India is battling a second wave of the COVID-19 pandemic just as the economy was reviving from the impact of the first. Now, as we look to the future, the focus needs to be as much on resilient economic growth as on addressing issues that hurt the fabric of our economic and healthcare systems. The trade in illicit or counterfeit products is one such issue that has deep and widespread ramifications. People often don’t realise that when they knowingly or unknowingly buy illicit goods, they are not only contributing to a parallel cash economy but also putting their own health at risk.
A 2019 report by the Federation of Indian Chambers of Commerce & Industry (FICCI) titled “Invisible Enemy” revealed that during the fiscal year 2017-18, contraband and counterfeit goods caused the government significant and broad-based revenues losses amounting to Rs 57.26 billion in the textiles industry, Rs 55.09 billion in the ready-made garments industry, Rs 87.5 billion in the cigarettes industry, Rs 184.25 billion in the capital goods industry and Rs 90.59 billion in the consumer durables industry.
COVID-19-induced mobility restrictions gave an impetus to illicit trade of essentials and non-essential items. As a result, the alcohol and tobacco trade invariably hung in an uncomfortable situation. According to a market research report by Euromonitor research and TII (2019), India has become the fourth-largest and fastest-growing illegal cigarette capital in the world, with smuggled cigarettes accounting for one-quarter of the domestic cigarette industry. Illegal trade more than doubled from 12.5 billion sticks in 2005 to 26.5 billion sticks in 2018, resulting in an annual revenue loss of Rs 13,000 crore to the government. In another report by Authentication Solution Providers’ Association, counterfeiting saw a drastic increase by 24 percent in 2019, as compared to 2018.
These numbers indicate the extent of damage caused by the grey market, casting a shadow on the Indian economy. The counterfeit and contraband trade market has widespread ramifications on consumer health because consumers often don’t realise that when they buy illicit goods, they are inadvertently contributing to a parallel cash economy and putting their health at risk.
Over the years, the Indian government has implemented several anti-illicit trade measures to curb this issue and protect consumer health. Between June and October of 2020, the seizure of illegal cigarettes by regulatory and enforcement authorities increased by almost 800 percent, as compared to the same period in 2019.
While the government’s efforts with effective seizures should be lauded, there remains a significant opportunity to address loopholes across the supply chain to include ports, wholesalers and retailers as well as in a high taxation framework.
Globally, many countries with high tobacco taxes face the menace of the illegal tobacco trade. Using Thailand as an example, from 2005 to 2020 the country introduced 13 tobacco control measures including six tax increases, comprehensive bans on public smoking and advertising, a total vaping ban and plain packaging.
Despite these tough measures, smoking prevalence rates amongst adults do not appear to have been materially impacted. According to a July 2019 study published in BMC Public Health (open access, peer-reviewed medical journal), Thailand’s tobacco control policies have been successful in reducing the overall smoking rate from 23 percent in 2003 to 19 percent in 2017. However, the study states that this reduction is not adequate to achieve WHO’s 2025 was voluntary global target of a 30 percent relative reduction in tobacco consumption. The same study cautioned against several other issues that impede the country’s efforts in reducing its smoking rate, which includes challenges in eliminating the illicit tobacco trade. Oxford Economics’ 2017 Asia Illicit Tobacco Indicator report revealed that the illegal cigarette trade in Thailand grew from 2.9 percent in 2012 to 5.5 percent in 2017, resulting in significant losses of tax revenue to the government.
As a percentage of per capita GDP, cigarette taxes in India are amongst the highest in the world, as per the data presented in the WHO Report on the Global Tobacco Epidemic 2019. Consequently, relative to per capita GDP, cigarette prices in India are also amongst the highest in the world. According to a report published by Alvarez & Marsal (A&M) in 2019, there is a 98 percent correlation between the level of taxation and retail prices, which directly impacts the affordability of cigarettes. Contraband cigarettes evade taxes and duties while exploiting arbitrage through illicit trade. Stricter action against it can reverse the risk-reward ratio and arbitrage. A similar trend has been observed between affordability and illicit trade across countries, as seen with alcoholic beverages where low affordability, driven by alcohol duties, has a 56 percent correlation with the level of unrecorded alcohol consumption.
The Ministry of Health in India is planning to amend the Cigarettes and Other Tobacco Products Act (COTPA). These amendments include the prohibition of retail sale of loose cigarette sticks, increasing the legal smoking age to 21 years, imposing additional restrictions on advertising and promotional content, and displaying harmful effects of tobacco consumption at retail outlets. However, the Federation of All India Farmers Associations (FAIFA) have appealed to the Hon’ble Prime Minister to recall the COPTA Amendment Bill. FAIFA has expressed concern that amendments to COPTA can lead to an increase in unlawful cigarette trade, which will have a negative effect on the legal cigarette business in India.
As India emerges from a public health crisis, the serious issues of illegal products need to be addressed on a war footing. Instead of stringent bans, stronger implementation of regulations that promote legal sales, while preventing the growth of black market activity, needs to be explored. As the country progresses on its path towards economic revival, builds a self-reliant ecosystem and balances public health, there needs to be a stronger collaboration with key stakeholders (state governments, industry associations, enforcement agencies and local authorities) to fix the situation on the ground, strengthen regulations and enhance consumer awareness. We simply cannot afford to let illicit activities light a match under India’s hopes for economic revival and growth.
—The authors, Dhruv Phophalia is Managing Director, Alvarez & Marsal, Disputes and Investigations practice in India and Rahul Gosain is Managing Director, Disputes and Investigations, Alvarez & Marsal. The views expressed in the article are authors' own
(Edited by : Ajay Vaishnav)