A recent move by the Karnataka health and family welfare department exploring the possibility of its entering a partnership with a tobacco company to build speciality government hospitals has sparked opposition among public health activists, according to a story in The Times of India.
In an e-mail dated April 18, Shalini Rajneesh, the principal secretary of the department, wrote to Anil Rajput, senior vice president, corporate affairs, at ITC, outlining the government of Karnataka’s plan to build five ‘super speciality hospitals’ and the opportunity for private companies to partner the government in this initiative.
‘As discussed, we are planning to set up five super speciality hospitals in five districts of Karnataka,’ the e-mail was reported to have said.
‘We plan to build the hospital and invite PPP partners to come with doctors and equipment to run the hospital.
‘The government will pay for the patients as per package costs pre-decided with a group of doctors both from the government and the private sector…
‘May I request you to put up this proposal before the ITC board, as early as possible?’
Public health activists have termed the move a clear case of a conflict of interests.
In opposing the initiative, one unnamed activist was said to have quoted Article 5.3 of the World Health Organization’s Framework Convention on Tobacco Control.
Meanwhile, anti-corruption activist Ravi Krishna Reddy said such partnerships allowed the tobacco industry to make inroads into the health sector and influence government decisions.
“The Karnataka government itself, recognizing WHO guidelines, issued a circular in the past that government and elected officers shall not participate in tobacco industry related events,” he said.
“The recent move by the Karnataka health department to partner a tobacco firm now is a breach of public trust and a case of conflict of interest – as the tobacco firm gains close access to decision making authorities dealing with tobacco control.”
Asked about the move, Rajneesh said no decision had been taken by the government to partner with ITC to build government hospitals.
“Following a cabinet decision to build five super speciality hospitals in five districts, we are exploring various financial models to implement the project, and PPP is one of them,” she said.
India’s new goods and services tax (GST) is a positive for cigarette companies, according to Sanjay Manyal, equity research analyst at ICICI Securities.
“Prices should go down by at least 5-7 percent or maybe even more, which probably will benefit the companies and would really help in aiding growth at least for FY18,” he told India’s Economic Times.
Manyal said cigarette consumption is not completely price inelastic as excise tax hikes almost every year have led to volumes declining by double digits.
If there is a price decline, he added, there will be some boost. Manyal said he expects market leader ITC to benefit most.
The incidence of tobacco use in India dropped by 6.0 percentage points between 2009/10 and 2016/17, according to a story in the latest issue of the BBM Bommidala Group newsletter citing the results of the second Global Adult Tobacco Survey 2016/17 (GATS-2).
The fall in the incidence of tobacco use from 34.6 percent to 28.6 percent means that there are now 8,100,000 fewer tobacco users in India than there were in 2009/10.
But even at 28.6 percent, the current incidence means that India has 267,000,000 tobacco users.
The incidence of tobacco use among men is 42.4 percent while that among women is 14.2 percent.
Tobacco usage was down among those aged 15-24 years, with the incidence falling from 18.4 percent in 2009/10 to 12.4 percent in 2016/17.
And according to GATS-2, the mean age of initiation into tobacco use rose from 17.9 years in 2009/10 to 18.9 years in 2016/17.
The survey found that 61.9 percent of adults had considered quitting cigarettes because of health warnings on tobacco packs, while 53.8 percent of bidi smokers and 46.2 percent of smokeless tobacco users had thought about quitting for the same reason.
The percentage of adults who were exposed to environmental tobacco smoke in public places was down from 29 percent in 2009/10 to 23 percent in 2016/17, and the percentage of those exposed to such smoke at home was down from 52 percent to 39 percent.
But the percentage of adults exposed to environmental tobacco smoke in the workplace increased marginally from just under 30 percent to just over 30 percent.
The study was carried out between August 2016 and February 2017 in all of India’s 30 states and in two union territories.
The Indian government has said that global companies will no longer have to depend on a local partner or agent to buy leaf tobacco from the country’s farmers, according to a story in the Business Standard relayed by the TMA.
The story suggested that allowing global players to participate directly in flue-cured tobacco auctions would increase competition and help improve farmer prices.
Global buyers were said to buy 70 percent of the country’s flue-cured tobacco, while the remainder was bought by local cigarette manufactures.
In 2016, the country’s exports of flue-cured tobacco amounted to 230 million kg and were worth Rs59.5 billion (US$921.1 million).
But exports declined by four percent this year, primarily due a decline in production, according to R Subba Rao Chowdary, a Tobacco Board official responsible for marketing and exports.
Flue-cured leaf tobacco prices at auctions in the Indian state of Andhra Pradesh have been running high so far this year and sales have been progressing briskly, according to a story in the latest issue of the BBM Bommidala Group newsletter
After about 40 days of marketing, the story said, 21.57 million kg of tobacco had been sold for an average of Rs145.53 a kg.
The top price had been Rs174 per kg.
Bright grades were fetching Rs158.38 per kg while medium grades were selling for Rs138 per kg.
Earlier this year, growers told the Tobacco Board that the average price should not go below Rs135 per kg if they were to ‘scrape through this year after two successive years of heavy losses’.
The Board was urged to ensure that growers received Rs160-170 per kg for bright-grade leaf and at least Rs120 per kg for low grades.
The Farmers’ Association said that the Board should take into consideration the challenging conditions under which the crop was raised – conditions that included a prolonged dry spell.
Andhra’s crop is expected to total about 105 million kg this year, well short of the 130 million kg that were authorised.
According to the Indian Tobacco Association, the total crop is expected to comprise 40 percent bright grades, 25 percent medium grades, with low grades making up the remainder.
The consumption of illicit cigarettes in India increased by 90 percent last year, according to a story by Siddharth Tiwari for the Sunday Guardian, citing ‘industry’ figures.
Industry studies backed by seizure figures are said to have revealed that 17 billion cigarettes are smuggled into India each year.
But, presumably because of locally-produced cigarettes on which tax is not paid, the total number of illicit cigarettes on the market is much higher. According to Euromonitor International, the number of illicit cigarettes consumed in India has increased from 11.1 billion in 2004 to 23.9 billion in 2015.
This was said to make India the fourth largest illicit-cigarette market.
Meanwhile, a study by the Federation of Indian Chambers of Commerce and Industry indicated that the number of illicit cigarettes in India had double during the past decade, causing an annual revenue loss to the national exchequer of more than Rs90 billion.
The illegal trade was said also to be undermining the government’s efforts to reduce smoking by making cigarettes increasingly expensive.
But some see the high-tax strategy used by the government as being at least part of the problem.
Tobacco-industry experts were said to have told the Sunday Guardian that high and discriminatory taxes, coupled with extreme regulations such as pictorial warnings, were providing a boost to the illegal cigarette trade in India.
“The illegal cigarette trade is on a growth trajectory due to the high tax arbitrage,” said Syed Mahmood Ahmad, director of the Tobacco Institute of India.
“In addition to this, non-adherence of illegal cigarettes with regulations like pictorial warnings lends an impression that they are safer alternatives to their legal counterpart.”
India’s promise to the cigarette industry is likely to remain where it has been for a long time—on the horizon.
By Shane McGuill
It is remarkable that a country whose people purchase billions of dollars of tobacco products every year is regarded as a sleeping giant by the cigarette industry. Indian consumers spend more than $20 billion annually on tobacco products (ranking the country 11th in the world), and the rolled manufactured cigarettes (RMC) market stood at 90 billion sticks in 2015, making it the world’s ninth largest. Yet in the context of a 1 billion-plus population, these figures are modest, attaching to the Indian market a seemingly perpetual sense of latent-but-never-quite-realized potential. Indeed, in many ways, the story of tobacco in India is characterized by changes that never arrive.
That is not to say that the consumption of tobacco in India is a marginal pursuit. However, tobacco use in India is significantly more diffuse than that in virtually any other world market. According to the Global Adult Tobacco Survey (GATS), one-third of the India population were daily users of tobacco in some form in 2010. Most of these—20 percent of the population—used chewing tobacco. The remainder was split between smokers of bidis and RMC, with the former having close to twice the level of use of the latter.
In the context of rising disposable income and improved logistics, a long-awaited shift in patterns of Indian tobacco use has been increased uptake of cigarettes. However, while the years between 2010 and 2016 have seen a dramatic shift in usage, it was not in the prevalence of cigarette smoking, which has remained stable. Instead, according to industry sources, on the back of increased restrictions and increased pricing, by 2015 bidi consumption overtook the use of chewing tobacco as India’s dominant mode of consumption.
The government of India intends to restrict the practice of selling cigarettes per stick, which accounts for 70 percent of cigarette consumption.
The driving force behind this shift as well as the lack of traction by RMC is India’s excise and tobacco-control regime, which is rapidly becoming one of the world’s most restrictive. In the past five years alone, India has sought to prohibit the smokeless tobacco category, introduced sweeping graphic health warning regulations and has increased excise taxes on tobacco products dramatically (though not always proportionately across categories). In the aggregate, legislative and excise tightening has benefited the hand-rolled bidi category with declines evident in smokeless tobacco consumption and elevated volume losses in RMC, the segment that dominates in other markets.
Excise evolution is especially problematic to the RMC segment because it has significantly increased the unaffordability of a product segment that has been striving to migrate lower-income consumers from competing tobacco products. The average Indian must work in excess of 2.5 hours at the average wage to purchase 20 cigarettes; in neighboring Pakistan, the equivalent figure is just over one hour, while Japanese and South Korean smokers on average earn quickly enough to afford a pack of 20 cigarettes every 15 minutes.
While the level of excise increases on the cigarette segment has varied year-on-year both in absolute terms and in terms of the balance of stick length segments by which the government levies taxation (13 percent net in 2015, 10 percent in 2016 and 12.5 percent in 2017), since 2012 excise has increased by more than 100 percent. In a fixed-price market, such as India, this goes in toto onto the pack price of lower-priced (usually shorter stick length) brands, with manufacturer margins absorbing some of the increases on premium (usually longer stick length) products. This level of unit price increase has not only acted as a barrier to migration into the category but also facilitated a shift out of it—into the illicit trade or back into the lower-priced bidi segment. The illicit tobacco trade has grown from 10 percent of the total market in 2001 to more than 20 percent in 2016. The price increases have also likely impeded increased uptake from demographics with limited disposable income, such as female smokers or adult smokers under 30.
A further effect of the excise evolution has been an increasing polarization in the market between stick lengths, with fewer consumers seeing the value in opting for products other than either 64 mm (downtraders) or 84 mm (those inclined to trade up). There has been some speculation recently that the government will seek to rationalize India’s excise regime on cigarettes, as recommended by the World Health Organization, away from stick length buckets.
Developments on the regulatory side have been scarcely less striking. India’s packaging legislation has progressed rapidly to stand now (after lengthy legal wrangling) at requiring full graphic warnings covering 85 percent of both the front and back of packs. Indian manufacturers briefly suspended production in 2016 in protest at the imposition of the measure. The federal government is also preparing to enforce nationwide public smoking restrictions. The impact of such restrictions will inevitably vary by region, but it is likely to be significant in major urban areas and will reduce consumption frequency, not least because of the effect on street stalls and kiosks where cigarettes are largely purchased and in the environs of which they are typically consumed.
In the medium to longer term, further regulatory action is probable. Around 70 percent of India’s RMC is purchased as single sticks because low-income consumers purchase as their daily revenue flows allow. The government has promised action to enforce a ban on these transactions, which are complicated by regular excise increases and which blunt the impact of health warnings. In the slightly longer term, India is a strong candidate for the introduction of standardized tobacco packaging.
The Indian RMC market continues to be dominated by domestic players, and in effect it is a duopoly with the conglomerate ITC (in which British American Tobacco holds a 29.74 percent stake) enjoying a retail volume share of 79 percent, followed by Godfrey Phillips India (GPI, which has a relationship with Philip Morris International) with 11 percent. Other domestic players, including VST Industries, share a further 8 percent of the market, with strong presences in certain regions of the country.
In general terms, the involvement of international tobacco manufacturers in the Indian market is limited by government restrictions on foreign direct investment (FDI), and these appear poised to amplify. FDI in cigarette manufacturing has been prohibited since 2010, while other forms of engagement, such as trading relationships and licensing, have been legal. It is under this rubric that GPI manufactures the Marlboro brand on behalf of Philip Morris International (PMI) with the product then distributed and marketed by a PMI-controlled sales operation. In March of 2017, it was widely reported that the Indian government is considering further restrictions on this type of arrangement (though not retroactively), which would have the effect of impairing future expansion by international companies in the Indian tobacco market.
With respect to the manufacturers’ retail partners, newsagent tobacconists and kiosks remain the leading distribution channel for cigarettes, accounting for around 70 percent of volume sales. There is a high density of these outlets, which are embedded in communities and typically benefit from a cohort of loyal consumers living locally. Given restrictions on the advertising of tobacco products to consumers through other media channels, point-of-sale display advertising represents the core marketing and promotional platform for manufacturers. The dominant players concentrate on creating branded material for kiosks and tobacconists, for which operators are compensated.
This type of material primarily takes the form of paper hoardings at point of sale, along with display cabinets and logo-specific hoardings displayed on the front and side of stores. Furthermore, manufacturers also pay to decorate stores with specific brand colors to attract consumers in India’s major urban areas.
Packaging and advertising regulation of the type in force in India tends to mitigate against frantic new product development, but innovation is nonetheless visible, particularly at the premium end of the market. Products incorporating features such as flow filters and packaging innovations have been launched in recent years. Capsule products have also begun appearing, notably across price points. Flavor in general remains niche, accounting for around 1 percent of the market, but is expected to grow in coming years as a range of menthol and other flavor variants, such as Marlboro Kretek, continue to hit the marketplace.
Looking ahead, consumer expenditure on tobacco in India is forecast to increase by more than 50 percent to $32 billion by 2021, as the influence of taxation in all product segments is felt. However, as enhanced regulations, such as pack warnings, public smoking restrictions and potentially even an increase in the legal smoking age, continue to bite, it is difficult to see considerable growth in the RMC segment. Euromonitor International currently forecasts a compound annual growth rate volume decline of about 3 percent in cigarettes between now and 2021, with value evolution also on an only marginally more moderated downward trend. In the same period, India’s per-smoker consumption of cigarettes (already one of the lowest in the world) will decrease further. In essence, another half decade of unrealized possibility.
The decision by the Tobacco Board of India to increase the size of the authorized flue-cured tobacco crop for the state of Karnataka has angered tobacco growers and anti-tobacco activists – though for different reasons.
The Hindu Online reported that the board had decided to increase the crop size by slightly more than four percent from 95 million kg for the 2016-17 season to 99 million kg for the 2017-2018 season.
Anti-tobacco activists are angry that the board has increased the crop size in a move that they say is in contravention of India’s commitment to the World Health Organization’s Framework Convention on Tobacco Control, under which it should be reducing tobacco cultivation.
Growers are angry that the size of the increase is too restrictive at a time when international demand is high and prices attractive.
The Indian Tobacco Association, representing tobacco manufacturers and exporters had called for a crop target of 105 million kg in 2017-18.
“The board should have fixed the crop size in accordance with the demand, which has come particularly from the exporters,” Javare Gowda, the president of the Karnataka FCV Tobacco Growers’ Federation, was quoted as saying.
“If the crop is restricted, farmers will be forced to pay a penalty for growing more than the authorized size.
“Last year, the farmers paid a whopping Rs24 crore [Rs240 million] in penalties.”
Gowda added that India would miss out on foreign exchange earnings if exporters looked to China, Brazil and Zimbabwe to meet their requirements.
But the increase in crop size came under fire from Vasanthkumar Mysoremath, who is convener of the Anti-Tobacco Forum of Mysuru and the honorary advisor to the Cancer Patients Aid Association.
“The increase is detrimental to people,” he said.
“It proves that the government is not serious about tobacco control. It is adopting a dual approach.”
The High Court of Bombay has issued notices to India’s Union government asking it to respond to a public interest litigation (PIL) filed by a group of health experts that has asked the court to direct the government to divest its holdings in tobacco companies, according to a story in the Economic Times relayed by the TMA.
These investments include the government’s Rs1.07 trillion (US$16.6 billion) stake in cigarette company ITC Ltd.
The court is due to decide on April 27 whether to admit the PIL.
The government, through its insurance arms, Life Insurance Corporation of India, General Insurance Corporation of India, the New India Assurance Company, Oriental Insurance Company Limited and Specified Undertaking of the Unit Trust of India (SUUTI), holds a 30.25 percent stake in ITC.
At the same time, the New India Assurance Company holds a 1.7 percent stake in VST Industries.
The petitioners want the court also to prohibit the government from making fresh investments in tobacco companies.
The average flue-cured tobacco price during the early part of the leaf auction season in the Indian state of Andhra Pradesh was up by almost 48 percent on that of the 2016 selling season, according to a story in the BBM Bommidala Group newsletter.
Following 20 days of marketing, about 5.17 million kg of flue-cured had been sold, 4.07 million kg of it comprising bright leaf grades.
The average price was said to have been Rs158 kg, with the highest bid going to Rs168 peer kg.
The rise in prices during the current season, which started on March 15, was attributed to the supply and demand situation.
Andhra Pradesh’s tobacco acreage is said to have declined this year as many growers, who suffered heavy losses last season, switched to chilli cultivation. Drought and late planting of the crop in many areas also contributed to the shortfall.
This season’s crop is estimated to be about 104-105 million kg, short of the 130 million kg authorized volume.
The High Court of Bombay has issued notices to India’s Union government asking it to respond to a public interest litigation (PIL) filed by a group of health experts that has asked the court to direct the government to divest its holdings in tobacco companies, according to a story in the Economic Times relayed by the TMA.