OVERVIEW OF THE INDIAN

TOBACCO INDUSTRY AND

ANALYSIS OF ITC LTD

Name: Mohit Mehta

St. Xavier’s College, Kolkata
Roll No: 623
Project Guide: Dr. MD Hanif
 DECLARATION

I hereby declare that the project report submitted by me for the partial fulfilment of the degree of
B.Com (Honours), in Accounting and Finance, St. Xavier’s College (Autonomous), Kolkata under
University of Calcutta is my original work and has not been submitted earlier to any other
University or Institution for the requirement of any course of study.

I also declare that no chapter or manuscript in whole or part has been incorporated in this report
from any earlier work done by others or by me. However, extracts of any literature which has been
used for this report has been duly acknowledged providing details of such literature in the
references.

Date: 03.04.2018

Place: Kolkata

Yours Faithfully,

Mohit Mehta.

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 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to St. Xavier’s College for providing me an
opportunity to present this project. A very sincere thank you to our vice principal Fr. Xavier for
constantly motivating and encouraging us and giving the students an opportunity to indulge
ourselves in this informative, resourceful and learning process of Project Preparation and Research
Work. I would like to extend a deep gratitude towards my project guide, Prof. MD Hanif, for
always being there for help, providing me with valuable inputs, patiently removing any scope of
doubt and helping me with his valuable suggestions.

I would like to thank my parents, without whose blessings and motivation this project would be
possible to complete.

Finally, I would like to thank all my friends who have constantly helped me during the course of
this project work.

Mohit Mehta

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 TABLE OF CONTENTS
INDIAN TOBACOO INDUSTRY ................................................................................................. 4
INTRODUCTION ....................................................................................................................... 4
OVERVIEW OF LITERATURE ................................................................................................ 7
OBJECTIVE .............................................................................................................................. 10
METHODOLOGY .................................................................................................................... 10
TAXATION............................................................................................................................... 11
EXPORTS ................................................................................................................................. 16
FOREIGN DIRECT INVESTMENT ........................................................................................ 19
SOCIETAL IMPACT AND SOURCE OF LIVELIHOOD ...................................................... 20
PRICE AND EXPENDITURE ELASTICITY OF TOBACCO IN INDIA .............................. 24
INTERNATIONAL COMPARISONS ..................................................................................... 25
REGRESSION: EXPORT EARNINGS AND PRODUCTIVITY ........................................... 29
REGRESSION: PRODUCTIVITY AND PRODUCTION ...................................................... 31
ITC Limited: Company Profile ..................................................................................................... 33
BACKGROUND ....................................................................................................................... 33
TOBACCO DIVISION ............................................................................................................. 34
BIBLIOGRAPHY ......................................................................................................................... 39
APPENDIX ................................................................................................................................... 40

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 INDIAN TOBACOO INDUSTRY

INTRODUCTION
Indian tobacco is an increasingly well-known as well as respected commodity in global tobacco
markets. Tobacco is one of the principal cash crops, as we know that the Indian Economy is mainly
agro-based. Tobacco generates enormous benefits in terms of providing employment, farm
incomes, revenue generation and foreign exchange earnings. The tobacco production and its allied
products’ sales in the country have played a prominent role in the development of economy.

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 third-largest tobacco producer in the world, with annual production of about 800
million kg’s generates around US$ 2.9 billion in revenues to the national exchequer by way of
excise duty and around US$ 728.9 million by way of foreign exchange every year. Four
multinational companies — the ITC Group, Godfrey Philips India Ltd, VST Industries Ltd and
GTC Industries Ltd. account for almost all of India’s cigarette manufacturing sector and together
account for Rs 150 billion in annual Revenue.

Majority of the Indian tobacco consuming population consumes beedis, snuff and smokeless
tobacco, including gutka, khaini and zarda, the tobacco market is majorly held by chewing and
beedi tobacco products. Unlike other countries such as the US, UK and others where the production
of cigarettes accounted for more than % of total production of tobacco related products, in India,
the tobacco market is majorly controlled by the production of snuffs, gutka and others. Cigarette
smokers however pay almost 85% of the total tax revenue generated from India. Although the
phrase, “Cigarette smoking is injurious to health” can be seen and heard in every corner of the
country the profit margin of the wide range of invaluable brands including India Kings, Insignia,
Gold Flake, Silk Cut etc show an increasing trend. India is today exporting tobacco to over 80
nations all over the world and at present this industry is providing livelihood to more than 25
million people in the country.

Tobacco is packed with harmful and addictive substances and causes numerous health problems
resulting in death or instability. In 1990 approximately 1.5% of total deaths in India were tobacco–
related and the nation amassed over 1.7 million disabilities–adjusted life years due to disease and
injury attributable to tobacco. India has one of the highest rates of oral cancer in the world.

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 Effective tobacco control in other parts of the world has been achieved via strategies focusing on
reducing the demand for tobacco products. These strategies include the following: raising taxes;
publishing and disseminating information about the adverse health effects of tobacco which
included adding prominent health warning labels to products, imposing comprehensive bans on
advertising and promotion; restricting smoking in public places.

India's first national level anti–tobacco legislation was the single–faceted Cigarettes Act of 1975,
which mandated health warnings on cigarette packets and on cigarette advertisements.

In February 2001, Indian Prime Minister Vajpayee's Union Cabinet introduced the Cigarettes and
other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce,
Production, Supply and Distribution) Bill, a multifaceted anti–tobacco legislation to replace the
Cigarettes Act of 1975. Smoking in public places would be restricted the sale of tobacco to persons
below 18 years of age would be prohibited, and tobacco packages would be required to have
warnings.

This paper is an attempt to study the various dimensions of the Tobacco Industry in India. It
analyses the production and productivity of this very important cash crop of the economy,
moreover it talks about how illegal trade of cigarettes has been taking place and various legislations
and their impacts. It also focuses on the societal impacts of increased tobacco consumption.

Prevalence of different forms of tobacco use (%), ages 15-49, 2015

Tobacco Use Women Men Total
Urban Rural Total Urban Rural Total Urban Rural Total
Smokes
cigarettes or 0.5 1.8 1.4 28.7 35 32.7 11.3 13.3 12.6
bidis
Smokes cigar
0 0.2 0.2 0.4 0.8 0.6 0.2 0.4 0.3
or pipe
Chewing
Gutka and 5.5 9.8 8.4 31.1 39.6 36.5 15.3 20.1 18.5
paan
Use of snuff 0.5 0.9 0.8 0.3 0.9 0.7 0.4 0.9 0.8
Others 0.3 0.9 0.7 0.3 1.3 0.9 0.3 1 0.8
Any other
uses of 6.7 12.9 10.9 49.9 61.1 57 23.3 29.6 27.5
tobacco (a)
No of
respondents 40,817 83,568 124,385 25,504 44,247 69,751 66,321 127,815 194,136
SOURCE: National Family and Health and Survey, NHFS-4, 2015

Prevalence estimates of the number of smokers in India have varied, in part due to difficulties in
comparing questions posed in successive sample surveys. The most direct estimation uses the
National Family Health Survey-4 (NFHS-4) of 2015-16. NFHS- 4, however, does not represent all
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adults; it collected for men aged 15-54 and women aged 15-49. Analysis of a combination of
sources suggests that an estimated 120 million Indians smoke some form of tobacco, a figure that
includes 115 million male smokers and 5-6 million female smokers. The table presents recent
evidence from NFHS-4 suggesting that 57% of men and 11% of women aged 15-49 years consume
some form of tobacco, smoked or non-smoked. Nearly a third of all men aged 15-54 years smoke
either cigarettes or bidis or both, with variation in tobacco use by age, literacy and other
socioeconomic characteristics. More than a third of Indian men and about 8% percent of Indian
women aged 15-49 years chew tobacco in the form of paan masala and gutka. Tobacco chewing
is the most prevalent and popular form of tobacco consumption in India. Nearly 40% of rural men
and 31% of urban men report chewing tobacco, as do about 10% of rural women and 5.5% of
urban women in the reference age groups.

Relative to WPI to all food items.

1.2

0.8

0.6

0.4

0.2

0
2010 2011 2012 2013 2014 2015 2016 2017

Cigarette Bidi Chewing Tobacco

.

This paper is divided into 5 sections which are as follows:

Section 1: Overview of literature

Section 2: Objective of the study

Section 3: Methodology

Section 4: Analysis

Section 5: Conclusion with recommendations

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OVERVIEW OF LITERATURE

Kumaresan (2010) in his paper, “TOBACCO EXPORTS: The untapped potential” projected that
the tobacco industry is poised to grow at 1.9 per cent annually, globally. He argued that despite
the numerous statutory warnings and increasing number of deaths due to consumption of tobacco
products, tobacco gains commercial importance because of the large population dependent on this
industry for their livelihood and the revenue it generates for the Indian economy mainly due to its
rising export potential.

According to a report by the Press Information bureau, Government of India nearly 8-9 lakh
people die every year due to diseases attributable to tobacco use. The Government has taken a
series of measures to deter people from consuming various tobacco products. Enactment of the
“Cigarettes and other Tobacco Products (Prohibition of Advertisement and Regulation of Trade
and Commerce, Production, Supply and Distribution) Act, (COTPA) 2003. Ratification of WHO
Framework Convention on Tobacco Control. Notification of rules on new pictorial health warnings
on tobacco product packages. Launch of public awareness campaigns through a variety of media.

Rani M, Bonu S, Jha P, et al in their paper

Tobacco use in India: prevalence and predictors of smoking and chewing in a national cross-
sectional household survey. Tobacco Control 2003, established that in order to improve the health
conditions of the Indian Population India must use effective intervention to control tobacco use.
They believe that there is a need for periodical surveys using more consistent definitions of tobacco
use and eliciting information on different types of tobacco consumed.

According to an article in BMJ 2004;328:801, the current large socioeconomic and geographical
gap in tobacco consumption in India is likely to feed into substantial, and perhaps increasing,
socioeconomic differentials in the health of adults over the future decades. A need exists to
document and monitor such inequalities in tobacco consumption in India systematically, to
understand their determinants better, and to provide an evidence base for public health
interventions that takes account of differences at state level as well as between population groups,
in tobacco consumption.

BioMed Central Ltd. 2011

In their paper studied The Spanish model" in order to demonstrate the impact on non-smokers'
protection in hospitality venues and the impact it had on some European and Latin American
countries. Second hand smoke has been a major cause of spread of diseases which affects lives of

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people not indulging in smoking and consumption of tobacco and hence there was a need to make
regulations to limit its effects. Partial smoking bans were introduced. The objective was to "initiate,
develop and assist with the implementation of worldwide programs that encourage self-regulation
and recognize the benefits of using ventilation effectively to facilitate reasonable accommodation
and preserve the social acceptability of smoking" The results however proved that it was an
ineffective strategy and more regulations were required in order to obtain effective results.

Akanksha Singh and Laishram Ladusingh,

In their paper, prevalence and Determinants of Tobacco Use in India have examined the regional
variations, and socioeconomic, demographic and other correlates of smoking, smokeless tobacco
and dual use of tobacco in India and found that tobacco use in India has been higher among males
than among females in India. However, the male-female gap was lower in the case of use of
smokeless tobacco. Tobacco use was found more common among the uneducated people in the
country. Uneducated males and females in India were at a higher risk of using tobacco. Tobacco
use was relatively lower among males and females in the unorganized sector, such as the self-
employed, than among the people in the organized sector, that is, government and non-government
employees. Higher prevalence of consumption of tobacco makes it even more difficult for the poor
and uneducated who do not have available resources to combat the morbidity. The paper
recognised following as reasons for high use of tobacco-

• Marketing efforts of the tobacco industry

• Targeting of younger age groups
• Weak enforcement of tobacco control policies
• Continuing affordability of tobacco products
• Inadequate Knowledge about the harmful effects of tobacco

Ritesh Dwivedi and Mr. Poorna Satish in their paper published in 2014 mentioned:

Implications of Tobacco Industry in India have studied a different side and discussed about the
revenue potential from this particular industry. India holds top rank in manufacturing of tobacco
and has a large section of 5.8 % of the international trade with cost of production relatively lower
than other countries giving it a comparative advantage in its production. It is a Suitable destination
for the multi-nationals who are exploring other avenues for quality FCV tobacco. Cigarette
industry gives a lot of revenue to the government and the market for it is dominant both nationally
as well as internationally. An Efficient and effective economic and institutional mechanism should
be adopted to catalyse growth rather than continuous imposition of restrictions. New areas for
tobacco consumption (including export) should be the government priority for providing support
to tobacco farmers and the industry

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Challenging Ties between State and Tobacco Industry: Advocacy Lessons from India Upendra
Bhojani, Vidya Venkataraman, Bheemaray Manganawar 2013

In their paper have shown that there is a need to strike a balance between public health affairs and
promotion of the tobacco industry. Tobacco use is a major public health concern given its huge
morbidity and mortality burden that is inequitably high in low- and middle-income countries. The
World Health Organization has suggested banning the advertisement, promotion and sponsorship
of tobacco. However, governments in some countries, including India are large operators in this
sector with livelihoods of lakhs of people dependent on this industry.

Asian Journal of Business and Economics Volume 1, No.1.1 Quarter I 2011 ISSN: 2231-3699 1
Globalization of tobacco industry and its impact on Indian revenue Ashish Samarpit Noel

Globalization is a multifaceted phenomenon and has made tobacco industry prosperous. The scope
of tobacco industry in India is higher as compared to other sectors. Even though the medical issues
are negative related to the mentioned sector and the media is always attempting to curtail its
growth, the same is indispensable to the economic life of our nation. Tobacco production is an
important source of income for India’s farmers. While alternative crops are available in terms of
agronomic suitability, in general a move away from tobacco production would result in reduced
income and food security for a considerable number of farmers. Manufacturing, particularly of
bidis, is also a source of employment and hence of income for a large number of people. Thus, any
attempts to control the use of tobacco would need to take into account the economic impact on
these sectors. To be effective, measures to control the use of tobacco would need to address all
forms of consumption, not only cigarettes. In particular, this would mean dealing with the
economic and political difficulties of taxing, or otherwise controlling, bidis and other non-cigarette
forms of tobacco consumption.

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OBJECTIVE
To study the various dimensions including production, productivity, trade, laws and legislations
and health related issues of the Tobacco Industry in India. Also review ITC’s competitive position
in the Indian Tobacco Industry.

METHODOLOGY
This paper is descriptive as well as empirical. The study is based on secondary data obtained from

• Food and Agricultural Organisation

• Tobacco board, ministry of commerce, Govt. Of India
• Ministry of Finance, Govt. of India
• ITC website
•
The time period chosen is 1980-2017. This time period is chosen in order to study the impact of
the various laws and legislations that came up during this period and analyse the production pattern
and gains of the government through revenue collected from the tobacco industry. India’s first
national level anti-tobacco legislation was the cigarettes act of 1975, which mandated health
warnings on cigarette packets and on cigarette advertisements hence this time period has been
chosen keeping in mind certain impacts the act would have had.
The variable chosen is exports in order to study the trade pattern, production and consumption to
analyse the prevalence and dominance of the industry in the country and tax collection in order to
estimate the revenue collected by the government from this sector since India is the third largest
producer of tobacco and exports form 60% of the produce which are sent to around 80 nations
across the world.
The impact of excessive consumption on the different sections of the society and their dependence
on the tobacco industry as a source of livelihood has also been studied as this sector provides
employment to 25 million people in India.
A comparative study has been made indicative of India’s position among the BRICS, SAARC and
Asian nations showing levels of production and the area of production and yield over the years.
Bar and Pie Charts and line graphs have been used to show the various trends.
Two simple linear regression models have been constructed to examine the relationship between
production and productivity and production and export earning of tobacco in India.

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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 undertaxed tobacco products. Tobacco taxation thus remains a
promising and underutilized policy intervention for tobacco control in India.

As a percentage of per capita GDP, Cigarette taxes (Excise Duty & State Taxes) in India, of the
most popular price category, are amongst the highest in the world. As is apparent from the chart
below, cigarette taxes in India (as a percentage of per capita GDP) are almost 14 times higher than
in the USA, 9 times higher than Japan, almost 7 times more than China, 6 times higher than
Germany; 5 times more than in Australia. Consequently, cigarette prices in India, relative to per
capita GDP, are also amongst the highest in the world.

Tax on cigarettes as a % of per capita GDP

SOURCE: 'WHO Report on Global tobacco epidemic'

India 6.54
Thailand 2.68
UK 2.36
Pakistan 2.26
Malaysia 1.88
Australia 1.14
Germany 1.13
China 0.95
Japan 0.72
USA 0.48

0 1 2 3 4 5 6 7

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.
The taxation of tobacco products in India is complicated by a myriad of tax structures, loopholes,
exemptions, different collection systems and other challenges of tax administration. The structure
of central government excise taxes, and the current plans to replace a variety of state-level taxes
with a consolidated goods and service tax (GST) are discussed.

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The graph below reveals the skewed tax policies implemented by the Indian government. It
provides an insight into how small unregistered manufacturers have escaped coming into the tax
net. It could also be attributed to intensive lobbying by dominant groups in the 3rd category.

SOURCE: Ministry of Finance, Govt of India

100%
87% 85%
90%
80%
70%
60%
50%
40%
30%
20% 11% 13%
10% 4%
0%
0%
Legal Cigarettes Illegal Cigarettes Other tobacco products

Share of Tobacco Consumption Share of Tax Revenue

It is very clear that the consumption of illegal cigarettes has substantially increased over the years.
This shows the opportunity lost by the Indian treasury in term of tax revenues. High consumption
of illegal cigarettes also leads to adverse health impacts.

Illegal Cigarrete Volumes (Billion sticks p.a.)

SOURCE: Euromonitor International, 2017
30
24.9
25 23.9
22.8
21.8
20.8
19.5
20 17.5 18.3
16.7
14.6
15 13.5
12.5
11.1
10

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

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The earlier structure was as follows:

Central Government Excise Taxes

The central government imposes excise taxes that are collected at the manufacturers’ level. These
taxes typically take the form of value added taxes (i.e. producers receive a credit for excise taxes
paid on inputs). The amount of each type of tax imposed in turn depends on the type of tobacco
product. Two aspects of these taxes are noteworthy — the categories under which excises are
imposed, and the form (specific or ad valorem) that these excises take.
• Basic Excise Duties (BED) are levied on all manufactured products. In contrast to many other
countries, there is no uniform value added tax (VAT) rate. This complicates the assessment of
the tobacco tax as an excise relative to other nontobacco taxes, since some form of averaging
of the excise tax on other goods is needed to assess to what extent tobacco excises effectively
raise prices in comparison to non-tobacco products.
• The National Calamity Contingency Duty (NCCD) was introduced in 2001, in the wake of the
earthquake in the state of Gujarat and was institutionalized as an earmarked levy for providing
calamity relief.
• Health Cess (HC): Since 2005-06, additional duties are levied on cigarettes, bidis, paan masala
and other tobacco products as a part of an initiative to finance the National Rural Health
Mission. Notably, bidis are exempt from this cess, though, a surcharge known as the Bidi
Workers Welfare Assessment is levied only on bidis, currently at the rate of Rs 5 per 1000
sticks.
• The Special Excise Duty (SED) was put in place in its present form in 2000-01, and covers
tobacco products other than bidis and cigarettes

Specific and ad valorem excises

Cigarettes of various lengths and filter type were taxed by the Central government at different
specific rates, as are bidis. Tobacco products other than cigarettes and bidis are taxed on an ad
valorem basis, i.e. at a percentage rate based on retail price. Specific excise taxes yield predictable
revenues, are easily administered, and, from a public health standpoint, tax the specific health
threat that tobacco poses. This leads to specific taxes being typically preferred to ad valorem taxes
for reducing tobacco consumption. In the Indian instance, while specific taxes dominate the
majority of tobacco products, the multiple tiers and the very low tax on bidis act as barriers to a
more effective tax system. One step to remedy this was the 2008-09 decision to merge the Basic
Excise Duty on unfiltered cigarettes and the first two tiers of filtered cigarettes, thereby resulting
in a long-overdue upward adjustment of the rates applicable on non-filtered cigarettes. The
considerable leeway given to bidis, however, remained. A second concern with the Indian system
is that while both specific and ad valorem taxes have been periodically raised, there is no annual
systematic inflation-adjusted increase built into the process. Without an annual inflation-adjusted
increase to specific tobacco taxes, some or all tobacco products will become relatively cheaper
from one year to the next.

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 Tobacco Products Excise ADE NCCD

Non-filter Cigarettes INR 1280 / INR 37 / INR 90 /

(< 65 mm) thousand units thousand units thousand units

Non-filter Cigarettes INR 2355 / INR 125 / INR 145 /

(> 65 mm, < 70 mm) thousand units thousand units thousand units

Filter Cigarettes (< 65 INR 1280 / INR 185 / INR 90 /

mm) thousand units thousand units thousand units

Filter Cigarettes (> 65 INR 1740 / INR 300 / INR 90 /

mm, < 70 mm) thousand units thousand units thousand units

Filter Cigarettes (> 70 INR 2355 / INR 400 / INR 145 /

mm, < 75 mm) thousand units thousand units thousand units

INR 3375 / INR 495 / INR 235 /

Other Cigarettes
thousand units thousand units thousand units

Unmanufactured
64% 10% 10%
Tobacco
Tobacco Refuse
55% 10% NA
(Branded)
Chewing Tobacco 81% 18% 10%
Jarda 81% 18% 10%
Gutkha 60% 18% 10%
Other Tobacco
81% 18% 10%
Products

Structure under GST

Similar to all other goods and services, Central Excise and VAT charged on cigarettes and other
tobacco products, have been subsumed under GST. The GST Council after much deliberation, has
finalized the highest tax slab rate of 28%, in addition to which GST Compensation Cess and
National Calamity Contingency Duty (NCCD) will be levied.

The GST Compensation Cess, as the name suggests, is being levied to create a corpus for
compensating states for any loss of revenue from implementing the GST, which subsumed over a
dozen central and state levies.

Initially the following were the GST Compensation Cess Rates determined for cigarettes and other
tobacco products:

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 GST
Tobacco Product Compensation
Cess Rate
Non-filter Cigarettes (< 5% + INR 1591 /
65 mm) thousand units
Non-filter Cigarettes (> 5% + INR 2876 /
65 mm, < 70 mm) thousand units
Filter Cigarettes (< 65 5% + INR 1591 /
mm) thousand units
Filter Cigarettes (> 65 5% + INR 2126 /
mm, < 70 mm) thousand units
Filter Cigarettes (> 70 5% + INR 2876 /
mm, < 75 mm) thousand units
5% + INR 4170 /
Other Cigarettes
thousand units
Unmanufactured
65% – 71%
Tobacco
Tobacco Refuse
61%
(Branded)
Chewing Tobacco 142% – 160%
Jarda 160%
Gutkha 204%
Other Tobacco
11% – 290%
Products

Given these GST Compensation Cess rates, it was speculated that the GST impact on the cigarette
and tobacco industry, at least the organized part of it, is largely going to be neutral as the standard
5% ad valorem rate of cess was mostly at par with the existing tax rates. While an initial increase
in the price in the transition period was inevitable, it was expected to settle down over a period of
time, given the benefits to manufacturers over a period of time. However, a few days into the GST
era, the GST Council, post recalculations, arrived at the conclusion that the GST rate being levied
on cigarettes along with the cess was turning out to be lower than the combined incidence of central
excise, state VAT, and other levies put together. The reason for the same was that the earlier
calculations did not take into consideration the cascading effect of taxes which were levied on
cigarettes in the previous regime. The total revenue gain, emerging from this cap was estimated to
be around INR 5000 crore per annum, which was a substantial amount.

The main concern, which naturally emerged was this: either this revenue would serve to bring
down the prices of cigarettes (which is not desirable), or, this would pass on as balance profit to
the cigarette manufacturers, which, of course, was not the intention of the GST Council.

Thus, in cognizance of this gap, the GST Council convened an early meeting on the 17 th of July,
and a unanimous decision to increase the cess amount appropriately was taken in consultation of
all states.

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As per the deliberations of the GST Council, the following were the revised GST Cess rates agreed
upon:

Cigarette Initial GST Cess Revised GST

Type Rates Cess Rates
Non-filter
Cigarettes 5% + INR 1591 / 5% + INR 2076 /
thousand units thousand units
(< 65 mm)
Non-filter
Cigarettes 5% + INR 2876 / 5% + INR 3668 /
(> 65 mm, < thousand units thousand units
70 mm)
Filter
Cigarettes 5% + INR 1591 / 5% + INR 2076 /
thousand units thousand units
(< 65 mm)
Filter
Cigarettes 5% + INR 2126 / 5% + INR 2747 /
(> 65 mm, < thousand units thousand units
70 mm)
Filter
Cigarettes 5% + INR 2876 / 5% + INR 3668 /
(> 70 mm, < thousand units thousand units
75 mm)
Other 5% + INR 4170 / 36% + INR 4170
Cigarettes thousand units / thousand units

However, even though the GST cess rates were increased, the GST Council has clarified that
consumer prices will not be affected by this change, as the increased tax incidence only seeks to
neutralize the windfall profits, which the manufacturer would have otherwise earned.

Considering the revised cess rates, the taxes applicable on cigarettes in the GST regime translated
roughly to an average increase of 13% over the rates which existed immediately prior to the GST
rollout. With this, the cumulative growth of tax rates on cigarettes, reaches a staggering 202% over
the last 6 years, that is, since 2011-12. While the increase in tax on demerit goods, is always
welcome news, it bodes ill for cigarettes and tobacco products after GST, and the industry at large.
In the wake of increasing taxes in the GST era as well, there is a rising concern over the
consequential growth of illicit, duty evaded cigarettes and smuggling of tobacco products into the
country. In the long run, this could adversely affect the revenue collection as well, unless
monitored carefully. Thus, the government, will need to maintain a fine balance by maintaining
the right tax rates for this segment, which discourages usage, as well as prevents any detrimental
business practices.

EXPORTS

Tobacco is an important commercial crop grown in India. The different types of tobacco grown in
India are flue-cured tobacco, sun-cured country tobacco, burley, bidi, rustica and chewing tobacco
16 | P a g e
which considered important. It occupies 3rd position in the world with an annual production of
about 800 million kilograms and also one of the largest consumers of tobacco. As an exporter of
tobacco, India ranks fifth in the world next to Brazil, USA, Zimbabwe and Belgium.

Global tobacco exports worth USD 11423 million and India represented 5.9% of the total’s output.
Considering that, India is also amongst the top tobacco exporters in the world. Indian tobacco is
exported to about 100 countries. Flue-cured Virginia (FCV) is the main exportable tobacco
produced in India and around 60 per cent of it is exported, while the rest used in domestic cigarette
manufacturing. According to the Tobacco Board, Total exports of manufactured and
unmanufactured tobacco and tobacco products stood at 83,861 tons, valued at US$ 326.96 million
in the 1st quarter of 2017-18.

Export Earnings (Rs cr)

SOURCE: Tobacco Board of India, Ministry of Commerce
7000
6000
5000
4000
3000
2000
1000
0
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16

Tobacco and tobacco products FCV Tobacco

Value (USD Million)

SOURCE: Tobacco Board of India, Ministry of Commerce

1000
842
800 671 688
638
600
461
400

200

0
2017 (Q1-Q3) 2016 2015 2014 2013

Value (USD Million)

17 | P a g e
India tobacco exports amounted to USD 461 million between January and September 2017 while
it was USD 671 million in 2016. India is exporting its tobacco to more than 80 countries across
the world. Indian tobacco export is declined by 3% in terms of quantity and 4% in terms of value
between 2012 and 2016. However, it is increased by 5% in terms of value during 2015-16.
Belgium, Russia, Korea, UAE and Nepal are the largest global markets where India’s tobacco has
been exported. Belgium is the largest market for India as more than 27% of tobacco is exported to
this country only.

For keeping the surging rising trend of tobacco exports intact, the tobacco board has come up with
new introductory methods with a sole aim of increasing the height of India's tobacco industry in
throughout the world. In India, tobacco growers are registered under the tobacco board which is
regulating the sector.

India is exporting tobacco in more than 80 nations, over all continents. At present the industry is
providing livelihood to more than 25 million people in India. Out of the total tobacco items
exported from India, unmanufactured tobacco shares around 80 percent to 85 percent of the export
while the manufactured tobacco products hold around nearly 20 percent to 25 percent. In the
unmanufactured tobacco exports, Flue Cured Virginia tobacco accounts to the single largest item
with nearly 75 percent to 80 percent export. The other exported varieties are- Burley, HDBRG,
Natu, DWFC, Top leaf and Jutty. All these are used for making cigarettes. Non-cigarette tobacco
exported worldwide are Lalchopadia, Judi, Rustica. These are used for chewing and making bidis.
Around 8 percent to 10 percent non- cigarette tobacco is exported in throughout the world.
Contrary to international trends, non-cigarette tobaccos are the dominated item in the nation’s
export. The current situation in the international tobacco market is proved to emerge out as the
favorable market for the Indian tobacco export. The prices of Brazilian export have almost
equalized the most expensive American tobacco cost. Zimbabwean farm prices have also seen an
upward trend. There are several advantages which can be put forth for favoring the Indian tobacco.
Like low unit production cost, average export prices of Indian tobacco FCV, which are found more
competitive than that of the prices of Brazil, USA, Zimbabwe.

18 | P a g e
FOREIGN DIRECT INVESTMENT

The Cabinet Committee on Economic Affairs (CCEA) IN 2010 approved the proposal from the
department of industrial policy and promotion (DIPP) to ban foreign direct investment in the
tobacco sector, jeopardizing plans of Japan Tobacco, BAT and the Altria Group in India. With this
ban, India was the only country in the World to go in for such a stringent move. The ban would
shut the door permanently on Japan Tobacco’s proposal to invest $100 million into its Indian
subsidiary. The move will leave the field wide open for ITC to increase its dominance in the
growing cigarette market. In India, three major cigarette players dominate the market, primarily
ITC with more than 50% market share. Godfrey Phillips and VST are two major players after ITC.
The move to ban foreign investments in tobacco has been controversial since the proposal came
soon after Japan Tobacco announced its intention to raise its stake in the local unit to 74% from
50%. Also, British American Tobacco, the single largest shareholder in ITC, has seen its desire to
take a controlling stake in the Indian unit thwarted consistently without any adequate reasoning.
BAT holds about 32% in ITC, and the government-controlled LIC and Unit Trust of India’s
government administrator are the other big shareholders. JTIL’s proposal was to raise its stake in
its Indian subsidiary—JT International (India) Ltd—to 74% from 50%. The company owns the
Camel and Winston cigarette brands. The Centre’s decision not to allow foreign direct investment
(FDI) in the tobacco trade, purportedly taken with a view to stifling the growth of the sin economy,
could end up protecting the sector from competition from international brands, thus stabilizing
growth. Under the earlier policy, FDI up to 100 per cent was allowed in tobacco, with prior
permission of the Foreign Investment Promotion Board (FIPB), and subject to the company
obtaining an industrial license. The policy allowed 100 per cent FDI for companies which wanted
to set up a manufacturing plant in a special economic zone for exports. The current policy allows
the existing foreign shareholders to continue but the government does not allow creation of fresh
cigarette manufacture capacity. The ban applies to new proposals and will not have any impact on
existing equity stakes held by overseas companies. The branded cigarette market in India is worth
Rs 17,000 crore annually. Although India is the second largest producer of tobacco in the world
after China, according to a study, cigarettes account for less than a fifth of total tobacco
consumption. Most of the tobacco produce is suitable for the manufacture of chewing tobacco,
bidis and other cheap tobacco products, which have no demand outside the country.

19 | P a g e
SOCIETAL IMPACT AND SOURCE OF LIVELIHOOD

Diseases and death

According to the World Health Organization (WHO) each year, Tobacco kills half of its users,
with smoking and smokeless tobacco killing nearly 6 million people worldwide – one death every
6 seconds

The political scenario in India makes it difficult to implement any kind of stringent reforms and
policies for prevention of consumption of tobacco. Over one million of the tobacco deaths occur
in India. Politicians are against having 85% of the cover covered with graphic labels without any
kind of proof of tobacco being the sole and major cause of cancer and the deaths. India has one of
the world’s weakest tobacco warning regimes. Currently, official cautions appear only on one side
of the package, covering a mere 40% of the entire packet.

According to a 2014 report by the Canadian Cancer Society, India is ranked 136th among 198
countries listed according to the size of their health warnings. It was at a better position but due to
strong reforms and policies being implemented in several countries its situation has become worse
and its position has gone down from 123rd to 136th.

Other Asian countries are far ahead in this regard, with warnings covering 85% of the package on
Cigarette smoke contains over 4,800 chemicals, 69 of which are known to cause cancer. Apart
from cancers, smoking is also a major risk factor in chronic bronchitis, heart disease and stroke;
and other conditions and disorders such as slowed healing of wounds, infertility, and peptic ulcer
disease.

Consumption of tobacco
25000
20000
15000
10000
5000
0
Dadra and Nagar…
Andaman and…

Karnataka
Kerala

Mizoram
Jammu and Kashmir

Manipur

Puducherry

Tamil Nadu
Goa

Maharashtra
Gujarat
Chandigarh
Chhattisgarh
Andhra Pradesh

Assam

Delhi

Himachal Pradesh

Madhya Pradesh
Bihar

Lakshadweep

Odisha

Sikkim

Tripura
Haryana

Meghalaya

Nagaland
Daman and Diu

Jharkhand

Rajasthan

Uttar Pradesh
Uttarakhand
Punjab

West Bengal
Arunachal Pradesh

20 | P a g e
45.7 million people in India are dependent on tobacco in India and there is huge socio-economic
importance attached to growth and cultivation of tobacco cultivation in the country as it is one of
the principle cash crops of the country and a large part of the production is also exported Due to
the numerous people dependent on it and tobacco cultivation being their only source of livelihood
It follows that strict tobacco control policies recommended by the FCTC (WHO Framework
Convention on Tobacco Control) that threaten the livelihood of such a large number of Indians can
lead to major social unrest and that these are unreasonable proposals being driven by anti-tobacco
activists at the behest of vested interests. The FCTC is the world’s first public health treaty under
the World Health Organization. It provides a new legal dimension for international cooperation in
healthcare in combating the tobacco epidemic. These proposals could wipe out the livelihood of
millions of tobacco growers in many countries one of them being India where cultivation of
tobacco has huge part of the population dependent on it. It is unfortunate, that the challenges faced
by farmers and farm workers in rural areas and other ground realities are completely ignored by
the FCTC particularly in rural areas where they have not many alternatives and solutions to switch
to other occupations within a short period.

In fact, several important tobacco producing countries viz. Malawi, Tanzania, Indonesia etc. have
not signed the FCTC. Other leading producers, USA and Argentina, though having signed the
treaty, have not ratified it. However, India was one of the earliest signatories to the FCTC and also
the 8th country to have ratified it in February 2004 despite the huge livelihood implication as the
second largest tobacco growing country in the world and the 45.7 million livelihood dependency
on tobacco.

FCTC has several recommendations on diverse issues such as Agricultural Practices,

Benchmarked Taxation, Denial of Access for Consultation to tobacco industry, Tobacco Product
Content Regulation & Disclosure, etc. And policies related to these have very tangible real life
implications for farmers and others dependent on tobacco for their livelihood. These restrictions
are at the cost of the Indian economy and its growth and will only benefit of other tobacco growing
countries and aid illegal trade in cigarettes.

A balanced approach towards tobacco control regulations should be proposed and the government
should not take any extreme measures taking into consideration the effects it will have on the
population.

It should not get swayed by the propaganda of the international NGOs who under the misguided
notion that FCTC Guidelines are mandatory on the Indian Policy Makers, campaign for
unreasonable regulations. India should also ensure that unreasonable and impractical proposals
and guidelines which will have devastating impact on tobacco farmers and millions of others who
are dependent on tobacco for their livelihood are not adopted by the FCTC.

Different conditions such as the economic importance of the crop, health needs, the extent of
dependence on a particular industry, revenue generation etc. prevalent in that country should guide

21 | P a g e
the policy makers to adopt their own set of reforms which would suit their economy and cause no
harm.

The Government of India should formulate tobacco control policies within the framework of the
law i.e. COTPA passed by the supreme law-making institution of the country which is the Indian
Parliament. India’s tobacco regulations should be specifically adapted to the conditions prevailing
in the country so that they do not jeopardize the livelihood of millions who are engaged in the
tobacco industry.

The guidelines and recommendations for the implementation of FCTC Article 6 overlook the
undesirable consequences of high and discriminatory taxation on cigarettes in a country where the
bulk of tobacco consumption is in the form of non-cigarette tobacco products (beedi) which are
either lightly taxed or escape taxation and have several loopholes to escape taxation. These
guidelines only result in widening the tax gap between cigarettes and other tobacco products and
will not even help in achieving the objective of tobacco control in the country since consumption
of beedi is more popular rather than cigarettes in a country like ours. The tobacco consumption
pattern in India is unique in that only 11% of total tobacco is consumed in the form of legal
Cigarettes. The balance 89% is consumed in other forms of tobacco consumption and illegal
cigarettes. This is very different to the rest of the world where more than 90% of the consumption
is in the form of cigarettes. Hence policies should be adopted in such a way that all kinds of tobacco
products are controlled from being produced and consumed and not just cigarettes which is
consumed by a small proportion of the country.

Despite the small consumption share Legal Cigarettes contribute as much as 87% of the overall
tax revenue from tobacco. The reason for this distorted pattern of revenue collections is that
cigarettes are subjected to high and discriminatory rates of taxation compared to other tobacco
products

There is a need for the government Government to progressively move towards a more uniform
taxation regime across all forms of tobacco consumption in the country and to bring the large
unorganized sector within the tax net and not focus tobacco taxation on cigarettes alone. Continued
increase in already high taxation on cigarettes will only promote the growth of the low tax and
duty-evaded tobacco products in the country.
The excessively high increase in cigarette taxation has made legal cigarette extremely
unaffordable and therefore, out of the reach of consumers. This has exerted severe pressure on
the legal cigarette industry, increased the arbitrage opportunity on illegal cigarettes and caused
accelerated shift in consumption from cigarettes to other tobacco forms.
Extremely high tax rates on Cigarettes provide an opportunity for tax evasion in India. India
has the 4th largest illegal cigarette market in the world. It is thus evident that the excessive
taxation on cigarettes does not decrease overall tobacco consumption. It simply catalyzes the
growth of non-cigarette tobacco forms and compels people to switch to cheaper illegal cigarettes
often of low quality, manufactured in unhygienic conditions.

22 | P a g e
An uninterrupted growth in illegal cigarette trade in the country has led to a consistent decline in
the legal cigarette industry, which uses domestic tobaccos, impacting the domestic demand and
prices for tobacco. The steep fall in legal cigarette volumes in recent years has resulted in lower
utilization of tobacco in domestic cigarette manufacture thus affecting offtake of FCV tobacco
grown by Indian tobacco farmers. In fact, since 2013-14, the earnings of FCV tobacco farmers
have shrunk cumulatively by more than Rs. 3,000 crores due to drop in offtake of tobacco for the
manufacture of domestic legal cigarettes.
It is therefore, important that India should not recklessly implement the guidelines or
recommendations made by WHO FCTC as based on a western model of tobacco
consumption. They do not necessarily serve the purpose of tobacco control or revenue
enhancement in a country like India where tobacco consumption is unique and a large proportion
of tobacco consumption is either lightly taxed or even evade taxes. Further, India being a large
tobacco producer, livelihood of millions will be affected due to such policies. We all know, tobacco
cultivation plays a vital role in India’s economy in terms of rural employment, revenue generation
and exports. Tobacco production has been providing sustainable incomes to farmers and has
resulted in a positive change in the socio-economic standards of the farmers, farm workers and
their families.
More importantly, the distressed situation of Indian Flue Cured Virginia (FCV) Tobacco growers
in Andhra Pradesh, Telangana and Karnataka brought about by the escalating taxes on legal
cigarettes and the consequent drop in demand for tobacco, the unabated growth of contraband
cigarettes, that do not use Indian tobaccos, and the persistent increase in consumption of non-
cigarette tobacco products, demand immediate policy intervention by the government to resurrect
the plight of Indian farmers.

23 | P a g e
PRICE AND EXPENDITURE 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.19 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. India’s 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). Estimates of
the own-price elasticity of demand for cigarettes in developed countries range from –0.25 to –0.5,
while estimates in low- and middle-income countries suggest that the price elasticity of demand
varies between –0.5 to –1. Most studies report a relatively higher elasticity for tobacco products
among lower-income populations.

Expenditure elasticity estimates for

Beedis Cigarettes Leaf Tobacco
Rural 0.49 2.37 0.37
Urban 0.28 1.59 0.29
SOURCE: RM John, 2008

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 a useful shorthand for analyzing how
consumption might change when incomes increase when actual data on incomes is difficult to
uncover. The 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. 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 underscores the concern on affordability: income increases in a rapidly
growing economy carry the risk of more than proportionate increases in cigarette consumption.

24 | P a g e
INTERNATIONAL COMPARISONS

BRICS Nations

Harvested Area and Production in BRICS nations

6000000
4900000
5000000

4000000
3150197
3000000

2000000 1527610
830000
850674
1000000 17010
405253
5139 2 2
0
China India Brazil South Africa Russia

Harvested Area (Hectares) Production (Tonnes)

The graph above shows that the among the BRICS nations the maximum harvested area of tobacco
belongs to India followed by China and the rest of the nations have very little contribution in this
sector. Correspondingly the ratio of harvested area to production is highest for China. The yield
per hectare has been highest for South Africa followed by Brazil and then the other nations. BRICS
countries are amongst the major tobacco producing countries in the world. In majority of the
BRICS countries, volume sales of cigarettes have declined, however, growing taxes on cigarettes
have led to an inclination in the sales revenue of tobacco products in the last few years.
Unlike other BRICS countries, China hasn’t banned the smoking in all public places, but it has
banned smoking in ~ indoor public places as listed in the state council regulations. South Africa
has had a strong tobacco control laws and policies since 1990s. Brazil is committed to creating a
healthy future population that will help continue driving economic growth. The country has
comprehensive national tobacco control legislation that bans smoking in all enclosed public places,
bans most forms of tobacco advertising, promotion, and sponsorship, and provides for strong
pictorial warning labels. Russia bans smoking in all indoor workplaces and public places, bans
almost all forms of tobacco advertising, promotion and sponsorship, and requires pictorial warning
labels to cover 40% of cigarette packs. India bans smoking in most indoor workplaces and public
places, bans most forms of tobacco advertising, promotion and sponsorship, and will implement
pictorial warning labels to cover 85% of the tobacco package
25 | P a g e
Asian Nations

Harvested Area
6000000
4900000
5000000

4000000

3000000

2000000 1527510

1000000
270020 136233
53000 51000 49775 34451 30500 26254
0

Yield (per Hectare)

Thailand
Azerbaijan
Oman
Republic of Korea
Armenia
Laos
Taiwan
Sri Lanka
Cyprus
UAE

0 20000 40000 60000 80000 100000 120000 140000 160000

Among the Asian nations China accounts for the highest production followed by Indonesia and
the least is that of Vietnam and Philippines. Harvested area on the other hand is maximum for
China followed by India and Indonesia. Yield per hectare is highest in the UAE and is a really
small proportion in Thailand and Taiwan.

26 | P a g e
The China National Tobacco Company is by far the world's largest tobacco company but to date
has been largely domestically focused. Taiwan Tobacco and Liquor Corporation and Thailand
Tobacco Monopoly have both expressed ambitions to globalize but remain domestically focused
and are more likely to become regional players in the foreseeable future. Vietnam has about 15.3
million smokers.
Singapore is seen as one of Asia's most determined countries to curb tobacco usage. Smoking is
banned in nearly every public area. Cigarettes are expensive, about US$9 per pack, and packages
already contain graphics. Yet the government says smoking is on the rise.
Indonesia, by comparison, is the complete opposite. The country of 240 million is one of the last
vestiges of laissez-faire tobacco controls in the world and is paying with the price of growing
addiction. Its problem is illustrated with a video circulating on the Internet, showing a toddler with
a 40-cigarette-a-day habit. Indonesia has no ban on advertising. Consumers see ads of well-known
athletes promoting smoking and even sporting events named after sporting events.
Some 17.3 million smokes in the Philippines, one of Asia's highest rates, and about 87,000 people
die per year of tobacco-related disease, according to Philippine Health Undersecretary Paulyn Jean
Ubial.

Top 10 Nations in the world

Harvested Area (Hectares)

Turkey 136233
Pakistan 120000
Argentina 130000
Malawi 120172
Zimbawe 115000
Indonesia 270200
USA 136080
India 4900000
Brazil 40523
China 1527610

0 1000000 2000000 3000000 4000000 5000000 6000000

The graphs above show the tobacco production and harvested area of top 10 nations globally.
Harvested area is maximum for India followed by China.

27 | P a g e
 Yield (per Hectare)
India 17543
Chile 38420
South Africa 33100
Spain 33000
Cyprus 34000
Uruguay 38554
Oman 50000
Laos 58209
UAE 135000
Peru 171436

0 50000 100000 150000 200000

The graphs above show the tobacco production and harvested area of top 10 nations globally.
Harvested area is maximum for India followed by China. Peru and UAE account for the nations
with the highest yield per hectare.
Four firms dominate international markets

• Altria formerly Philip Morris International

• British American Tobacco
• Imperial Tobacco
• Japan Tobacco

Global Tobacco Industry sells approximately 6 trillion cigarettes annually, making it one of the
highest-concentrated industries across the world, with the major part of international tobacco
market being controlled by several corporations. China is the largest cigarette market around the
world basing on the consumption per capita, as there are 350 million in the country who smoked
more than 2,000 billion cigarettes in 2009, or more than 40% of the total annual consumption.

Excluding China, the top-10 of countries, which have the highest number of consumed cigarettes,
is comprised of the USA, Indonesia, Russian Federation, India, Turkey, Brazil, Japan, Ukraine,
Italy and Korea.al Tobacco Company, a corporation owned by the state.

28 | P a g e
REGRESSION: EXPORT EARNINGS AND PRODUCTIVITY

y
12000
y = 55.733x - 9878.6
R² = 0.4812
10000

8000

6000 y
Linear (y)
4000

2000

0
0 100 200 300 400

Y= EXPORT EARNINGS dependent

X= PRODUCTION independent

Export earnings = α1 + β1 (production) + u where β defines the slope of the line of regression.

On running a SLRM between the production of tobacco India and export earnings the following
results are obtained:

We get our sample regression function as:

Export earnings = -9878.6+55.733(production)

The positive value of β (55.733) shows that production and exports earnings are positively related.

The value of R2 shows us the percentage variation in dependent variable explained by variations
in the independent variable. In our analysis we see that 48.11% variations in export earnings is
explained by variations in the production.

The p-value (0.038219931) being less than 0.05 proves that the analysis is significant at 5% level
of significance.

29 | P a g e
 Regression Statistics

Multiple R 0.693663
R Square 0.481168
Adjusted R
Square 0.40705

Standard Error 2047.444

Observations 9

ANOVA
df SS MS F-Stat F-critical

Regression 1 27214026 27214026 6.49185487 5.59

Residual 7 29344184 4192026
Total 8 56558210

Coefficients Standard t Stat P-value T-

Error Critical
Intercept -9878.59 6225.261 -1.58686 0.1565668
x 55.73342 21.87416 2.547912 0.03821993 2.30600

If there is a significant linear relationship between the independent variable X and the dependent
variable Y, the slope will not equal zero. The null hypothesis states that the slope is equal to zero,
and the alternative hypothesis states that the slope is not equal to zero. From the test results we can
prove that the slope coefficient is significantly different from zero because:

• T- Statistic > T- Critical

• F- Statistic > F- Critical

• P value (0.038219931) being less than 0.05 proves that the analysis is significant at 5% level
of significance.

30 | P a g e
REGRESSION: PRODUCTIVITY AND PRODUCTION

y
900
y = 0.3687x + 46.025
800
R² = 0.7055
700
600
500
y
400
Linear (y)
300
200
100
0
0 500 1000 1500 2000

Y= PRODUCTIVITY
X= PRODUCTION

Productivity = α1 + β1 (production) + u where β defines the slope of the line of regression.

On running a SLRM between the production of tobacco India and its productivity the following
results are obtained.

We get our sample regression function as:

Productivity = 46.025+0.3687(production)
The positive value of β (0.3687) shows that production and productivity are positively related.

The value of R2 shows us the percentage variation in dependent variable explained by variations
in the independent variable. In our analysis we see that 70.54% variations in productivity is
explained by variations in the production.

The p-value being less than 0.01 proves that the analysis is significant at 1% level of significance.

31 | P a g e
 Regression Statistics

Multiple R 0.839931
R Square 0.705485
Adjusted R
Square 0.70081

Standard Error 80.89692

Observations 65

ANOVA
F-
df SS MS F-Stat critical

Regression 1 987606.4 987606.4 150.910676 7.06

Residual 63 412291.6 6544.311
Total 64 1399898

Coefficients Standard t Stat P-value T-

Error Critical
Intercept 46.02512 34.84895 1.320703 0.191378
x 0.368718 0.030015 12.28457 2.24E-18 2.65

If there is a significant linear relationship between the independent variable X and the dependent
variable Y, the slope will not equal zero. The null hypothesis states that the slope is equal to zero,
and the alternative hypothesis states that the slope is not equal to zero. From the test results we can
prove that the slope coefficient is significantly different from zero because:

• T- Statistic > T- Critical

• F- Statistic > F- Critical

• P value being less than 0.01 proves that the analysis is significant at 1% level of significance.

32 | P a g e
 ITC LIMITED: COMPANY PROFILE

BACKGROUND

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India
Limited. As the Company's ownership progressively Indianized, the name of the Company was
changed from Imperial Tobacco Company of India Limited to India Tobacco Company Limited
in 1970 and then to I.T.C. Limited in 1974. In recognition of the Company's multi-business
portfolio encompassing a wide range of businesses - Fast Moving Consumer Goods comprising
Foods, Personal Care, Cigarettes and Cigars, Branded Apparel, Education and Stationery Products,
Incense Sticks and Safety Matches, Hotels, Paperboards & Specialty Papers, Packaging, Agri-
Business and Information Technology - the full stops in the Company's name were removed
effective September 18, 2001. The Company now stands rechristened 'ITC Limited, where ‘ITC’
is today no longer an acronym or an initialized form.

In addition to tobacco, the company manufacturers food products and stationary, and is active in
the hospitality industry, packaging industry, and the agricultural and information technology
sectors. In March 2017, the media reported that ITC was given shareholder approval to explore
health care services, with the aim of establishing multi-specialty hospitals in India.

Sales Mix

16.5%

8.6%

55.5%
1.9%

17.5%

Cigarretes Agri Business Hotels Paper and Packaging FMCG

33 | P a g e
The following points are noteworthy:

• One of India’s most Admired and Valuable companies with a market capitalization of 3.3 lakh
crores and weightage of 5.59% in the Nifty 50.
• ITC & its Group Companies employ over 32,000 people directly; Sustainable development
models and value chains have supported creation of ~6 million sustainable livelihoods.
• Leading Fast Moving Consumer Goods (FMCG) marketer in India having established several
world class brands in India.
• Among the top tax payers in the country.
• A global exemplar in sustainable business practices

TOBACCO DIVISION
ITC, incorporated in 1910, is a professionally managed company with institutions holding 49.9%
of shares, British American Tobacco (BAT) holding 31.2% of shares and public having 18.9%
shareholding as in FY17. Until 1925, ITC was only in the cigarettes and leaf tobacco business.
From 1925 onwards, it diversified into various other businesses, paper (1925), hotels (1975),
agriculture (1990) and FMCG (2000), capitalizing on the opportunity in each segment. Entry into
each business has also helped it to build a synergistic value chain for all its related businesses by
providing forward and backward integration channels. ITC has been the largest cigarette
manufacturer and the market leader in the Indian cigarettes market. Occupying a dominant market
position, 75% by volume and 83% by value in FY17, the company has no close competitor in the
cigarettes space.

ITC's cigarette business stands testimony to the company's unwavering and unrivalled
commitment to quality, innovation and consumer focus. With more than one hundred years of
expertise in developing products to match the evolving taste of the consumers, ITC's cigarette
business continues to be relentless in its pursuit of strengthening its leadership position in every
segment of the market in India. ITC's wide range of brands, includes Insignia, India Kings,
Classic, Gold Flake, American Club, Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol,
Flake, Silk Cut, Duke & Royal. The Company has been able to consolidate its leadership
position with single minded focus on continuous value creation for consumers through
significant investments in creating & bringing to market innovative product designs, maintaining
consistent & superior quality, state-of-the-art manufacturing technology, & superior marketing
and distribution. With consumers & consumer insights driving strategy, ITC has been able to
fortify market standing in the long-term, by developing & delivering contemporary offers
relevant to the changing attitudes & aspirations of the constantly evolving consumer.

ITC's cigarettes are manufactured in state-of-the-art factories at Bengaluru, Munger, Saharanpur,

Kolkata and Pune, with cutting-edge technology & excellent work practices benchmarked to the
best globally. An efficient supply chain & distribution network reaches India's popular brands
across the length & breadth of the country.

34 | P a g e
In overseas markets, ITC's cigarette business continues to maintain high standards of international
quality and competitiveness. West Asia is a key export region for ITC and we offer a wide portfolio
of high quality cigarettes in this region. With a Portfolio of brands under the Classic, Wills and
Scissors Umbrella, ITC has cemented its international standing being the 3rd largest player in the
countries of Bahrain & Qatar. ITC was also the first company to introduce a flavor on demand
(capsule) product in the economy industry segment in West Asia region. We will now analyze the
various factors affecting ITC’s business:

• Strong brands at all price points

The biggest strength of ITC lies in its strong brands and its vast distribution network. Strong
brands like Insignia, India Kings, Lucky Strike, Classic, Gold Flake, Navy Cut, Players,
Scissors, Capstan, Berkeley, Bristol and Flake, Silk Cut, Duke and licensed brands like Benson
& Hedges have helped the company to gain market share and hold on to its leadership position.
It offers products in filter cigarettes at every price point from 2.8 to 8.0 per stick. ITC exited
the non-filter segment in 2008. The company has also ventured into electronic vaping device
sold under the brand Eon. The company’s latest annual report mentions that being a nascent
category, regulations with respect to such devices continue to evolve globally and in India, the
company continues to engage with the government to evolve appropriate regulations for this
novel category. ITC also expanded the market presence of KwikNic, its nicotine chewing gum.

• Market Leader
The cigarette market in India is dominated by ITC with a 78.5% share of sales by volume,
followed by Godfrey Phillips (13.5%) and VST Industries Ltd (7%). ITC’s average cigarettes
realization is higher than its competitors. We have seen the company generally commands a
premium of 1.5-1.6x in prices over its competitors like Godfrey and VST. Though competitive
brands like Marlboro are giving tough competition to its Wills Classic brand, it has managed
to gain only~2% market share. We believe there is no major competition to ITC’s well-
established brands and these would continue to command realization premium in future.

Market Share
7.0%
13.5%

78.5%

ITC Godfrey Philips VST

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• Pricing Power
ITC’s pricing power remained very strong. The company has passed on every excise
duty/value added tax (VAT) increase through judicious price hikes. The company’s topline
growth in the last 10 years has mainly been through price led growth. Considering the revised
cess rates, the taxes applicable on cigarettes in the GST regime translated roughly to an average
increase of 13% over the rates which existed immediately prior to the GST rollout. With this,
the cumulative growth of tax rates on cigarettes, reaches a staggering 202% over the last 6
years, that is, since 2011-12. This bodes ill for cigarettes and tobacco products after GST, and
the industry at large. However, the company has effectively transferred the burden of the prices
to the customers. Operations have stabilized post the GST rollout and growth in volumes have
been picking up. Although reduction in operational hassles, uniform taxation and prices across
country are positive, higher prices can delay the volume growth recovery.

Steady Volume Recovery post GST

SOURCE: ITC LTD
5 3 3.5
1.5
0.5 0
0
-0.5
-5 -4 -4
-2.5
-10

-12
-15 -14 -14.5
-17
-20

Revenue Growth (YoY)

SOURCE: ITC LTD
20
16.8
15 14.7 14.4
14.3 12.2 11.9
10
9.2
6.2
5 4.7 5.1

0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E

36 | P a g e
 Pricing of 1 cigarrete under GST with an example
Particulars Cigarettes Cigarettes Cigarettes Cigarettes Pan Pan
under between between above masala masala
65mm 65mm to 70mm 75mm with
70mm and gutkha
75mm (tobacco)

Value per Rs 5 Rs 10 Rs 15 Rs 15 Rs 5 Rs 10
unit (A)

Probable Rs 0.25 Rs 0.50 Rs 0.75 Rs 0.75 Rs 3 Rs 20.40

maximum (5%) (5%) (5%) (5%) (60%)
cess
Probable Rs 1.591 Rs 2.876 Rs 2.876 Rs 4.170 Not Not
cess per applicable applicable
1000 sticks (both filter (both filter
(non-filter)
(C) and non- and non-
and
filter) filter)
Rs 2.126
(filter)
GST rate Rs 1.40 Rs 2.80 Rs 4.20 Rs 4.20 Rs 1.40 Rs 2.80
@28% (D)
Probable Rs 8.016 Rs 16.176 Rs 21.502 Rs 24.12 Rs 9.40 Rs 33.20
price that (non-filter) (both filter
can be and non-
charged on Rs 15.426 filter)
products (filter)
(A+B+C+D)

The group now has diversified its business into many sectors. ITC’s aggression to push its non-
cigarette businesses is not misplaced. The recent public interest litigation contesting the investment
of state-owned insurance companies in ITC is another case in point. If LIC has to eventually pull
off its investment from ITC on ethical and health grounds, it is likely to put further pressure on
ITC to reduce its exposure to tobacco business.

As a corporate strategy, ITC is now focused almost exclusively on cigarettes, where it is among
the market leaders. Indeed, far from going away, tobacco may be more resilient than is commonly
believed. Perhaps, even with the elements stacked against it, tobacco is still the best investment
bet for ITC.

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 According to a 2015 Credit Suisse Global Investment Returns report, since the beginning of 2005,
the MSCI Global Tobacco Index has risen 196.4%, providing an 11% annual return. It far
outperformed the catch-all MSCI World Index, which went up 50.6% in the same period. Not
surprisingly, tobacco is a perennial winner in the markets: a dollar invested in the US market in
1900 in tobacco, gave an annualized return of 14.6%, and a terminal value of $6.2 million by 2015.

Vice stocks tend to do well in good times as well as bad, and ITC, without the burden of its other
investments, is among the best of those stocks, given its dominant market position and its huge
cash hoard.

For years, ITC has poured money to buy market share in the personal care business. But throwing
cash is never a sustainable strategy. So far, it has always countered the drop-in cigarette sales
volume by expanding revenue through price hikes. Now, however, it faces the classic dilemma of
the smoker who knows smoking is killing him but can’t kick the habit because the process is
painful.

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 BIBLIOGRAPHY

• Nick K Schneider, Ernesto M Sebrié and Esteve Fernández (2011) “The so-called "Spanish
model" - Tobacco industry strategies and its impact in Europe and Latin America”, BMC Public
Health 2011 11:907
https://bmcpublichealth.biomedcentral.com/articles/10.1186

• Kumaresan (2010) “Tobacco Exports: The Untapped potential:

http://www.efymag.com/admin/issuepdf/Tobacco-Jan10.pdf

• M Rani, S Bonu et al “Tobacco Control” (2003);12:e4.

http://tobaccocontrol.bmj.com/content/12/4/e4

• Dwivedi, Satish(2014), “Implications of Tobacco Industry in India”

https://www.researchgate.net/publication/279923932_Implications_of_Tobacco_Industry_in
_India-Research_and_Analysis

• .http://www.indianmirror.com/indian-industries/tobacco.html

• The threat of growing illegal cigarette trade in India, adversely impacting livelihood,
government revenue and legal industry”, Second Edition (2017)
http://www.tiionline.org/publications/tii-booklets/ Retrieved on 1st January,2018, IST 8:41pm

• http://www.tiionline.org/facts-sheets/tobacco-exports/ Retrieved on
12th January,2018 IST 9:30pm

• .http://www.thehindu.com/news/national/telangana/gst-to-further-dent-beedi-
industry/article18719207.ece Retrieved on 11th December,2017, IST 6:45 pm

• Akanksha Singh, Laishram Ladusingh (2014), Prevalence and Determinants of Tobacco Use
in India: Evidence from Recent Global Adult Tobacco Survey Data
http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0114073

39 | P a g e
 APPENDIX
This data relates to regression 2 (production and productivity)
Production Productivity Production Productivity

YEAR (In ' (In YEAR (In ' 000 (In

000 Ton) Kg/Hectare) Ton) Kg/Hectare)

1980-81 481 1065 2000-01 345 1318

1981-82 520 1172 2001-02 546 1565
1982-83 582 1157 2002-03 500 1529
1983-84 492 1120 2003-04 550 1487
1984-85 486 1113 2004-05 549 1498
1985-86 441 111 2005-06 552 1481
1986-87 462 1187 2006-07 519 1409
1987-88 359 1108 2007-08 493 1417
1988-89 493 1307 2008-09 541 1385
1989-90 552 1335 2009-10 666 1503
1990-91 556 1353 2010-11 802 1632
1991-92 584 1369 2011-12 751 1613
1992-93 581 1390 2012-13 657 1542
1993-94 560 1463 2013-14 735 1612
1994-95 570 1486 2014-15 839 1842
1995-96 540 1356
1996-97 618 1443
1997-98 637 1369
1998-99 608 1294
1999-00 524 1211

This data relates to regression 1 (production and export earnings)

Production Export
Year
(cr) (crores)
2005-06 228.27 2263
2006-07 268.93 2785
2007-08 252.98 3265
2008-09 317.94 5618
2009-10 323.25 7390
2010-11 301.1 6765
2011-12 266.99 6585
2012-13 270.5 8169
2013-14 315.95 10145

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