1. INTRODUCTION

The tobacco industry is one of the most profitable industries in the world. Tobacco companies use their enormous wealth and influence both locally and globally to market their deadly products. Even as advocacy groups and policy makers work to combat the tobacco industrys influence, new and manipulative tactics are used by tobacco companies and their all is to circumvent tobacco control efforts. It is important for tobacco control advocates to know which companies are present in their country, how and where they operate, the types and quantity of products sold, and marketing tactics used to sell tobacco products. By being informed about all aspects of the tobacco industry within a country, advocates are better equipped to fight for effective tobacco control policies.

It is important to note that the tobacco companies typically report market data annually at least several months after the end of the fiscal year. By its nature, annual market data reported by analysts and tobacco companies are one or two years old. It is also important to note that information about the tobacco industry in India is not always readily available. This is particularly true for the loosely regulated bidi and smokeless sectors. Therefore, general trends, forecast data, and tobacco industry positioning within the market contained here are the most recent we are able to obtain from tobacco analysts, Euro-monitor International, and other sources.

In India, the tobacco industry is divided into three distinct and powerful sectors: bidis (smoking products hand-rolled in tendu leaves), smokeless tobacco (mainly chewing tobacco) and cigarettes. Bidis are the most popular tobacco products consumed in India- 48% of the market. Smokeless tobacco makes up 38% and cigarettes only 14% ofthe market.4Some aspect of the tobacco industry, whether it be tobacco farming, manufacturing, or distribution, is present in every Indian state, making tobacco control a truly national effort. This report, like the tobacco industry in India, has sections on each of the tobacco sectors as well as examples of tobacco promotion, sponsorship and corporate social responsibility efforts designed to increase consumption and industry profits.

2. THE BIDI INDUSTRY

Bidis are slim hand-rolled, unfiltered cigarettes that are rolled in brown tendu or temburni leaves and held together by a string. The product is often flavoured, and in general bidis are stronger tasting than regular cigarettes. Bidis are cheaper than cigarettes which makes them very popular in rural areas and among the poor. While bidis are the number one tobacco product used in India, very little is actually known about the organization of the bidi industry. Bidi production is fragmented and because most brands are hand-rolled in individual homes on a small scale, the bidi industry is considered to be a cottage industry.

In 1995 the Ministry of Statistics and Programme Implementation estimated there were over 6,600 bidi manufacturers in India, compared to 40 cigarette factories and 55 smokeless tobacco factories.4While recent numbers are not available, it is still clear that bidi manufacturers greatly outnumber other types of product manufacturers. A woman sitting at home-rolling 100 sticks a day qualifies as a bidi factory.

The bidi manufacturing industry is divided into two different sectors: organized and unorganized. The organized sector is factory based and production is increasingly mechanized and the unorganized sector is made up of home-based production and small cooperatives. Most production and hand-rolling is done at home by women and children.Tobacco industry analyst, Euro-monitor International, estimates that 20% of bidis are produced in the organized sector and 80% in the unorganized sector. Even organized factories tend to outsource production to individual homes.

Because the bidi industry is fragmented there are no specific figures on how many bidis are sold or produced. It is estimated that 750 billion to 1.2 trillion sticks are produced annually.

According to Euro-monitor International, the bidi industry in India is worth Rs200 billion ($4.1 billion USD).Bidis are much cheaper than cigarettes and smokeless tobacco products due mainly to unequal levels of taxation on the different products. Bidis cost between Rs2.50-5.00 for 25 sticks (less than one Rs per stick) whereas the leading brand of gutka costs Rs3-4 per unit. The leading brand of cigarettes costs Rs80-88 for 20 sticks (Rs4-4.4 per stick).In 2009, Euro-monitor reported that bidi volume sales were down 5% from the previous year because of a ban on smoking in public places.

Despite being fragmented, the bidi industry still has a powerful voice in Indian politics which keeps taxes on bidi products low and regulations lax. The major lobbying organization for bidis is the All India Bidi Federation which represents the entire bidi industry. Other organizations that lobby nationally and regionally for the bidi industry include:

All India Beedi, Cigar & Tobacco Workers Federation (New Delhi) Karnataka State Beedi Workers Federation S.K.Beedi Workers Federation Karnataka Beedi Industry Association Mumbai Beedi Workers Union (Maharashtra) All Bengali Beedi Workers and Employees Federation (Calcutta)

According to Euro-monitor International, no single bidi company or brand has more than a 5% market claim.

Large bidi producers have their own territory (state or district) where they dominate the market with little competition from other bidi companies.There are a few regional players that sell their bidi brands in more than one state or district, including Ganesh Beedi Works, Kajah Beedi Co and Bharat Bidi Works.There is no national bidi brand and at one time it was estimated that there were over 300 different brands across India. Some notable brands include:O 502 Pataka produced by Pataka Biri ManufacturingO 501 Ganesh produced by Magalore Ganesh Beedi WorksO Top regional brands such as Dinesh in South India, Taj in North India, andHowrah in East and North-east India.

While bidi production is concentrated in the west and south of India, it has also been estimated that each state has around 200 bidi manufactures.

LEADING BIDI COMPANIES AND BRANDS

COMPANYNAMELOCATIONPRODUCTION AND DISTRIBUTIONPOPULARBRAND (S)WEBSITE

Bharath BeediWorksMangalore Produces 60 million bidis a day13 Popular in North and West India Part of the Bharath GroupThirty BrandBeedishttp://www.30beedi.co.in/

Kerala DineshBeedi WorkersCooperativeKerala Produces 30 million bidisa day6 Produces 1.8 billion bidisannually 18differentsocieties(companies) Market covers Kerala, Tamil Nadu and Karnataka Cooperative is sponsored by the Kerala government and includes bidi rolling, food processing, umbrella assembling, clothing and ITKeralaDinesh Beedihttp://www.keraladinesh.com/

Mangalore Ganesh Beedi WorksTamil NaduKarnataka Produces 20 billion bidis annually Claims to produces 30% of the bidis in the organized sector15 Network of 30 branches501http://www.saiwaiboeki.com/ganeshbeedi/

Pataka BiriManufacturingCo LtdDelhi Produces100 million bidis a day Has 10 factories(2004)6502 PatakaBiri

Rajah Group(Kajah BeediGroup)Tamil NaduKeralaMaharashtraCooperative of four different companiesKajah BeediAction Beedihttp://www.rg8.biz/beedi.html

3. THE SMOKELESS INDUSTRY

Popular among rural and urban consumer, smokeless tobacco is also much more popular among woman than smoking. The smokeless industry in India is highly fragmented - some products are commercially manufactured but many are made in the home and sold locally. Smokeless tobacco products in India include khaini, gutka, mawa, gudhaku, and zarda.

TYPE OF SMOKELESS TOBACCODESCRIPTION

Khaini/ KharraMixture of sun-dried tobacco and lime.

Gutka (Gutkha)A dry mixture of crushed areca nut, tobacco, catechu (spices), lime, aromas and flavourings as well as other additives.19

Pan MasalaGeneral term for areca nut product. Does not usually contain tobacco and is often confused with Gutka.

MawaUses shavings of areca nut, tobacco and lime.

GudhakuA paste made of tobacco and molasses.

ZardaRaw tobacco that is scented using spices such as saffron.

Another product, pan masala, is often confused with gutka because it is packaged the same but it does not contain tobacco.

In a recent Global Adult Tobacco Survey, it was reported that khaini is the most commonly used tobacco product in India, followed by gutka. However, according to Euro-monitor International, Gutka is the most popular form of chewing tobacco sold in India and is estimated to account for approximately 80% of chewing tobacco total volume sales. This discrepancy is mainly a difference between actual prevalence of use and what Euro-monitor International is able to measure in terms of volume. More people in India report using khaini, but gutka companies such as Dharwal Industries are larger and more organized and therefore more likely to report product sales. In general, smokeless tobacco products are very cheap and are sold in single use packets for Rs1-3 (less than one cent US).Unbranded smokeless products, including unbranded khaini, are common, keeping the products cheap and unregulated.

In India, retail volume sales of smokeless tobacco products increased by 82% between 1999 and 2009.After a 2008 smoking ban and tax increase on unfiltered cigarettes, chewing tobacco sales increased by 6.5% as low-income smokers switched to cheaper smokeless products.

19992000200120022003200420052006200720082009

352380.1404.8425.1454.8484.4506.2539.1566600639

LEADING COMPANIES AND POPULAR BRANDS

The smokeless tobacco industry in India is controlled by a few large national companies and many different regional players.22The top five companies account for 31% of sales, the rest is controlled by regional players that often only operate in one district in a state. In general, Indian smokeless tobacco users prefer to buy locally.

SMOKELESS TOBACCO COMPANY SHARES RETAIL VOLUME(%)

COMPANY NAME200120022003200420052006200720082009

Dhariwal Industries Ltd (Manikchand Group)11.511.811.8121212.312.312.512.5

Dharampal Satyapal Ltd7.88.28.89.39.58.87.877.2

SomSugandh Industries Ltd3.73.84.34.244.755.56

ShreeMeenakshi FoodProductsPvtLtd2.32.52.52.82.8333.23.5

Kothari Products Ltd4.54.54.24.34.343.52.82

Others70.269.268.467.467.467.268.46968.8

Most smokeless tobacco companies in India just produce one brand. Different flavour varieties and packaging sizes are sold under the one brand name. The brand name is also often used to sell a non-tobacco pan masala product. Uniting a tobacco product and non tobacco product under one name is a clever marketing technique, as India has an advertising ban in place that prevents the direct advertising of tobacco products. Tobacco products that are packaged identically to pan masala benefit from the association made between the two products.

Market leading brand RMD (Right:PanMasala;Left:Gutkha)

Hot Pan Masala and Khaini with the same packaging

4. THE CIGARETTE INDUSTRY

Cigarette consumption makes up a small portion of the tobacco market in India, only 14% of tobacco products sold are cigarettes. Retail volume sales have decreased by 9% in the last ten years from99.6 billion sticks in 1999 to 90.3 billion sticks in 2009.Recent declines in cigarette volumes are mainly due to a 2008 increase in the tax on unfiltered cigarettes. The tax increase has also led to many unfiltered brands being removed from the market.ITC Ltd stopped unfiltered cigarette production entirely and some companies have launched filter versions of their most popular unfiltered brands to maintain their customers.

1999200020012002200320042005200620072008200999.698.789.391.994.596.5100101.199.891.290.3HISTORIC INDIA CIGARETTE MARKET SIZE- RETAIL VOLUME (BILLION STICKS)

Despite recent declines in sales, it is expected that cigarette use will increase overtime as disposable incomes increase in India. Euro-monitor International predicted in 2008 that if the smokers who currently smoke bidis switched to factory made cigarettes, then Indias cigarette consumption would increase to around 640 billion sticks. This increase would make India the second largest volume cigarette consumer in the world behind China.CIGARETTE COMPANY SHARESRETAIL VOLUME (%)

200120022003200420052006200720082009

ITC GROUP63.965.36666.167.567.867.971.872.9

GODFREY PHILLIPS9.810.710.911.911.111.511.912.913.8

VST INDUSTRIES LTD12.2109.48.98.78.48.58.58.7

GOLDEN TOBACCO LTD 3.61.5

GTC INDUSTRIES LTD9.99.79.49.49.2 98.6

JAPAN TOBACCO INC 1.31.41.3

GALLAHER GROUP PLC 2 2 21.51.41.3

OTHERS2.32.42.22.22.21.91.81.91.7

TOTAL100100100100100100100100100

The cigarette market in India is controlled by four locally established companies, but most companies also have close ties to international tobacco companies. The leading transnational tobacco companies (TTC) have recently attempted to increase their shares of the Indian cigarette market but have had little success. The ability of TTCs to increase their presence in India has in part been limited because of restrictions on foreign direct investment (FDI) in cigarette manufacturing.

SLIM CIGARETTES TARGETING WOMEN

Although the female smoking population is currently very small (about 3%), cigarette companies in India see the potential for growth by attracting women. Since 2007, slim cigarette brands have been launched to appeal to women smokers.

The first slim cigarette to hit the Indian market was the Stellar Slims brand by Godfrey Phillips in 2007.Thebrand is marketed as having lower levels of nicotine with the satisfaction of a regular cigarette.

In 2008, ITC Group launched Wills Classic Verve slim cigarettes targeted at women and first time smokers. ITC describes the brand packaged in a shiny red as Indias trend setting cigarette that defines uber-cool urban style. Golden Tobacco also has a slim cigarette called June.

TARGETING HEALTH CONSCIOUS CONSUMERS WITH MISLEADING CLAIMS

As Indian customers become more aware of the health risks associated with tobacco use, cigarette companies have created new products and tactics to counteract consumer knowledge. One such tactic is to use misleading terms (ex low-tar) on cigarette packaging or in advertisements that encourage health- concerned smokers to switch to cigarettes brands that they perceive as safer. This also offers consumers that are concerned about health risks from tobacco an alternative to quitting. As of 2006, India prohibits tobacco product packaging and labelling from containing information that is false, misleading or deceptive, or that is likely to create misperceptions about the characteristics or health effects of tobacco products. This includes prohibiting the use of terms such as light, mild and low-tar. Despite these restrictions, cigarette brands are still misleadingly marketed as being healthier.

Golden Tobacco markets Diet Blue cigarettes which use ECOTINE technology and is low in TSNA [so that it]does less damage to smokers. On the company website, Diet Blues are also described as having almost zero carcinogens making themthe safer option for existing habitual smokers. According to Euro-monitor International, ITC plans to peruse creating less harmful cigarettes and is expected to promote mid and low tar cigarettes towards consumers in the future.

BRANDS: APPEAL TO YOUNG TECH-SAVVY SMOKERS.

India has a very large technology industry and a growing information technology culture. Cigarette companies are capitalizing on the technology trend by introducing premium brands that appeal to younger consumers.

Godfrey Phillips launched I-gen in 2006. I-gen cigarettes have a black filter and the black, red and silver packaging is aimed at making the product look trendy and contemporary.The brand is descried on the companys website as a cigarette that holds the promise cigarette quality and immense style.In 2005, Golden Tobacco launched Chancellor XP. XP refers to the Windows operating system and the brand is designed to appeal to Indias information technology workers.

CHALLENGES FACING THE TOBACCO INDUSTRY

India currently holds the dubious distinction of being the second largest producer and the second largest consumer of tobacco in the world. Not a particularly dignified title, considering that tobacco kills half of its dedicated users prematurely in their productive years! According to the Global Adult Tobacco Survey-2010, 47.9% of males and 20.3% of females currently use tobacco in some form in India. Globally, smoking prevalence is declining in developed nations while it is on the rise in developing countries. India is currently on an upward swing both in terms of tobacco use and mortality thereof.

The World Health Assembly recognised the rising global tobacco epidemic and passed nearly 17 resolutions in the 30-year span between 1970 and 1999 exhorting its Member States to initiate action against tobacco use. Nevertheless, these resolutions did not lend a legislative framework that would obligate countries to take action against tobacco, nor could they address the transnational nature of the tobacco problem. Thus, in May 1999, Member States of World Health Organization (WHO) passed a resolution mandating negotiation of an international treaty to address the tobacco challenge. Four years and six gruelling rounds of negotiations later, WHO Member states agreed upon the Framework Convention on Tobacco Control (FCTC), the worlds first legally-binding international public health treaty under the WHO. India played a constructive, leadership role right through the negotiations and ratified the treaty in 2004.

REGULATIONS ON THE TOBACCO SECTOR

The Supreme Court of India in 1998 ordered a national smoking ban and called on the Government to legislate on tobacco control. The Cigarettes and Other Tobacco Products (Prohibition of Advertising, Regulation of Trade, Commerce, Production, Supply and Distribution) Act (COTPA) was thus enacted in April 2003. In addition to providing a national, legislative framework for action on tobacco control, this law spells hope for regulatory action on other consumer products with health consequences that are aggressively promoted, but largely unregulated.

The COTPA has been in existence for nearly a decade now. It is therefore a good time to assess its implementation and take stock of policy requirements to match the challenges of the coming decades. Slowly but steadily, a handful of Indian states are beginning to implement the tobacco control law, largely due to political leadership, administrative actions and civil society advocacy at the State level. In recent times some states have banned smokeless tobacco, some have enhanced regulation of retailers such as through licensing, others have extended smoke free public areas to include parks and streets and still others are increasing tobacco taxes. These state-level actions, if adequately defended, mobilised and extended, could in turn ignite the next generation of national-level policies to tame the still-escalating tobacco epidemic in the country.

While COTPA provided an early step towards meeting Indias FCTC obligations, the country falls short of several of the treaty requirements. For instance, while FCTC requires health warnings on tobacco packs to occupy minimally 30% of the principal display areas, Indian warnings average to only 20% of the principal display areas of cigarette packs. Similarly, FCTC, as well as COTPA, requires a comprehensive ban on direct and indirect tobacco advertising. But conflicting and ambiguous policies by different Ministries have led to surrogate advertising being the order of the day.

India has also witnessed some well-intended tobacco control policy initiatives failing to reach their logical end. India was the first country in the world to prohibit the use and display of tobacco products in movies and television in 2005. Legal challenges and opposition by certain interest groups have since watered it down and continue to delay the implementation of even the diluted rules. Similarly, industry and political meddling has led the health warnings originally proposed for tobacco packs to be reduced in size and impact. Tobacco taxes wax and wane from one year to another, with no clear policy in place on tobacco economics.A fundamental reason for the unintended fate of these well-intended policies is the lack of a planned approach by policy-makers. Policies often spring up spontaneously and as sporadic efforts, with sparse strategy and preparation in place to withstand potential industry challenges. It is notable that Australia spent nearly 2 years in identifying potential challenges, developing counter strategies, research and legal defence before announcing its plain packaging policy last year which is working to its benefit. India needs to urgently develop, through a consultative process, a national road map and strategy with clear policy goals for tobacco control in the country for the next 20-30 years. The National Tobacco Control Programme (NTCP) is a good place to start this forward thinking.

Recent times have seen much discussion and some efforts to combat the emerging wave of Non communicable diseases (NCDs). Tobacco use is the single major risk factor for four of the major NCDs. NCDs account for over half (53%) of the total mortality in the country. The NCD Plan under the countrys 12th Five Year Plan is a potential opportunity to create synergies between the various national programmes addressing NCDs in the country and integrate tobacco control into its implementation. The NTCP for the next plan cycle is expected to integrate tobacco control into the national NCD package. The programme needs to put the nuts and bolts for this to happen in reality.

Secondly, tobacco has been hitherto viewed as a health challenge in the country, and rightly so. However, there is a growing body of evidence that throws light on the socio-economic implications of tobacco use and supply. It is now known that tobacco affects the poor in the country more adversely-- be it in terms of misplaced expenditure, lost opportunities, productivity challenges and treatment costs. India stands to lose USD 237 billion between 2004-2015 from cumulative increase in losses from premature deaths due to NCDs. Tobacco is therefore very much a challenge to the countrys development, and its efforts to achieve its development goals.

At the UN High Level Meeting on Non communicable Diseases in September last year, Indias Minster of Health and Family Welfare had said, Non Communicable Diseases (implicitly its risk factors including tobacco) are not only a health issue but also a development issue, as they impact productivity and also impoverish the society due to high health expenditures. Given the rising burden of tobacco use and NCDs and the multifarious developmental challenges facing India, it is imperative that the Government of India follows up on its recognition of the problem and takes urgent and serious steps in integrating tobacco control and FCTC implementation into its national development plans. Indias next development planning cycle would commence in 2013 and the poverty reduction strategy revision is due in 2014. The forthcoming review of these key national strategies offers key opportunities to push for the integration of tobacco control via FCTC implementation into the plans and programming. Internationally, India is a key leader in the development discussions. Nevertheless, Indias ability to lead from the pole position at the international development forum and in the development assistance arena would be determined and influenced largely by the results of its actions on FCTC and development on the domestic front.

On the supply side, the tobacco industry has often successfully paraded tobacco and areca nut growers, farm workers and bidi rollers to thwart tobacco control policies. In a country with sizeable tobacco production and related employments, it is pertinent that the Government identifies the systemic, socio-cultural and industry-abetted factors that create and sustain dependency on tobacco-related employment and also explore factors that would facilitate those interested to explore alternatives. Another supply side aspect that needs consideration is strengthening policies to control illicit tobacco trade, in line with the Protocol on Illicit Tobacco Trade that India has helped to develop and agree last month.

Last but not the least it is critical that India tackles the increasing tobacco industry interference in its tobacco control policy-making. Article 5.3 of the FCTC requires Parties to the treaty to protect their tobacco control polices from the influence of the tobacco industry. India is among the early ratifiers of the treaty. But the Government is yet to formulate policies to meet this treaty obligation. Incidentally, the theme for this years World No Tobacco Day (31 May) is Tobacco Industry Interference and presents a great political opportunity to launch a code of practice regulating interactions between public offices and the tobacco industry.

The government is likely to ban foreign direct investment (FDI) in wholesale trade in tobacco shortly at the insistence of the health ministry. The Department of Industrial Policy and Promotion (DIPP) may notify the changes once inter-ministerial consultations on the subject, currently underway, are over. However, the move is sure to be opposed by a clutch of domestic as well foreign tobacco firms, which see it as a step to encourage monopoly by a single cigarette manufacturer. Even trade bodies, such as the US-India Business Council (USIBC), have opposed the move, saying that if the argument is health, how differentiation can be done between domestic and foreign firms. Those opposed to the move also argue that India may end up risking trade rules of the World Trade Organisation, something that may see several countries blocking tobacco exports from the country. For instance, India's trade pact with Singapore under the Comprehensive Economic Cooperation Agreement (CECA) allows for wholesale trade in tobacco. How the government handles it remains to be seen. Sources said that commerce and industry minister Anand Sharma is visiting Singapore later this week and may seek a review of this clause. Critics of the move say that Indias annual tobacco exports are around R4,000 crore against imports of only R100 crore, so the government should carefully think before taking any such step. Since 2010, foreign direct investment (FDI) in cigarette manufacturing is not allowed. Cigarette manufacturing is a licensed industry, which means that manufacturing cannot be done even domestically unless the government gives licences to manufacturers. The policy has been generally of not encouraging cigarette manufacturing by giving either fresh licences or allowing incumbents to increase their capacity. Industry sources said that the last time licences were given was some 8-10 years back. The total manufacturing licensed capacity in the country currently is around 1 billion, but only 30-40% of this is being utilised. This means that apart from banning FDI in cigarette manufacturing, the policy framework neither allows any new domestic player to enter the fray nor permits the existing ones to expand.

The government is likely to ban foreign direct investment (FDI) in wholesale trade in tobacco shortly at the insistence of the health ministry. The Department of Industrial Policy and Promotion (DIPP) may notify the changes once inter-ministerial consultations on the subject, currently underway, are over. However, the move is sure to be opposed by a clutch of domestic as well foreign tobacco firms, which see it as a step to encourage monopoly by a single cigarette manufacturer. Even trade bodies, such as the US-India Business Council (USIBC), have opposed the move, saying that if the argument is health, how differentiation can be done between domestic and foreign firms. Those opposed to the move also argue that India may end up risking trade rules of the World Trade Organisation, something that may see several countries blocking tobacco exports from the country. For instance, India's trade pact with Singapore under the Comprehensive Economic Cooperation Agreement (CECA) allows for wholesale trade in tobacco. How the government handles it remains to be seen. Sources said that commerce and industry minister Anand Sharma is visiting Singapore later this week and may seek a review of this clause. Critics of the move say that Indias annual tobacco exports are around R4,000 crore against imports of only R100 crore, so the government should carefully think before taking any such step. Since 2010, foreign direct investment (FDI) in cigarette manufacturing is not allowed. Cigarette manufacturing is a licensed industry, which means that manufacturing cannot be done even domestically unless the government gives licences to manufacturers. The policy has been generally of not encouraging cigarette manufacturing by giving either fresh licences or allowing incumbents to increase their capacity. Industry sources said that the last time licences were given was some 8-10 years back. The total manufacturing licensed capacity in the country currently is around 1 billion, but only 30-40% of this is being utilised. This means that apart from banning FDI in cigarette manufacturing, the policy framework neither allows any new domestic player to enter the fray nor permits the existing ones to expand.

PRODUCTION TRENDS - Indian Tobacco Company (ITC)

ITC, the largest cigarette manufacturer in the country, hiked prices of its cigarette brand Gold Flake by around five-seven per cent in July 2013. This is the second time in fiscal 2013-14 that the cigarette major has raised product prices. Earlier in April 2013, the company had increased prices of a few of its cigarette brands by 14-18 per cent. A sharp rise in cigarette prices is likely to depress demand for the product for a few months. However, cigarettes being an addictive product, habitual customers will eventually absorb the price rise. Moreover, rising purchasing power and increasing health awareness is further likely to result in a shift in consumption towards cigarettes from low-cost substitutes such as bidis. To cater to the rise in demand, cigarette manufacturing companies are likely to ramp up their production. We expect total cigarette output to rise by 1.9 per cent to 119 billion sticks in 2013-14.

Production and Sales Pattern for Tobacco Industry

Net sales of the tobacco products industry grew by 11.6 per cent in the June 2013 quarter, at the slowest pace since September 2009. The industry, however, managed to translate this modest sales growth into a healthy profit growth. It reported a 17.2 per cent growth in net profit and witnessed a 100 basis points improvement in the net margin to 22.9 per cent. The industry net sales are expected to rise by 13.2 per cent in the September 2013 quarter as compared to that a year ago. ITC, the market leader, will continue to influence the aggregate financial performance of the industry. Prices of tobacco (major feedstock), are expected to remain lower on a y-o-y basis. Besides, expenses on other raw materials used by ITC are also likely to remain under check. As a result, raw material expenses are expected to grow at a slower pace (12.2 per cent) than sales. This, coupled with a controlled rise across majority of the expense heads is likely to have a positive impact on the industrys profitability. The net margin is expected to improve to 24.5 per cent from 23.4 per cent a year ago.

ITCs Total income to rise by 13.3% in 2013-14

ITC drags down sectoral sales growth in June 2013 quarter

The tobacco products industry reported a modest sales performance in the June 2013 quarter. Aggregate net sales of the four listed companies in our sample grew by 11.6 per cent during the quarter, at the slowest pace since September 2009. The prime reason behind this slowdown in sales was a sedate 10.5 per cent growth in revenues from ITC, the company accounting for more than 85 per cent of the industrys sales.ITC derives around 40-45 per cent of its overall revenues from sale of cigarettes. Revenues from the cigarette segment grew by a mere 7.1 per cent in the June 2013 quarter. Net sales of the hotels and paperboard segments also grew in single digits, by 7.5 per cent 9.9 per cent, respectively. However, a healthy rise in revenues from the non-cigarette FMCG segment and the agri-business pushed up the growth in the companys overall sales to 10.5 per cent. While revenues from the non-cigarette FMCG segment grew by a healthy 18.4 per cent, those from the agri-business rose by a robust 29.4 per cent.In contrast, the smaller companies in our sample staged a healthy sales performance in the June 2013 quarter.

Net sales of Godfrey Phillips, the second largest company in our sample were up by a smart 27.5 per cent. VST Industries reported a 13.9 per cent growth in sales during the quarter. While the sales growth was modest, the industry did not witness input cost pressure during the quarter. Raw material expense, the industrys single largest expense head, grew by 9.2 per cent, slower than the rise in sales. Resultantly, the raw material-to-net sales ratio dropped to 41.3 per cent from 42.2 per cent a year ago. Other expenses, another major cost head, declined marginally during the quarter. This had a positive impact on the industrys profits at the operating level. The PBDIT rose by 16 per cent during the quarter.At the net level, post-operative expenses grew by 15.2 per cent, at a slower pace as compared to the growth in PBDIT. This resulted in a healthy 17.2 per cent rise in the industrys net profit. The net margin improved to 22.9 per cent from 21.9 per cent in the June 2012 quarter.

Import Trends in Tobacco

India imports small quantities of raw tobacco required for blending purposes for manufacturing international-brand cigarettes in the country. In recent years, imports of raw tobacco totalled around 110 million sticks per annum.

Export Trends in Tobacco IndustryIndiawas the third leading world producer of leaf tobacco in the recent decade, following China and Brazil. Tobacco production in India averaged about 615,000 tons dry weight annually during 200608. About a third of the output consisted of flue-cured tobacco. The India Tobacco Board manages arrangements for farmers to grow tobacco and for the auction markets. All tobacco grown for commercial purposes is sold at through an auction system. Prices paid to farmers for tobacco increased in recent years as demand for domestic uses and exports expanded.Many small farmers grow tobacco. The southern states of Mysore and Karnataka account for most of the production of flue-cured tobacco. Guntur is a major center for marketing leaf tobacco and preparation of supplies for export. Employment by cottage industries preparing the small bidis and mixtures for pipe tobacco is an important factor in India. Anti-smoking measures have included bans on smoking in public transportation and within 100 yards of schools.India's leaf tobacco exports averaged about 168,000 tons annually during 200608, or about a tenth less than that by the United States. The value for India's leaf tobacco exports was $334 mn in 2007, for and average of $1,992 per metric ton. Flue-cured shipments accounted for over 80% of India's tobacco exports in recent years, and the average price for those sales was higher than the exports of dark sun-cured tobacco.Belgium Is The Leading Destination For India's Tobacco Exports:Belgium was the leading destination for India's leaf tobacco exports in recent years, followed by Russia, Philippines, Netherlands, and Germany. A large share of the leaf tobacco exported from India to Belgium is subsequently distributed to cigarette factories in other countries. India exported 22,561 tons of tobacco to Belgium in 2007, valued at $55.6 mn, for an average price of $2,462.39 per ton.Russian Market Remains Important Despite Downward Drift In Shipments:Russia has traditionally been a top export destination for India's tobacco exports, although shipments to Belgium became more important in the last several years. Moscow trading firms became large buyers of tobacco in India in the 1980s when use of rupees obtained from exports of Russian manufactured goods was arranged through trade agreements. In the recent decade the transactions have been on a commercial basis. India exported 18,913 tons of leaf tobacco to Russia in 2007. That was only about half the 39,055 tons of tobacco shipped from India to Russia in 2005.India's share of Russian leaf tobacco imports was about 13% during 200305, but by 2006 it declined to about a tenth. Greater shipments of tobacco to Russia from Brazil and some suppliers in Africa other than Zimbabwe meant greater competition for sales of India's tobacco to Russia. India has been a major supplier of flue-cured tobacco for Russian cigarette factories for the last two decades, despite the downward drift recently for market share. The average price paid for tobacco imported from India was $1,642 per ton in 2007 was less than half the average for arrivals of Brazilian tobacco, and about a fifth of the price for imported US tobacco.Philippine Imports Of Tobacco From India Bolstered By Expanding Cigarette Exports:

Greater exports of cigarettes by Philippine manufacturers to customers in other countries of ASEAN (Association of Southeast Asian Nations) contributed to increased demand for imported tobacco. That contributed to increased imports of tobacco from India. Shipments of tobacco from India to Philippines reached 11,774 tons, valued at $26.2 mn in 2007, for an average price of $2,231 per ton.

Dutch Manufacturers Use Flue-Cured Tobacco From India For Cigarette Blends:Imports of US tobacco into Netherlands declined in recent years as arrivals from Brazil and India increased. The average price of Dutch cigarette exports of over 64 cents per pack of 20 was among the highest recorded for major exporters in the last two years. Exports of leaf tobacco from India to the Netherlands reached 11,014 tons for an average price of $1,907.75 per ton in 2007. Use of less costly tobacco from India and some other suppliers allow Dutch cigarette manufacturers to reduce the average price for cigarette ingredients.India's Share Of German Tobacco Imports Was Higher In The Past:Increased competition from Brazil, Argentina, and some countries in Africa tended to limit prospects for expanding India's share of German imports of flue-cured tobacco from India in recent years. India exported 10,057 tons of tobacco to Germany in 2007 for an average price of $2,512 per ton. Some managers of India Tobacco Board have sought to have farmers grow better quality flue-cured tobacco for export. They have arranged to reduce the propensity for the content of undesirable components in tobacco. Their efforts may be reflected in the average price for exports of tobacco from India to Germany, Australia, and Romania.Competition Remains Strong For Shipments Of Tobacco To United Kingdom:Total use of leaf tobacco in the United Kingdom has declined in recent years because of smaller output of cigarettes, both for the domestic market and for exports. A steep decline for arrivals of tobacco from Zimbabwe into the UK accounted for much of the overall downward drift for total imports. India's tobacco exports to the United Kingdom fell from 10,000 tons in 2004 to 7,755 tons in 2007, for an average price of $2,158 per ton.Upward Trend for Indias Tobacco Exports to Poland likely :Poland is one of the world's fastest growing cigarette exporters. Exports of cigarettes from Poland in 2009 may be near the quantity shipped from the United States. Most of the extra cigarette exports from Poland are made predominated from imported leaf tobacco. India's shipments of tobacco to Poland rose to 3,077 tons in 2007. Further gains are likely.Exports To Some Other EU Countries Remain Strong:The EU accounted for about a third of India's exports of 167,637 tons of tobacco in 2007 and 2008. In addition to the significant shipments to Belgium, Germany, Netherlands, and the UK, exports to France, Romania, and Sweden have remained strong. The dramatic increase for French exports of cigarettes to Middle East markets in the last two years contributed to rising imports of leaf tobacco. India's exports of tobacco to France rose to 3,562 tons in 2007. India exported 1,847 tons of tobacco to Sweden in 2007 for $929.62 per ton, including some dark tobacco for snuff. Romania expanded cigarette output recently as efforts were made to reduce imports. India exported 1,461 tons of tobacco to Romania in 2007, for an average price of $$2,671.46 per ton.South Korea is an Expanding Market:India exported 7,135 tons of tobacco to South Korea in 2007 for an average price of $1,900 per ton. South Korea is the third leading destination for India's exports of flue-cured tobacco after the EU and Russia. Gains for South Korea's exports of cigarettes to UAE, Iran, and Iraq contributed to increased demand for imported tobacco.

TAXATION OF TOBACCO IN INDIA

India is unique in the range of tobacco products that are available at different price points, targeted at populations with substantial differences in socioeconomic and demographic profiles. Tobacco is consumed in a variety of forms, from smoking tobacco products like bidis and cigarettes to several types of chewing tobacco. There are considerable differences in the taxes imposed on each of these product categories. Tobacco taxes are low overall in India, and are especially low for the products consumed most widely.India is the worlds third largest tobacco - producing country after China and Brazil and produced more than 10% of the worlds raw tobacco during 2003-04, but ranked only ninth globally as an exporter of tobacco and tobacco products. Tobacco production in India is geared towards consumption within the country. A large proportion of raw tobacco is used to manufacture chewing tobacco, bidis and other products. Cigarette tobacco accounted for less than a third of the total tobacco production in 2004.7

Four multinational companies the ITC Group, Godfrey Philips India Ltd, VST Industries Ltd and GTC Industries Ltd. account for almost all of Indias cigarette manufacturing sector and together account for Rs 150 billion (US$ 3.4 billion) in annual revenue. Of these four, the ITC Group dominates cigarette production and controls about 70% of market volume.

ECONOMIC RATIONALE FOR TOBACCO TAXATION

India presents a mixed landscape for tobacco taxation. Most tobacco products are taxed in India, but taxes tend to be very low for the forms of tobacco that are most commonly used bidis are a particularly notable instance of under taxed tobacco products. Tobacco taxation thus remains a promising and underutilized policy intervention for tobacco control in India.

The tobacco industry worldwide has held that increased taxation on tobacco is inefficient and unwarranted. The basis for such a position rests not only in a resistance to regulation, but also in the belief that smokers consume tobacco with full information about its health consequences, and that they take into account the costs and benefits associated with its consumption. In practice, however, the market for tobacco products is characterized by market failures.16 There is an information failure about the health risk associated with tobacco consumption some consumers do not have full knowledge of risks while yet others might be aware of the health consequences, but underestimate the risk of addiction to tobacco. Smoking also imposes external costs on non-smokers and society more broadly. A variety of diseases, including cancer, are known to be caused by second-hand smoke. External costs of tobacco use can also take other forms such as deforestation resulting from the extensive use of wood in flue-curing tobacco, fire hazards from discarded cigarette and bidi ends, and the costs of cleaning cigarette and bidi litter and chewed tobacco spittle from public places.

STRUCTURE AND TRENDS OF TOBACCO TAXATION IN INDIA

Excise tax regimes are typically the focus of tobacco control efforts, since they fundamentally determine the relative price of tobacco products in comparison to other consumption goods. Tobacco products in India are subject to a complex schedule of taxes imposed by both the Central and State governments. Most smoked tobacco products in India are subject to specific excise taxes that are levied as rupee amounts per 1000 sticks. The specific taxes on smoked tobacco products vary by product category and tier, and are particularly low for bidis. Most non-smoking tobacco products, in contrast, are subject to ad valorem excise taxes, levied as a percent of the retail price.

TRENDS IN PRICES, AFFORDABILITY AND DEMAND FOR TOBACCO PRODUCTS

Effective tobacco tax policy requires continuously monitoring trends in tobacco product prices as they compare to prices of other products. At present, aggregate tobacco price information is readily available in at least three different sources as a part of the Wholesale Price Index (WPI), as a part of the Consumer Price Index (CPI) for rural workers, and as part of the database on the corporate sector in India generated by the Centre for Monitoring Indian Economy (CMIE). Since prices by themselves are difficult to analyze, especially in an environment of consistent overall inflation.

The trend in the relative price of cigarettes is not uniform when using different indices. Movements of the WPI relative price tend to be much less pronounced than movements of the CPI. This might, in part, reflect changes in the taxation of tobacco over time that affect retail prices but do not change wholesale prices. Looked at in another way, the flatter rise of the WPI points to how critical the excise tax system will continue to be, especially if cigarette and bidi manufacturers are able to use increased productivity to keep tobacco product pre-tax prices relatively low.

While relative prices represent one dimension of demand in which relatively cheaper products are demanded more than expensive products they do not capture the full scope of responsiveness with respect to income. An alternative indicator, calculated by dividing the relative prices of tobacco products by per capita gross domestic product, captures the affordability of tobacco products. Even with the increase in relative prices, if incomes rise relatively faster, this affordability index would capture the increased capacity of individuals to consume tobacco products.The trends in affordability of tobacco products show two phases. In the first phase until 2000-01 the affordability index for all three tobacco products (cigarettes, bidis and chewing tobacco) shows fluctuations. Subsequently, there appears to have been a systematic decline in the index, indicating increases in affordability.

An alternative measure of affordability suggested by Blecher & Walbeek is calculated as the percentage of per capita GDP required to consume 100 packs of cigarettes (and, analogously, packs of bidis and chewing tobacco). The results, suggest that the average Indian has needed to spend a smaller fraction of income over time to consume each of these tobacco products.

There is, quite clearly, no case for a reduction in prices relative or absolute in an environment where the stated objective is to reduce tobacco consumption.

TOBACCO EXCISE BURDEN BY TYPE OF PRODUCT

A priority for effective policy is the structure of taxes across different tobacco products, and the extent to which the different excise taxes across the categories of tobacco products are internally consistent.

One test of how taxes on different tobacco products compare involves computing the ratio of the excise duty as a percent of price, often termed the excise burden. A meaningful application of this measure to the three broad product categories in India (bidis, cigarettes and chewed tobacco) requires the use of actual prices and not aggregate indices. The estimates here are therefore based on retail prices as available from CMIE rather than on the wholesale or consumer price indices.

Table presents computations of excise duty as a percent of retail price for individual tobacco products. The brands listed are some of the most popular brands in their categories. The last row also displays retail prices per gram of tobacco for each of the categories in 2000-01 to illustrate the nearly twenty-fold difference in the post-tax price per gram at the two ends of the spectrum of tobacco products. These retail prices, moreover, correspond to a non-uniform pattern of excise burden and indicate significant gaps, both in revenue potential and in the effectiveness with which current taxes reduce consumption in each product category.

Unfiltered cigarettes, bidis, and chewing tobacco face relatively lower tax rates when compared to filtered cigarettes. Longer cigarettes do not necessarily bear a higher excise burden: the sole brand cited in the 70-75 mm category carries a smaller burden than the cheaper brand listed in the sub-70 mm category. For a given length within the category of filtered cigarettes, the excise duty as a ratio of retail price decreases when moving from cheaper filtered cigarettes to costlier ones. The 2008-09 increase in the Basic Excise Duty on unfiltered cigarettes is likely to mitigate some of this imbalance.

Table reproduced from Sunleys study employs a slightly different approach. Instead of calculating excise tax as a fraction of price, the burden of excise duty per gram of tobacco for the three broad smoked tobacco categories is computed. The table makes it clear that the tax burden per gram of tobacco content in non-filtered cigarettes and bidis is much lower, at less than one-hundredth of the burden per gram of tobacco contained in filtered cigarettes. This disparity in the tax burden per gram tobacco is an indicator of how under taxed bidis and unfiltered cigarettes are relative to filtered cigarettes.

The brief survey of Indias tobacco tax structure in this chapter points to several concerns: cigarette taxes are complex and multi-tiered, bidi taxes are systematically low, and other tobacco product taxes are easily evaded. Each of these presents a challenge for the pace at which health losses from continued tobacco use can be prevented in India. An improved tax administration and public health strategy will likely have to rely not only on well-designed taxes, but also on a better understanding of how these taxes precisely affect consumption behaviours, revenues and health gains.

PRICE ELASTICITY OF TOBACCO IN INDIA

Any meaningful discussion of tobacco taxation must consider how taxes, specifically, tobacco excises, are passed on to higher effective prices, and to what extent current and potential tobacco users will reduce their consumption. Price is one of the most important factors affecting tobacco consumption decisions; alongside other factors such as literacy, gender, age, and economic status. Increased taxes are especially effective at reducing consumption among economically disadvantaged populations and young people.Good estimates of the responsiveness of tobacco consumption to higher prices are a key input to analyzing the future of tobacco taxation in any country. Indias case is complicated by the existence of several distinct categories of tobacco products. This necessitates estimates of the responsiveness of the demand for any given tobacco product, both to its own price, and to the price of other tobacco products (respectively termed the own-price and cross-price elasticity of demand).

ELASTICITY ESTIMATES

EXPENDITURE ELASTICITY OF TOBACCO PRODUCTS

In addition to estimating the price elasticity of demand, it is useful to have an idea of the extent to which rising incomes increase households consumption of tobacco products. The expenditure elasticity for a product is the percentage change in demand when household expenditure changes by a percentage point. Expenditure elasticities are useful shorthand for analyzing how consumption might change when incomes increase when actual data on incomes is difficult to uncover.

Table presents the total expenditure elasticities (the sum of the expenditure elasticities for quantity and quality) for bidis, leaf tobacco, and cigarettes from the study. The estimated expenditure elasticities are less than 1 for both bidis and leaf tobacco and greater than 1 for cigarettes. A similar result was obtained by Suryanarayana, though that study used aggregate data rather than the more finely parsed household-level data used by John. The expenditure elasticity estimates imply that cigarettes are luxury goods in the economic sense in both rural and urban India, whereas bidis and leaf tobacco are not. The estimates suggest that a 10% increase in rural household expenditure would lead to a 23.7% increase in cigarette consumption. This underscore s the concern on affordability: income increases in a rapidly growing economy carry the risk of more than proportionate increases in cigarette consumption.

OWN- AND CROSS-PRICE ELASTICITY OF TOBACCO PRODUCTS

Table reports own- and cross-price elasticity estimates for bidis, cigarettes and leaf tobacco for both rural and urban households as well as estimates from the all-India pooled sample. The price elasticities reported here are conditional elasticities since the models employ data from only households with non-zero tobacco expenditures. The elasticity in any given cell represents the effect of a change in the price of the tobacco product in the corresponding column on the quantity demanded of the tobacco product in the corresponding row. For example, the estimate of 0.45 in the cell formed by the first column and the second row suggests that a 10% increase in the price of bidis will cause rural consumers to decrease their consumption of cigarettes by approximately 4.5%. Table 4.2 confirms that the own-price elasticities of demand (diagonal elements) are negative and, with the exception of cigarettes in urban India, statistically significant. Most of the cross-price elasticities are negative, but are generally not statistically significant. Own-price elasticity estimates for rural and urban households are nearly the same, except in the case of cigarettes, which are relatively more price-inelastic in urban India than in rural India. A 10% increase in bidi prices could reduce rural bidi consumption by 9.2%. A 10% increase in cigarette prices could reduce rural cigarette consumption by 3.4%.

Cigarette demand is relatively inelastic a given increase in cigarette prices translates into a less than proportionate decline in cigarette demand. This is in agreement with conservative estimates available for cigarettes from both developing and developed countries. There are no comparable studies for bidis and leaf tobacco, for which the price elasticities presented are closer to unity.

The statistically significant negative signs on the cross-price elasticity estimates suggest that bidis and cigarettes are economic complements in rural India an increase in cigarette price is likely to reduce bidi consumption. All other cross-elasticity coefficients are statistically insignificant (suggesting that there are no strong relationships between consumption of these products). The complementarities between bidis and cigarettes, however, does not necessarily mean that an increase in the price of one would result in substantial reduction in the consumption of the other, a fact underscored by the small magnitude of the cross-price elasticity coefficients. In rural India, the effect of a percentage increase in cigarette price on bidi consumption is very low, whereas that of a price increase for bidis on cigarette consumption is higher. The finding that there is little substitution between cigarettes and bidis is also consistent with the observation that the markets for the two products are quite distinct bidis are typically smoked by people with lower socio economic status and lower educational attainment levels, while cigarette smoking is more common among the more educated.

(Values in brackets are adjustments made)

One qualification of this empirical finding is of particular relevance to tax policy. Sunley points out that a reduction in the excise on non-filter micro cigarettes from Rs 120 to Rs 60 per 1000 in 1994-95 was followed by an increase in consumption of all cigarettes in the next year, part of which can be explained by some bidi smokers shifting to non-filter micro cigarettes.13 To situate the findings of the present analysis in the context of Sunleys observations, it should be assumed that substitution between bidis and cigarettes is absent at an aggregate level. The elasticity for cigarettes computed in Johns analysis is for an average cigarette and does not differentiate between low priced non-filter cigarettes and high priced filtered cigarettes. Detailed and disaggregated analyses of the demand for different types of cigarettes and bidis would be required to examine more complicated substitution and complementary relationships between cigarettes and bidis.Another important caveat in interpreting Johns analysis is the fact that elasticities in the study are computed at the household level and not at the individual level, while tobacco consumption cannot be attributed to all members in the household. Tobacco is consumed mostly by adult men in most households in India. Existing data do not provide sufficient information to produce similar estimates at the individual level. Moreover, the estimates here are aggregated for all income groups. Studies in other countries indicate that the price elasticity of tobacco is likely to be different across income groups, with lower-income groups having higher price sensitivity. The elasticity estimation in Johns study uses the variability in unit values for average households from one location to another, and as such cannot be used to further generate disaggregated estimates of elasticities specific to income groupings.

PRICE ELASTICITY OF YOUTH SMOKING

Joseph (2008) used Global Youth Tobacco Survey (GYTS) data collected from 26 of 28 states and two of the seven Union Territories between 2000 and 2004 to estimate the price elasticity of youth cigarette, bidi and gutka demand in India. The Indian GYTS data collected prices from both tobacco users and non-users; these data were used to construct school-level and State- and Union Territory-level prices (prices constructed based on data from only users were highly correlated with those based on the full sample). Joseph found that higher cigarette and bidi prices significantly reduced the prevalence of cigarette and bidi smoking (elasticities of 0.17 and 1.17, respectively), and that higher prices also significantly reduced cigarette consumption among young smokers (conditional demand elasticity of 0.3). Finally, Joseph found that boys were more responsive than girls to changes in cigarette and bidi prices, suggesting that any declines in prices of these products would lead to larger increases in male youth smoking. These estimated price elasticities for youth are comparable to those computed by John for adult cigarette and bidi smoking in India. In both studies, bidi smoking was more responsive to price changes than cigarette smoking.