Rational Expectations

That8217;s why, presumably, the government is increasingly banning smoking in public places, and some states have banned selling cigarettes in railway stations. That8217;s obviously working, as cigarette sales are falling, from a high of 106 billion sticks in 1997-98 they8217;re down to 102 billion in 1998-99, and are likely to go down another 4 billion this year. Great.

There8217;s a little problem though. All the while, the government8217;s actions are contradictory to this professed aim at cutting down potential cancer from smoking cigarettes. Much of the problem lies in the structure of the tobacco industry. Cigarettes are less than a fifth of all tobacco consumed, bidis are more than half, and chewing tobacco fills up the balance. Add to this, a large part of government revenuescome from taxing tobacco, and around 28 million Indians, including 4.5 million in bidi-rolling, earn their living from tobacco. Little wonder that various government initiatives seem so contradictory what8217;s good for cigarettes is bad for bidis, and so on.

Several studies, including one fr-om the Tata Institute of Fundamental Research, suggest that bidis which account for over half the total tobacco consumption in India have a lot more nicotine, tar and carbon monoxide th-an cigarettes. Figures vary, but on an average, bidis tend to have around double the tar and nicotine levels. It is with this in mind, to give smokers a financial reason for switching from bi-dis to cigarettes th-at, when he was Finance Minister, Manmohan Singh decided to halve the excise duty on the micro8217;, or the non-filter cigarette below 60 mm in length, in 1994-95. The impact was immediate. From around 600 million in 1993-94, sales of micro-cigarettes soared to 7.4 billion the next year, and 17.3 billion the year after.

The problemis that when subsequent governments saw this phenomenal rise, and the sad state of their budgets, they decided to up the duties once again. Now while that looks very good in theory 8212; we8217;re increasing duties on cigarettes, because they8217;re bad for health, etc 8212; it doesn8217;t really work that way. All that happened, with the excise duty on micro cigarettes increasing in subsequent years and finally doubling this year, was that consumption of micro cigarettes started falling. So the switch from the tar and nicotine-richer bidis obviously slowed. Similarly, it is obvious that cigarettes with filters, or wi-th more porous paper, do less da-mage.

Logically, therefore, duties on this segment should be reduc-ed, and more tax advantages shou-ld be given to cigarettes of lower tar and nicotine content.

Another biza-rre example of yo-yo policies is the announcement, just before the elections, that new industrial units in Assam and Tripura will be totally exempted from paying excise duty for a period of ten years.Immediately the government got 10 applications to set up fresh capacity in the northeast of 183 billion sticks, or an investment of Rs 1,400 crore.

While electoral gains were the reason behind the policy, an immediate result of accepting these applications is that the cigarette industry will be able to wipe out the bidi industry since it will no longer be paying heavy taxes. And by the logic of cigarettes being less toxic than bidis, this is good news in terms of reducing the risk of tobacco-related diseases.

But with the huge tax loss that the government will have to face, and the livelihood of such a large number of bidi-rollers threatened, the government8217;s unstated policy now appears to be that Vajpayee8217;s largesse will not apply to cigarette units, and that these licenses will not be granted.Similarly, when he was industry minister, Sikander Bakht allowed 100 percent foreign investment in cigarettes. This is now, reportedly, being reviewed by his successor Murasoli Maran after industry petitioned him,arguing that this will actually help increase smuggling of cigarettes in the country.

It is argued, I think not too rigorously, that if fully-owned foreign companies come in and set up their own, or take over, a distribution network, they will use this to sell smuggled and hence duty-free production from other countries. Though these local cigarette majors give examples of other countries where contraband has shot up following liberalisation of foreign investments, clearly the solution lies in further lowering excise duties on cigarettes liberalisation has shown that lowering of duties and taxes is a major factor in lowering evasion.

With an industry structure that results in contradictory policies, and the government so dependent on cigarettes for revenues, clearly we need a rational tobacco policy, including incentives for greater research into uses for tobacco tobacco has more sugar than sugarcane, but its extraction is still not viable and helping farmers sw-itch to other crops. Knee-jerk andpi-ecemeal policies just add to the smoke and send contradictory signals.