India, home to the world’s second highest number of tobacco users (around 275 million), last year had set a target of reducing tobacco use by 20% by 2020 and 30% by 2025.

Going by the decline in tobacco products output, the target under an action plan drawn up by the ministry of health and family welfare, may not be out of reach. Stiff increase in tobacco and cigarette taxes and stringent packaging norms have contributed to the decline.

According to the Index of Industrial Production (IIP) data, output of tobacco, which includes cigarettes, bidis and chewable tobacco products, declined by 12.1% in March 2015 from a year ago.

In March of last year, tobacco output had dipped by 3.8% from March 2013. Between January 2014 and March 2015, the output of tobacco products dipped in nine out of 15 months. Except for the first two months of 2015, it has been on a decline since September 2014. Interestingly, tobacco output typically declines in March, the month following the presentation of the Union budget, which routinely raises so-called sin taxes, as duties on alcohol and tobacco are called.

Since July 2014, when finance minister Arun Jaitley presented the National Democratic Alliance (NDA) government’s first budget, duty on cigarettes has been increased substantially.

In the 2015 budget, he hiked excise duty by 25% on cigarettes of length not exceeding 65mm, and by 15% on cigarettes of other lengths.

The decline in consumption is also reflected, at least partly, in the quarterly results of India’s largest cigarette maker ITC Ltd.

While ITC does not disclose volume of cigarette sold, analysts with the equity brokerage firms Edelweiss Securities Ltd and Elara Capital India Pvt. Ltd estimate a 13% drop in the company’s cigarette sales volume in the January-March quarter.

Revenue from cigarette sales grew by a muted 3.2% during the March quarter, from the corresponding period last year, and 1.7% from the October-December 2014 quarter.

The increase was marginal considering ITC tried to push sales by introducing shorter cigarette sticks earlier this year.

Abneesh Roy, analyst at Edelweiss Securities, said that cigarette volumes for ITC are likely to decline 10% year-on-year in fiscal year ending March 2016.

An analyst at a management consulting firm said although the number of consumers may not have fallen, the quantity of consumption seems to have declined. “Stiff excise duty hikes ever year since July 2014, mainly on filter cigarettes that attracted more than double excise duty and restrictions on sale of cigarettes without filters, have forced people to either reduce the number of sticks per day or to shift to low-cost options," said the analyst on condition of anonymity.

The NDA’s anti-tobacco campaigns, its efforts to stop the sale of loose cigarettes (that accounts for about 70% of total sales) and hike in penalties for smoking at public places has also worked in its favour, said the analyst.

But industry body the Tobacco Institute of India (TII) does not subscribe to the view that consumption of tobacco products may have actually declined.

Rather, said Syed Mahmood Ahmad, director at TII, sales of counterfeit brands and smuggled and counterfeit cigarettes had gone up as they are easily available at a cheaper rate.

“The escalating excise duty burden on legal cigarettes has almost doubled in the last four years, as a consequence of successive increases in Union budgets since 2012-13," he said.

Over the last three decades, legally manufactured cigarettes’ share of total tobacco consumption in India has declined from 21% in 1981-82 to 12%, according to the TII. During the same period, overall tobacco consumption increased by 42%.

ITC, in a statement after declaring earnings on Friday, said that high taxation had led to a significant shift in tobacco consumption to lightly taxed or tobacco products such as bidis, khaini, chewing tobacco, gutkha, and smuggled and counterfeit cigarettes that evade tax. These products currently account for more than 88% of total tobacco consumption in India at present.

IIP numbers may not reflect the reality as the index does not include data from the unorganized sector, said P.C. Jha, former chairman of the Central Board of Excise and Customs (CBEC) and advisor to Committee Against Smuggling and Counterfeiting Activities Destroying the Economy (CASCADE) at industry body, the Federation of Indian Chambers of Commerce and Industry (Ficci).

“Tobacco addicts are shifting to other low-cost options, which are more dangerous, and counterfeit brands," said Jha, adding that increased use of counterfeit products resulted in losses to the government and the industry.

According to Ficci’s reports on counterfeit products, the grey market for tobacco products has almost doubled since 2010, adding about 5,000 crore to about 13,130 crore of existing industry losses, and about 3,000 crore to government loss of revenue between 2010 and 2014.

Quoting research firm Euromonitor International, Ahmed said India was the fifth largest market for smuggled and counterfeit cigarettes, accounting for about 20% of overall cigarette industry in India.

In the year ended March 2014, the government earned 17,800 crore from tobacco taxes.

That’s dwarfed by the 1.04 trillion burden in 2011 of treating ailments related to tobacco consumption estimated by the health ministry study last year.

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