channels, which are said to be the key to effective cross-border movement of ``illegal'' cigarettes. Retailers push smuggled cigarettes enthusiastically because the margin they earn by hawking the illegal product is four times of what they get from vending a duty-paid legal product.

Cigarette MNCs, say people in the know, could afford huge margins to retailers because they avoid paying excise duty in the country of manufacture of these cigarettes by earmarking them for export. Cigarettes, strategically, are exported to countries lik e Bangladesh or Nepal where import duties are low, and these points emerge as the convenient hubs for supplies of smuggled brands.

As per some estimates, close to 15 billion packs of cigarettes per year (nearly a third of those in international commerce) get smuggled across national borders without duties or taxes being paid, even though global tobacco majors like Philip Morris, BAT and R.J. Reynolds (known as Japan Tobacco Company outside the US) deny they are responsible.

The big players say they sell their products legally to distributors, and that they cannot control what happens further down the supply chain. The black market results from high cigarette taxes creating enormous incentives for smuggling rings. The contra band volume is said to have grown five-fold over the last 10 years.

Out of the total Indian market of 97 billion sticks per year, contraband cigarettes account for nearly six billion, and the loss to the national exchequer from this (by way of lost revenues) is put at nearly Rs 2,000 crore per annum. If the percentage of contraband cigarette trade touches say 30-35 per cent of total sales, the loss to the exchequer may be a staggering Rs 12,000-14,000 crore annually.

Duty-free cigarettes exported by MNCs in Europe and the US to Nepal and Bangladesh, which levy nominal import duties, easily find their way into India through the porous borders, alongwith low-priced cigarettes manufactured for local consumption. Against a monthly demand of two million Marlboro sticks in Nepal, some 4.3 million cigarettes, on average, are exported by Philip Morris.