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India's tobacco sector is still a giant, despite attacks on smoking by its government.

INDIA'S US$12.4 billion annual turnover tobacco industry is passing through a difficult period, with little hope for a better future, despite its continued large size--this estimate coming from the Tobacco Institute of India for sales of all tobacco products, chewing tobacco and beedis. For two consecutive years the country's cigarette market has shrunk, and high taxes along with overall restrictive policy of the central government against tobacco smoking has spread pessimism throughout the industry.

"Though it is a big contributor to the revenue exchequer, government has been looking at the tobacco industry in a negative sense", said Anand Shah, a market analyst with Mumbai-based firm Angel Broking.

Cigarettes are the most venerable section of the industry and are at the frontline of the government's fire. The 100 billion cigarettes sticks produced every year in the country constitute only 13% in volume and 32% of the value of the country's total tobacco industry. However the cigarettes sub-sector's share of the US$1.7 billion central tax collected from the tobacco industry stands at staggering 85%. Shah claims that the situation indicate that the "cigarette lobby has been weakening".

The single biggest identity in the Indian cigarette market remains ITC (formerly the Imperial Tobacco Company of India Limited), which according to its spokesman, presently holds 60% to 70% of the Indian cigarette market share with annual cigarette and 'smoking mixtures' sales in financial year April 2007 to March 2008 amounting to US$3 billion.

From its manufacturing units at Bangalore, Munger, Saharanpur and Kolkata, ITC makes cigarette brands such Insignia, India Kings, Classic, Gold Flake, Silk Cut, Navy Cut, Scissors, Capstan, Berkeley, Bristol and Flake. It also manufactures Benson & Hedges and State Express 555 under licence from British American Tobacco (BAT), the international giant that holds around 32% equity in the company.

The other major company in the sector is Godfrey Phillips India which is owned by the K.K.Modi group and has an equity holding from Philip Morris. It controls most of the remaining share of the cigarette market with cigarettes and tobacco products sales in the financial year April 2007-March 2008 of US$170 million. This figure for the October to December 2008 quarter stands at US$56 million, representing a significant increase in sales, which the company has been reluctant to explain. Its major brands include Four Square, Red and White, Jaisalmer, Cavanders, Tipper and Stellar, which are sold through a network of more than 500 distributors and 800,000 retail outlets.

Japan Tobacco International (JTI) is the only international company that manufactures cigarettes within India in a private joint venture with a local partner, whose identity the JTI spokesman did not want to confirm to World Tobacco, and its geographical spread is restricted largely to the southern state of Kerala, where it sells a low priced regular size filter. Philip Morris International (PMI) imports comparatively small quantities of Marlboro though its branch office in India.

"Legally manufactured or imported international brands account for less than 0.5% of the domestic market," said Udayan Lall, director of the Tobacco Research Institute, "however smuggled international brands are also available locally- Marlboro being the leader, which reportedly constitute 5% to 7% of the domestic market."

In the cigar segment, Cuba's Cohiba and Partagas and the USA's Phillies are the preferred brands, which are distributed through Godfrey Phillips, according to Euromonitor data. The company also has a distribution agreement with Altadis, USA, Oettinger Davidoff International of Switzerland, Promocigar from Cuba, Villiger of Switzerland, Henri Wintermann from Holland and Cibahia from Brazil, Davidoff, Don Diego, Santa Damiana, Phillies, Hav-A-Tampa and Dutch Treats.

As far as the exports of Indian brands are concerned, according to Lall, "ITC is quite successful in marketing its brands in the Middle East and in the USA." The company website says that it offers high-quality, value-priced cigarettes and 'roll-your-own solutions' in the US market.

Godfrey Phillips too has an export market in the Middle East, west Africa, southeast Africa and southeast Asia. According to the company website it is "providing various professional and expert services like contract manufacturing, consultancy services, cut tobacco and smoke analysis."

For the international tobacco companies and their brands, there is a little scope to enter the local market. According to Shah, "the Indian government doesn't want foreign companies to come here and dominate". He gave examples of Japanese and British tobacco companies that wanted to increase their stake in Indian companies. However, according to him central government blocked both the moves.

Shah, who tracks ITC for his broking firm, told World Tobacco that the tobacco company has been diversifying aggressively for last two years due to the uncertain future of the tobacco industry. "ITC's focus has widened drastically", he said.

ITC already has stakes in hotel, food, paper, packaging, agri-business, packaged foods & confectionery, information technology, branded apparel, personal care, stationery, safety matches and a few other fast moving consumer goods segments. It also owns a fashion brand 'Wills Lifestyle' (NOTE--NO APOSTROPHE IN 'WILLS'), that allows it to advertise a name attached to one of its cigarette brand.

Godfrey Phillips' diversified interests include retail, beverages, confectionary and cosmetics. Across the tobacco industry there is unanimity that this approach is sensible and that the main reason behind the fall in the sales of smoking tobacco has been the stringent tobacco control laws implemented in the last few years.

These laws are covered by the Cigarette and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003. This law prohibits smoking in public places; the advertising (largely), promotion, and sponsorship of tobacco products; the sale of tobacco products by and to persons below 18 years of age; and the sale of tobacco products in an area within a radius of 100 yards of any educational institution.

The Act also makes it compulsory for companies to put graphic health warnings on cigarette packets, however under strong protests from the industry this move has been deferred many times in the past few years and is now scheduled to come up for discussion before the central government in May 2009. There are a few other, not-yet implemented provisions of the law, which demand cigarette manufacturers not use descriptors such as 'light', 'mild', 'low tar', and to print nicotine and tar content, along with the maximum permissible limits on the packets. Restricted advertising of tobacco products is however allowed at shops where they are sold. The government justifies its decisions on the basis of various national and international studies that point to the health-related cost of smoking. According to a five-year-old Tobacco Control Report by the World Health Organisation (WHO) and the Indian ministry of Health and Family Welfare, in India more than 800,000 people die of tobacco-related disease every year.

Former Indian health minister (2004-2009) Dr Anbumani Ramadoss (NOTE--SPELLING IS CORRECT) was so convinced by the arguments against the use of tobacco that in 2006 he even banned smoking scenes in film and on television. The order was however later quashed by the Delhi High Court. Since then central government has approached Supreme Court to get the order reinstated.

But the greatest impact of a direct government action was still to come, in the 2008 national budget when, due to a 400% increase in the excise duty of non-filter cigarettes, the whole segment became commercially unviable and was essentially forced to shut down. The ITC was hit hard with a discontinuation of its brands, but Shah says that the company was able to lure 70% of its clients to costlier filter cigarettes. The rest were lost to cheaper beedis--leaf-rolled local mini cigarettes, or may have migrated to consuming chewing tobacco. Though the move may not necessarily be linked to its exit from non-filter segment, in September 2008 ITC launched a new cheaper cigarette under its old brand Wills Navy Cut, which costs US$0.50 for a pack of 10. According to Shah, in the financial year ending March 2009 ITC will post only a 3% volume decline, which would be better than the industry average and the company has already taken the price hike to compensate for the revenue loss.

According to a New England Journal of Medicine study released in 2008, it is estimated that there are about 120 million smokers in India, (around 20% of the adult population--a relatively low figure--which excludes chewing tobacco consumers).

Some experts feel that this number is gradually going down, however Shah does not agree. According to him the number of new smokers is steadily rising but due to smoking restrictions people are forced to smoke less.

Extreme frustration against the government policy has also been seen within the beedi industry, which accounts for about 53% of tobacco consumption in India. "They [government] are just aping the west [by imposing stiff restrictions on the smokers]", said Sorab Patel, General Secretary of Federation of Bidi (NOTE--THE ORGANISATION NAME SPELLS BEEDI IN THIS UNORTHODOX WAY) Leaves and Tobacco Merchants' Association. His main argument in support for the beedi industry is that it supports a very large number of people, who have no other means of income, and have no opportunity to diversify.

According to the Tobacco Institute, Beedis provide employment to about 38 million people including approximately 2.2 million tribal people, who engage themselves in plucking and sale of 'tendu' leaves used as the outer shell of the beedis. Among the beedi-makers 76% happen to be women, who can earn US$1 a day by making 1,200 beedis from their homes.

According to Patel, in line with the decline in cigarettes sales during the last two years, beedis sales are also going down. Due to the unorganised nature of the industry it is difficult to grasp the exact impact, but he says it must be equal to the cigarette figures--that is a 2% and 7% fall in 2007 and 2008 respectively.

Patel is also annoyed because at the places where smoking is banned, people can still use chewing tobacco. Due to this, he said, the beedi market is now taken over by chewing tobacco that, according to him may be equally harmful for public health. Furthermore, as Indian chewing tobacco--popularly known as 'gutkha' or 'khani'--is manufactured in factories, it does not provide a fraction of employment generated by beedis. He calls beedis a "poor man's paradise."

A packet containing 25 beedi sticks cost between US$0.05 and US$0.13 in comparison to US$0.26 for the cheapest cigarette packet containing 10 sticks. Excise duty or central tax on beedis is also much lower, only US$0.30 per 1,000 sticks in comparison to US$2.60 for a same number of low end cigarette sticks.

A reliable source in the (NOTE -USE 'SOURCE' TO PROTECT HIS INFORMANT) industry claimed to World Tobacco that a major cigarette manufacturer is at initial stages of planning an entry into the beedi market that consumes around 700-800 billion sticks annually. The possibility of an actual entry has however been discounted by experts for various reasons.

The Beedi sector "is very unorganised, and the margins will be very constrained", said Shah. When contacted by World Tobacco, ITC spokesperson plainly said: "We don't want to enter that [beedi] sector as it is not our competency."

Despite the tough times, the Indian tobacco industry remains one of the largest in the world. After China and Brazil, it is the third largest producer of tobacco leaf worldwide with an annual production of 700 million kilogrammes. According to Lall, less than 40% of this production consists of Flue Cured Virginia, which has a demand in the international market. Despite the slump in India's cigarette market, local production has shrunk because there has been a substantial growth in exports of tobacco products, mostly leaf tobacco. There are no noticeable imports of tobaccos as almost all the tobacco used in India is produced locally.

Sharing his latest figures with World Tobacco, the chairman of the India's Tobacco Board, Dr J Suresh Babu said that until the end of February 2009, the export of tobacco leaf from India had reached US$640 million, and therefore he expected the final figure for the financial year (April 08 to March 09) to exceed US$700 million. This will be substantially higher than the previous year's figure of US$503 million. The board is a government body that helps the growth of tobacco leaf exports by facilitating companies involved in the business, however there are no subsidies aimed at tobacco leaf cultivation.

In fact there is a concerted effort by the central government to curb this aspect of the industry. Earlier this year, the central government released US$500,000 to the country's Central Tobacco Research Institute (CTRI) in Rajamundari to undertake a pilot project on "alternative cropping systems for beedi and chewing tobacco" in different agro-ecological sub-regions of the country. Babu told World Tobacco that, after the in-principal approval for the project, the government has asked for some clarifications from the Tobacco Board and his office is processing that request, but he is certain that the project will be implemented soon. This will happen despite Lall's apprehensions. He said that, "Flue Cured Virginia is an extremely remunerative crop, providing farmers higher returns as compared to other crops grown in the region and will be difficult to substitute".

Babu added that the government's long term aim for the year 2020 is to reduce tobacco production by 50%. He admits that his job is to promote the industry but still has to work to restrict the production and consumption of tobacco in the country, which was due to the policy of the last government. He looks forward to a new central government being formed by the end of May.
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Author:Verma, Raghavendra
Publication:International News
Geographic Code:9INDI
Date:Apr 1, 2009
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