Tax Tobacco Farming or Go up in Smoke.

MOHAN GURUSWAMY:

The tobacco business in India was estimated to be worth around Rs.90, 000 crores in 2009. It is expected to reach Rs.230, 000 crores by 2018. While bidis account for almost 85% of tobacco use it is not the mainstay of the business in terms of value. Cigarettes account for 44% of the market value of the business. Chewing tobacco, bidi’s and other forms account for the rest. While increasing population and rapid economic growth are driving growth of the market, increasing government regulation and taxation, along with smuggling of counterfeit brands of cigarettes are key to slowing down the growth in the market.

The only good news from the tobacco business is that per capita cigarette consumption has declined from 190 in 1970 to 99 now. 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 rich and powerful cigarette industry, has not yet conducted a detailed study of this and the consequential cost to the economy. This is despite a specific request from the Revenue Department to enable it to evolve a scientific basis for cigarette and tobacco products taxation.

Whatever be the drop in stick sales it is very 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 “barbadhion ka jashn manata chala gaya, har fikr ko dhuey mey udhatha chala gaya! (I celebrated every act of misfortune and blew away my worries in smoke.)

The decline in cigarette consumption need not necessarily mean good news, as dropouts would have switched to bidis and gutka? This is evident from the fact that tobacco leaf production has increased from 337 million kgs. in 1970 to 750 million kgs. in 2015. Nevertheless, the decline in consumption, attributed by the cigarette industry to higher excise duties in each of the previous few budgets, means that the policy is in the right direction and that there is a case for further 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 71474 millions. This was when India had a PPP per capita income of just $1354. It is closer to $6200 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 FAO estimates that in 2000 the total tobacco consumption was about 4,703,000 tons. This was projected to rise to 5,638,000 tons in 2010? This must be music to the ears of the tobacco industry bosses since manufactured and hand-rolled cigarettes (bidis) account for 85% of all tobacco consumption. The FAO also forecasted that in 2010 the share of tobacco consumption in developing countries will come down from 34% to 29% and the poor countries will account for 71%. It must be noted that all cigarette manufacturing in India is with MNC dominated companies and it is the conscious policy of these MNC’s to shift their markets to LDC’s.

The tobacco business employed some 8 million people accounting for 1.5% of overall employment. More than two-thirds of this employment is rural, though many of these jobs, particularly those in bidi manufacturing, are primarily part-time. Exports of Indian tobacco and tobacco products have witnessed steady growth. Exports rose at a CAGR of 9.0% to US$ 918.9 million in 2014–15 from US$ 502.2 million in 2007–08. India exported 246 million kgs of tobacco and tobacco products in 2014-15.

The tobacco industry will, no doubt, argue now that it is not wise to kill the goose that lays the golden egg. But it is not a golden egg but a time bomb as each cigarette or bidi smoked or gutka chewed now implies a future medical cost. Very recently the US government negotiated a $246 billion damages package from the US cigarette industry to pay for future health costs.

It is not that the incidence of smoking is low in India if we take into consideration the widespread bidi habit. With current cigarette consumption of around 90 billion, we have a per capita consumption of around 100 per year. This is, by any standards, a very high and dangerous figure when you consider that cigarette consumption accounts for only about 25% 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. A nationwide survey revealed that the prevalence of tobacco use among all adult men was 25.7% and 35.3% in urban and rural.

Another survey estimates that 160 million males and 34 million females used tobacco in India. This survey also estimates that 112 million persons smoked tobacco, while 96 million used it mostly in its smokeless form. Both forms are just as dangerous and harmful.

It is estimated that about 900,000 people died in 2010 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 which require expensive medical intervention. It need not be emphasized that these diseases entail higher medical costs and man-days lost than cancer. The estimated annual loss due to tobacco related illnesses is now over Rs.105, 000 crores.

In stark contrast to this, tobacco related taxation in 2011 fetched revenues amounting to about Rs.18000 crores. Of this Rs.9000 crores was from cigarettes. 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. A group of expert commissioned by the Bill and Melinda Gates Foundation have calculated that: “Raising bidi taxes to Rs 98 per 1000 sticks would add Rs 36.9 billion to tax revenues and prevent 15.5 million current and future smokers dying prematurely; increasing cigarette taxes to Rs 3691 per 1000 sticks would further add Rs 146.3 billion to tax revenues and prevent 3.4 million premature deaths.”

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 critically acclaimed Hollywood movie “The Insider” featuring Russell Crowe was based on real events that led to unraveling of the cigarette industry’s habit inducing practices. It is rumored that similar practices are still widespread in India. There is, therefore, a case for pegging excise duties with nicotine content also, which implies that the packs then states details of the exact contents of the product.

There are several ways of doing this apart from Central Excise. The states could levy a production tax and the 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 labor intensive business, but it would be quite easy to estimate that the benefits due to this are far outweighed by health costs, most of which are borne by the state. In most developed countries taxes account for 50-70% of tobacco product sales prices. In India it is still around 10%. Clearly there is much scope for more taxation. The World Bank in a series of studies has clearly evidenced that a 10% increase in tobacco product prices will result in an 8% reduction in consumption.

Contrary to the weight of good sense and economic logic the government is active in the promotion of the Tobacco industry. It even has a Tobacco Board to promote the industry. Clearly this is one government agency that is doing its ‘work” well. In 2014 it bagged internationally acclaimed "Golden Leaf Award-2014" for its "most impressive public service initiatives" in Tobacco sector.

The other great irony is that tobacco cultivation is water and fertilizer intensive. India uses about 1% of its irrigated area for tobacco cultivation. This means that the benefit of water, power and fertilizer subsidies also accrue to the tobacco industry. The only way to neutralize this would be to tax tobacco agriculture with both land revenues and income tax. This will be unpopular with politicians from the tobacco growing areas, but its time we bit the bullet.

Clearly we need a policy that will, not only address the issue of future health costs and reduce the incidence of smoking, but 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 altogether 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.