BENGALURU/NEW DELHI: In the bustling IT city of Bengaluru, 27-year-old Girish Kumar sits comfortably in his 2×4 sq ft shop in Yelahanka, selling pan and cigarettes. In his crammed store, cigarettes made by ITC and Godfrey Phillips India are increasingly being edged out by brands such as Baisha, Marboro, Luvin, Golden Elephant and Win. These Chinese cigarettes, mostly unheard of, are fast becoming popular and are as cheap as bidis. Kumar’s math is simple — for every pack of 10 Chinese cigarettes sold, he earns Rs 10, whereas a similar pack of Indian brands brings him only Rs 4. “With a price tag of Rs 3 per stick, people don’t hesitate to pick up an entire pack at once,” said Kumar, referring to Chinese cigarettes that cost about one-third of Indian-made ones. In a country where about 102 billion cigarette sticks were smoked in FY15, illegal brands and cheap imports aren’t new, although they’re spreading fast. According to Euromonitor International data, India’s share of illicit cigarettes was 19 per cent in 2014, up from 12 per cent in 2006. Only 12 per cent of tobacco consumption is in the form of duty-paid cigarettes, with the rest accounted for by lightly taxed or non-tax paid products such as bidis and chewing tobacco. Illicit cigarettes have become popular as India boosted excise duty on cigarettes to 40 per cent in the past two years alone, making a pack costing Rs 30 on the street practically irresistible compared with Indian brands selling for Rs 100 upwards. In addition, amateurs seeking extra income are making and selling cigarettes illegally. “Unscrupulous operators have set up manufacturing units without compulsory licensing. Cigarettes from these units are available in the market at one rupee per stick, which is even lower than the tax applicable on such cigarettes,” said Syed Mahmood Ahmad, director at the Tobacco Institute of India. As a result, retail sales of legitimately sold cigarettes dipped 14-15 per cent in the second half of FY15 and 17 per cent in the first quarter of this financial year, the steepest decline ever. “Unprecedented pressure on the legal cigarette industry with imposition of steep taxes has led to consumption being diverted to tax-evaded as well as smuggled products,” YC Deveshwar, chairman of ITC, the country’s largest cigarette seller, told shareholders in July. “The wide proliferation of illegal cigarettes has deprived the exchequer of significant revenue, eroded income of Indian farmers and threatened livelihood of many engaged in the supply chain by driving the trade into unscrupulous hands and creating a large unaccounted flow of foreign exchange out of the country,” Deveshwar said. Where taxes are increased at moderate rates, it will “help the legitimate industry to progress and not be taken over by the illegitimate industry,” said Sanjiv Puri, president for FMCG at ITC. He added that one in every five cigarettes sold is illegal — those on which no tax is paid, don’t comply with graphical health warning norms and where quality may be a concern. It’s not just Chinese brands with flavors such as green apple, strawberry, orange, ice-burst and mint that are invading Indian pan shops. Indonesian cigarettes have found a following in the national capital. A Mild, Djarum Black and Gudang Garam are prominent on the shelves at pan shops in Delhi and have even displaced betterknown Indian brands at some. While Gudang Garam has been available in the Indian market for some time, Djarum Black is new. Djarum’s Kretek or clove-flavoured cigarettes are popular with both consumers and shopkeepers. “It’s not only the margin. Customers come asking for it,” said Manoj, a pan-wallah in Delhi. One thing is common across cheap imported cigarettes — the packs breach laws that require statutory warnings against smoking to be displayed on both sides and cover at least 85 per cent of the packaging. According to sources, these cigarettes are smuggled through Myanmar and distributed to cities and villages in the country. “Illegal cigarettes are cheaper because they do not have to comply with the Indian tax system. The actual production cost of a cigarette is low, but tax adds over 60 per cent to its price,” said Abneesh Roy, associate director at Edelweiss Capital. “This is negative for ITC even though not every consumer is switching to illegal cigarettes.” A theory by some analysts that the industry will be helped by bidi smokers upgrading to branded cigarettes could also go up in smoke. India has a 365 billion sticks per year bidi market. A recent JP Morgan report estimates that even if half of the bidi volumes translates to cigarette sales, the industry will gain incremental 3 percentage points growth per annum. “Sharp increase in retail prices of cigarettes in India may have reduced the relative affordability for some consumers — the 2015 Union Budget marked the fourth consecutive year of over 15 per cent excise hikes on cigarettes in India,” added the report.easingly being edged out by brands such as Baisha, Marboro, Luvin, Golden Elephant and Win. These Chinese cigarettes, mostly unheard of, are fast becoming popular and are as cheap as bidis. Kumar’s math is simple — for every pack of 10 Chinese cigarettes sold, he earns Rs 10, whereas a similar pack of Indian brands brings him only Rs 4. “With a price tag of Rs 3 per stick, people don’t hesitate to pick up an entire pack at once,” said Kumar, referring to Chinese cigarettes that cost about one-third of Indian-made ones. In a country where about 102 billion cigarette sticks were smoked in FY15, illegal brands and cheap imports aren’t new, although they’re spreading fast. According to Euromonitor International data, India’s share of illicit cigarettes was 19% in 2014, up from 12% in 2006. Only 12% of tobacco consumption is in the form of duty-paid cigarettes, with the rest accounted for by lightly taxed or non-tax paid products such as bidis and chewing tobacco. Illicit cigarettes have become popular as India boosted excise duty on cigarettes to 40% in the past two years alone, making a pack costing Rs 30 on the street practically irresistible compared with Indian brands selling for Rs 100 upwards. In addition, amateurs seeking extra income are making and selling cigarettes illegally. “Unscrupulous operators have set up manufacturing units without compulsory licensing. Cigarettes from these units are available in the market at one rupee per stick, which is even lower than the tax applicable on such cigarettes,” said Syed Mahmood Ahmad, director at the Tobacco Institute of India. As a result, retail sales of legitimately sold cigarettes dipped 14-15% in the second half of FY15 and 17% in the first quarter of this financial year, the steepest decline ever. “Unprecedented pressure on the legal cigarette industry with imposition of steep taxes has led to consumption being diverted to tax-evaded as well as smuggled products,” YC Deveshwar, chairman of ITC, the country’s largest cigarette seller, told shareholders in July. “The wide proliferation of illegal cigarettes has deprived the exchequer of significant revenue, eroded income of Indian farmers and threatened livelihood of many engaged in the supply chain by driving the trade into unscrupulous hands and creating a large unaccounted flow of foreign exchange out of the country,” Deveshwar said. Where taxes are increased at moderate rates, it will “help the legitimate industry to progress and not be taken over by the illegitimate industry,” said Sanjiv Puri, president for FMCG at ITC. He added that one in every five cigarettes sold is illegal — those on which no tax is paid, don’t comply with graphical health warning norms and where quality may be a concern. It’s not just Chinese brands with flavors such as green apple, strawberry, orange, ice-burst and mint that are invading Indian pan shops. Indonesian cigarettes have found a following in the national capital. A Mild, Djarum Black and Gudang Garam are prominent on the shelves at pan shops in Delhi and have even displaced betterknown Indian brands at some. While Gudang Garam has been available in the Indian market for some time, Djarum Black is new. Djarum’s Kretek or clove-flavoured cigarettes are popular with both consumers and shopkeepers. “It’s not only the margin. Customers come asking for it,” said Manoj, a pan-wallah in Delhi. One thing is common across cheap imported cigarettes — the packs breach laws that require statutory warnings against smoking to be displayed on both sides and cover at least 85% of the packaging. According to sources, these cigarettes are smuggled through Myanmar and distributed to cities and villages in the country. “Illegal cigarettes are cheaper because they do not have to comply with the Indian tax system. The actual production cost of a cigarette is low, but tax adds over 60% to its price,” said Abneesh Roy, associate director at Edelweiss Capital. “This is negative for ITC even though not every consumer is switching to illegal cigarettes.” A theory by some analysts that the industry will be helped by bidi smokers upgrading to branded cigarettes could also go up in smoke. India has a 365 billion sticks per year bidi market. A recent JP Morgan report estimates that even if half of the bidi volumes translates to cigarette sales, the industry will gain incremental 3 percentage points growth per annum. “Sharp increase in retail prices of cigarettes in India may have reduced the relative affordability for some consumers — the 2015 Union Budget marked the fourth consecutive year of over 15% excise hikes on cigarettes in India,” added the report.