Indian Govt reviewing 100% FDI in cigarettes (fwd)

[Robert Weissman <rob@essential.org>]

Govt reviewing 100% FDI in cigarettes
by R. Krishnan
Source: Hindustan Times, Monday, 12/13/99

Minister for Industries and Commerce Murasoli Maran is reportedly
reexamining a decision taken by his predecessor at the industry ministry,
Sikander Bakht, who was for allowing 100 per cent foreign direct
investment in cigarettes. As part of the review, the government is
studying the experience of other countries some of which opened up and
shut FDI in cigarettes.

Industry sources, however, felt it may not be wise for India to allow FDI
in cigarettes as no multinational tobacco major will be interested in
making large investments to set up manufacturing operations to roll out
premium brand cigarettes in India considering the fact that they already
have huge unutilized capacities back home. Without exception, almost all
tobacco companies like Philip Morris, British American Tobacco and R.J.
Reynolds have excess capacities in the United States, Netherlands, Germany
and Britain.

A few years ago, one of the global majors, R.J. Reynolds (known as Japan
Tobacco Company outside the US), acquired a license to manufacture
cigarettes in India through a joint venture with an Indian company.
Official sources said the license which remained unimplemented has now
reportedly lapsed. Even as various state governments have begun to impose
all kinds of restrictions on smoking in public places including checks on
the advertising of tobacco products, FDI in tobacco should not be really
government's top priority.

There is yet another dimension to the issue besides public health. For
instance, Argentina, Brazil, Poland, Hungary, Bulgaria, Russia and even
the Philippines relaxed norms relating to FDI in the cigarettes industry.
Instead of attracting much promised investments, they experienced an
increase in the sale of contraband cigarettes which rose from under five
per cent before the regulations were relaxed to as high as 30 per cent of
their total cigarette sales.

In sharp contrast, China, France and Japan which do not allow FDI in
cigarettes have been able to contain trade in contraband below six per
cent and the bulk of smuggled cigarettes are the premium brands of MNC
tobacco companies. Out of the total Indian market of 97 billion cigarettes
per year, contraband cigarettes account for nearly three million. While
the government collected Rs 5,800 crore in excise duty from domestic
cigarette manufacturers during 1998-99, the contraband sales deprived the
exchequer of crores of rupees inclusive of evaded import duty had they
been legally imported.

Sources said the inducement for smuggling cigarettes into India was crore
because of lower excise duty in neighboring SAARC member nations of Nepal
and Bangladesh and even Myanmar (Burma). The facilitation of free trade
among member countries of SAARC without harmonizing excise duty rates
between them has further increased the movement of cigarettes across the
porous borders and this is one of the reasons why any premium
international brand is easily available in Indian cities. While the demand
for cigarettes in Nepal is two million sticks per month, the Himalayan
kingdom receives on an average 4.3 million sticks of a major brand.

The European Union has completely prohibited duty-free imports of
cigarettes within its member countries from July, 1999. Bangladesh has
amended its baggage rules to restrict bringing in of duty-free cigarettes.
Even according to most conservative estimates, over 28 million Indians
earn their living from the tobacco industry. The World Health Organization
is reported to be keen that India signs the framework convention on
tobacco control which has already been signed by the US. The ministry of
health is also working on a national legislation for restricting tobacco
products and ban smoking in public places. Three states have already frame
laws along these lines. The industry ministry is reportedly studying all
these aspects before it formulates a view on the issue.