New Delhi: The country’s leading cigarette maker, ITC Ltd, will have to suspend production at all its factories to introduce pictorial warnings on cigarette packs from 1 June, but the company will make sure that there is no supply gap in the market.
Duly warned: ITC chairman Y.C. Deveshwar says the company will ensure there’s no shortage of cigarettes in the market till production restarts at its factories, because prices are extremely sensitive to supply shrinkage. Rajkumar / Mint
India’s second largest manufacturer, Godfrey Phillips India Ltd, however, said it wouldn’t halt production to introduce the so-called graphic health warnings, which illustrate the damage caused to human lungs by smoking and caution that “Smoking Causes Cancer”.
The Supreme Court cleared the introduction of pictorial warnings on packs of tobacco products on 6 May. Although the Union government has only recently indicated the specifications and the pictures that are to be carried on the front of the packs, cigarette makers have been told that they cannot sell their products without pictorial warnings from 1 June.
“We aren’t ready yet with our new packets, and to introduce the pictorial warnings, we will have to take a shutdown at all our production lines, though in a phased manner,” said ITC chairman Y.C. Deveshwar.
He, however, declined to say how long his company will take to prepare the new packs. “We will make sure that there’s no shortage in the market till production restarts at our factories,” he added.
ITC normally maintains 20-25 days of trade inventory. The company would have to raise the level of trade inventory before suspending production because cigarette prices are extremely sensitive to supply shrinkage.
ITC has been raising prices to maintain margins amid declining cigarette sales, and does not want a further spurt in prices before introduction of the pictorial warnings, which alone could affect sales considerably, analysts say.
“Graphic health warnings are coming on the packs for the first time in the history of the Indian cigarette industry,” Godfrey Phillips’ executive vice-president for marketing and corporate affairs Nita Kapoor said in an emailed statement. “We do not have any past record or data which can give us any clue on the impact (it could have) on our business... We would not like to speculate.”
Under the law, even cigarettes made outside India will need to carry pictorial warnings of the same specification on the front of the packs.
The government has mandated that the graphic health warning should cover at least 40% of the space on the front of every pack of cigarettes sold in India.
This means the introduction of pictorial warnings could affect sales of foreign cigarettes at duty-free shops, and that foreign manufacturers such as British American Tobacco Plc. and Altria Group Inc. (formerly Philip Morris Cos Inc.) would have to make changes in their cigarette packs to continue to sell in India.
The introduction of pictorial warnings will put Indian manufacturers at a further disadvantage compared with cigarettes illegally imported into the country or manufactured locally in violation of excise laws.
Companies such as ITC had stopped manufacturing non-filtered cigarettes after the Union government in 2008 raised taxes on them from Rs173.04 to Rs843.57 per 1,000 sticks.
ITC said in a statement recently, “The extraordinary increase of 140-390% in the rates of excise duty on non-filter cigarettes in the 2008 Union budget, coming on the heels of a 30% increase in tax incidence in the previous year, drove the organized cigarette industry to substantially vacate this (unfiltered cigarette) category.”
The space has now been captured by illegal manufacturers, who are selling filtered cigarettes for as little as Re1 a stick.
“Because manufacturers of these cigarettes do not pay any tax at all, they are able to sell at Re1 a stick and even offer better trade margins than established brands. Had they paid taxes, they would have had to pay some Rs968 per 1,000 sticks in various state and Central taxes,” said a cigarette seller, who did not want to be named.