 "Demonetisation crushes illicit cigarette trade")
The illicit tobacco trade in the country is feeling the heat of the Centre’s demonetisation drive. Cigarette retailers say while the move has had an immediate impact on the overall trade with sales dropping 40-60% in certain regions, illegal trading will take a further hit in times to come when the situation stabilises.
The prime reason, according to retailers, is the very nature of this cash-based industry where credit period is crucial. While around 40% of the legal market operates on a cash-and-carry model, large billings often get a 4-14 day credit period. On the other hand, the illegal cigarettes which are retailed by distributors are not eligible for any credit period, making this business depend on 100% cash transactions.
“Our cash liquidity is low now and in the coming months, too, there is uncertainty over liquidity. Given this situation, one would prefer a credit period over cash transactions,” said a Delhi-based cigarette retailer.
As demonetisation took the tobacco sector by surprise, the retailers opted to retain cash in the face of uncertainty of commodity prices rather than make upfront payments to the cigarette distributors for fresh stocks. This occurred despite the fact that contraband items offer higher margins to the sellers than legal cigarettes.
“This resulted in the supply chain taking a hit especially for those who are not offering any credit period,” said a tobacco wholesale dealer from Mumbai.
Cigarettes major ITC was quick to respond to the changing market dynamics by increasing its credit period by seven to 10 days for its distributors who in turn extended their credit period to the retailers.
According to Abneesh Roy, senior vice-president of institutional equities at Edelweiss Securities, contraband trade doesn’t deal in cheques or other forms of accounted payments, which can be revealed in the accounts books.
“The Centre is serious about curbing black money and, hence, the retailers who are selling non-duty paid items will become afraid and desist it.”
Agreeing with this view, another Kolkata-based cigarette distributor said that from now on, even petty retailers would be hesitant to buy contraband tobacco sticks. “In the account books and while filing the taxes, how can one show the payments made and income derived from contraband cigarettes?”
According to a report from Edelweiss Securities, the fast-moving consumer goods (FMCG) trade, of which cigarette is a part, will become more organised as the wholesalers who deal in cash will move towards dealing in cheque or online payment modes, which will reduce under-reporting.
This will be further helped by the implementation of GST, which will act as a catalyst towards conversion from unorganised to organised trade.
According to the annual report of Godfrey Phillips India, which has an estimated 14% market share in the country, one in every five cigarettes is illicitly sold in India.
Estimates by Tobacco Board, United States Department of Agriculture, and industry sources show that the consumption of illicit cigarettes has steadily risen from 11.1 billion sticks in 2004 to 23.9 billion in 2015, which implies a four% market share in the 562 million kg Indian tobacco market.
Lauding the government to demonetise high-denomination currency notes, an ITC spokesperson said: “ITC has been highlighting the menace of cigarette smuggling, which is a big generator of black money and is a source of funds for terrorist and criminal activities. The bold initiative of the government to curb the menace of black money will greatly benefit the economy.”
However, the entire benefit of curb in contraband cigarette trade will not result in increased income for the domestic cigarette companies.
“There are legal imports, too, which are also popular among the consumers,” said another tobacco seller from Mumbai.
Cigarette is one of the largest revenue contributors to the government. According to the Tobacco Institute of India, legal cigarettes which represent 11% of the tobacco sector, contribute as high as Rs 29,000 crore to the exchequer annually. Excise duties collected from tobacco contribute Rs 14,000 crore, or 10% of all excise revenues.
According to industry body Ficci, the size of illicit markets in cigarettes and other tobacco products – primarily cigarettes, chewing tobacco, bidi, khaini, cheroot, etc – has grown 28.7% from Rs 8,965 crore in 2012 to Rs 13,130 crore in 2014.
READ OUR FULL COVERAGE ON THE MODI GOVT'S DEMONETISATION MOVE
READ OUR FULL COVERAGE ON THE MODI GOVT'S DEMONETISATION MOVE
Cigarette market in India
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Rising consumption of illicit cigarettes in India
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Seizure of smuggled cigarettes
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