Foreign tobacco, local smokescreens

And, apart from the fact that it would be impossible for Levi’s to wipe out all local players — current experience, in fact, suggeststhat MNC brands like Levi’s are in trouble — why would they not buy local cotton if it was competitive? In any case, higher import duties on cotton, or stipulations that fixed amounts of local cotton must be bought, will resolve the issue.

It is arguments of this genre, however, that are increasingly advanced to oppose allowing fully-owned foreign firms into the tobacco industry. With this, the local cigarette industry now fears, it is only a matter of course before the government clears the long-pending proposal of the UK-based cigarette giant Rothmans to produce cigarettes here. That’s right, one of the arguments against fully-owned foreign firms in tobacco is that they will smuggle cigarettes in precisely the manner they do elsewhere in the world!

Never mind that the allegations, though strong, have not really been proved so far. In any case, even if one assumes that companies like Rothmans do help smuggle cigarettes into countries like India, surely it doesn’t need to invest $150 million (that’s whatits application to the government states) in a manufacturing facility to do this? The answer given by local tobacco manufacturers is that such smuggling doesn’t take place since brands like Rothmans aren’t too well known in India. But once Rothman is allowed in, the argument implicitly implies, it will be able to advertise heavily. So, once all Indians start swearing by it, Rothman’s will start smuggling in cigarettes. But if the aim is only to be able to create brand awareness, why not do it the way that some of the other global players are doing?

After all, BAT has entered into a 20-year agreement with ITC for rights to produce 555 and Benson & Hedges in India. And, for this privilege, ITC is to pay BAT an annual fee of around Rs 5 crore in the first ten years, and will also import tobacco of around Rs 25 crore or so annually — that’s around Rs 300 crore of forex outgo in the first decade alone. Godfrey Phillips also has an agreement to sell some of Phillip Morris’ brands on similar lines.

A hilarioussuggestion from one of the local producers, and doing the rounds in newspaper offices, is that the government should survey the amount of smuggled cigarettes annually, and ask the MNCs whose brands these are, to compensate it for the duty loss! And yes, the MNCs should give an undertaking that the amount of smuggled cigarettes will never be more than a certain amount, usually a percent of the domestic production of that brand.

It is also argued by local manufacturers that the real threat (to India!) is that these foreign companies are aiming at the lower-price segments, including that of beedis which constitute around 80 percent of the total tobacco market. Given the history of most foreign brands in India, it’s difficult to see how this can happen. Even very successful brands such as Coke have done well largely because they have bought existing local brands such as Thums Up. And here too, there has been no impact on the traditional market of orange squashes, or the hundreds of other localbeverages.

So, for Rothmans to be able to wipe out the well-known Ganesh or 502 brand of beedis, it will not only have to be able to understand fully the dynamics of the Indian market, to be able to produce at a fraction of its current costs, it will also have to have the ability to persuade the government of the day to reduce the current tax levels on cigarettes to a fraction of what they are today. Given that around a tenth of government excise comes from tobacco today, that’s a big assumption.

And for the 6 lakh or so tobacco farmers to be destroyed once the foreign devils come in, we have to assume that Indian tobacco is of very poor quality and that the government will allow these tobacco companies to import all their requirements. Since we do export a fair quantity of tobacco and companies like Rothmans are willing to accept conditions which will restrict their imports to around a fifth of their total use (this, incidentally, is also ITC’s consumption pattern), the bogey does soundfar-fetched.

Of course, it can be argued, especially if you’re convinced that there is an iron-cast correlation between cigarettes and deadly diseases such as cancer, that there is no great benefit to be got by allowing foreign cigarette companies in. After all, it’s not as if they are bringing in any great technology — in any case, by this argument, any technological advances in areas such as tobacco-growing practices, would only lead to more cancer. To use the cancer argument, however, one would have to ask existing players such as ITC and GPI, apart from the 4.3 million bidi workers, to wind up business.