OMINOUS SMOKE SIGNALS

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News - OMINOUS SMOKE SIGNALS

May 26 2007

Does the commerce ministry want FDI in tobacco? Mihir Srivastava smells strong hints that it might

The contentious issue of foreign direct investment (FDI) in tobacco has snowballed into a larger controversy following the hush-hush trip of a government delegation to Zimbabwe and Brazil to study the impact of such policy in those countries.

The fact that the commerce ministry had planned a trip like this more than 15 years ago and could not muster the courage to send the members has set the cat among the pigeons. Many, understandably, are asking the million-dollar question: was there any need to send the delegation?

Tehelka has reliably learnt that Tobacco Board of India (TBI) chairman Dr J. Suresh Babu led the delegation from February 28-March 12, triggering speculations that the mandarins of the commerce ministry were actively contemplating the FDI route, vehemently opposed by a large chunk of tobacco growers in India.

Not many have liked the trip. Says Rayapati Sambasiva Rao, MP and also a member of the TBI: “This is a move to allow international middlemen in the tobacco markets in India. They are very big buyers, will control the prices and inevitably lead to farmers getting a raw deal. I will take up the matter at the highest level — to the prime minister.”

India follows a transparent auction system where buyers, including international giants, procure tobacco from farmers. The system is unique to India, worked well for more than two decades, encouraged healthy competition in the market and ensured remunerative prices for the farmers.

“Unlike Brazil, tobacco farmers in India have small holdings. We cannot compete with the big tobacco cartels. They will pay us peanuts. We cannot allow FDI unless the present system continues,” says Vikram Raj Urs, a tobacco farmer and treasurer, Karnataka Tobacco Growers’ Forum.

Urs fears are not misplaced. Nearly two decades ago, there were six multinational leaf dealers in the global market. Excessive overproduction of cigarettes led to the market’s churning up and rapid mergers and acquisitions (M&A) in the intervening period. Today, there are only two big time players: Alliance One and Universal Leaf Tobacco.

In this scenario of overproduction, with the Big Two calling the shots, it is unlikely that these companies will increase their production when they enter the Indian markets through FDI.

On the contrary, says a member of TBI on condition of anonymity, “The duo with their overwhelming influence on the market would be pushing the prices down, adversely affecting the income of the farmers. They would squeeze supply from India to eliminate overproduction.” Currently, global players have access to the Indian market through their representatives and pick up 60 percent of the produce.

But Babu argues that Indian farmers will get remunerative prices comparable to farmers in Brazil and Zimbabwe (see interview). Brazilian tobacco is heavy-bodied and is ranked in the premium category, while Indian tobacco is primarily of the filler variety and, at best, can be blended with other flavoured tobacco. So there can be no comparison in the rates.

As far as profitability is concerned, the farmers are more than satisfied. “We make better money than any cash crop in India. The profitability is as high as 35 percent,” says Urs. There is a regulatory mechanism in place that stipulates the crop size. The profitability is so high that crop size far exceeds the normal allowance of 10 percent. Even the high penalty rates of 15 percent have not deferred the farmers from exceeding the permissible stipulated crop size.

Earlier, FDI was not allowed because of public health considerations. But these considerations are stronger now with wto estimates that the proportion of tobacco-related deaths in India is set to increase from 1.4 percent in 1990 to 13.3 percent in 2020.

Past experiences have shown that FDI has essentially had a positive correlation with the increase in the country’s smoking population. Taiwan, Korea, Thailand and Japan allowed FDI in the late 1980s and saw an increase in cigarette consumption of over 10 percent.

The move, says the Tobacco Institute of India (TII) in a note, could increase contraband trade and also force losses of nearly Rs 2,000 crore per annum in terms of taxes and forex outflow. Currently, contraband cigarette sales cause a loss of Rs 1,500 crore-Rs 2,000 crore per annum.

No one knows whether or not the commerce ministry will take the decision but insiders claim the countdown has begun: the farmers are waiting. So are the companies.

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