India has historically attempted to curb smoking through a combination prohibitively high taxation, a ban on foreign investment and more recently a ban on e-cigarettes. And rightly so given the harmful nature of cigarettes on human health. Whilst this has resulted in slowing growth in cigarette consumption, also helped by increased awareness among the youth, there have been unintended consequences of these actions such as pushing consumers to cheaper variants of tobacco such as beedis and chewing tobacco and as this article brings out, massive growth in smuggled cigarettes.

“According to industry estimates, around 120 billion sticks are consumed in India every year and the share of smuggled cigarettes has grown to a fifth of this market, at roughly 30 billion sticks, up from 11.1 billion in 2004 (see graphic). As per a Ficci Cascade (committee against smuggling and counterfeiting activities destroying the economy) report, the market for illicit tobacco products in India in 2019-20 was valued at ₹22,930 crore.”

One particular Korean brand, Esse has become ubiquitous across cigarette stalls across the country.

“Esse is believed to have cornered at least 25-28% of this smuggled pie. Which means that while it can’t officially operate in India, it has managed to garner a reasonable share of India’s overall cigarette market. Inadvertently perhaps, India also accounts for a sizeable share of Esse’s near 50 billion sticks per annum overseas sales.”

Whilst the FDI ban allows an almost monopoly for the market leader ITC, Esse’s meaningful share of illegal cigarettes contests that. And the heavy taxation which was meant to discourage smoking itself seems to be making smuggling of cigarettes attractive as the untaxed smuggled cigarettes are meaningful cheaper than their legal counterparts.

“Evasion of the tax net explains Esse’s low price. One stick of smuggled Esse Lights costs ₹10, while a like-for-like slim Classic Connect stick, manufactured by Indian conglomerate ITC Ltd, costs ₹15 because of the tax component. A pack of 20 cigarettes of the Esse brand in Delhi is available for ₹180, against ₹340 for a pack of ITC’s Classic Milds—India’s bestselling cigarette. It’s a gap that ITC, despite its humongous 75% market share, cannot bridge.

“The mushrooming of illicit and smuggled products not only causes a significant revenue loss to the government exchequer but exports jobs from the country across the entire value chain, which includes impacting the livelihoods of Indian tobacco farmers as inputs used in smuggled cigarettes are not indigenous,” says Anil Rajput, president, corporate affairs and member, corporate management committee, ITC Ltd.

Indeed, smuggling impacts local tobacco farmers and organized players such as ITC and Godfrey Phillips India. As the smuggled cigarettes do not contain tobacco grown in India, they are a lost opportunity for farmers. For ITC and Godfrey Phillips India, this poses a challenge in a market where demand is slowing as young consumers are more reluctant to take up smoking.

“It (smuggling) has started to impact demand. In 2010-11, we were producing 330 million kgs of tobacco for cigarettes every year. Now, it has come down to 270 million kgs,” says Murali Babu, general secretary, Federation of All India Farmers Associations (FAIFA). “Thirty billion sticks means 25 million kgs of tobacco production. That is what we are losing out on. In terms of business, it is almost ₹5,000-6,000 crore.”

There is another advantage that smuggled cigarettes enjoy over legal ones:
“Since Esse is smuggled in, it is also not obliged to have gory pictorial warnings on the packet, which became mandatory in India in 2010. Introduced to spread awareness on the ill-effects of smoking, all locally produced cigarettes need to have health warnings covering 85% of the pack. Esse Lights only sports a warning in small font without any photograph, and thus has a cleaner, more premium appearance. This is one of the reasons for its popularity with young smokers, as also women.

“To the naive smoker, it also gives the impression that it’s less harmful than the others,” says P. C. Jha, former chairman, CBIC.”

The article goes on to talk about the history of Esse’s Korean owners and how India has become a meaningful market for them despite the Indian market being officially closed for foreign tobacco companies.

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