The Indian economy is growing at a fast pace, but as is apparent, so is the menace of smuggling and counterfeiting. The socio-economic impact of these anti-social activities in seven critical Indian sectors namely auto components, alcohol, computer hardware, fast-moving consumer goods, mobile phones and tobacco. While illegal trade in auto components causes a loss of R9,198 crore to the industry, other figures are equally worrisome. The loss is R5,626 crore in alcohol, R4,725 crore in computer hardware, over R35,000 crore in FMCG (which includes both personal and packaged goods), R9,042 crore in mobile phones and R8,965 crore in tobacco. The total loss calculated from all sectors in 2012 alone is nearly R73,000 crore.
The losses to the government are steep as well. There is a loss of R3,504 crore in direct taxes and R22,686 crore in indirect taxes, amounting to a total tax loss of R26,190 crore to the government of India. The lack of adequate legislation, regulation, and particularly, enforcement and penalties are often invoked as weaknesses that smugglers and counterfeiters exploit. This is especially true for the legal systems of many economies in transition or in the development phase. There is also the need for greater cooperation between government, law enforcement agencies and the private sector companies to combat this global malaise.
If both the industry and the government are losing money, how is the consumer gaining Basically, counterfeiting is bereft of any qualitative property. The producers of illegal goods are not interested in creating quality products for the consumer, but to produce substandard goods in bulk which are attractive to consumers because of their discounted price. This then has an adverse effect on the health of consumers, particularly those who live at the margins. In three segments particularly auto parts, alcohol and tobacco, the impact on health is immediate, and more often than not, fatal. It is this insidious nature of smuggling and counterfeiting that needs to be immediately thwarted.
One step in this direction is to increase border surveillance and the number of enforcement agencies. The motives for consumers to buy smuggled or counterfeit products vary. While lower price and easy access are partly responsible for their choice to buy smuggled goods, the perception that counterfeit purchases rarely have a legal rider with little or no consequence makes this decision easier. A strong consumer awareness programme wherein a person is rewarded for reporting fake goods along with public awareness campaigns can go a long way in addressing this issue. The consumer has to be informed that this illegal industry is not generating victimless crime; it is in fact a syndicate which now has established terror linkages.
Every effort is made by smugglers/counterfeiters to demoralise and rip the spirit of legal manufacturers. The legal manufactures lose sales, goodwill and brand value, which is the most valuable asset of any company. They have to bear the expense of monitoring the market and institute legal proceedings against the infringers. All this has a spiralling impact as countries afflicted with smuggling and counterfeiting, suffer both tangible and intangible losses. Manufacturers of reputable products become reluctant to produce goods in countries where smuggling and counterfeiting are rife as there is no guarantee that their intellectual property rights will be safeguarded. This leads to a loss of huge capital investment, innovation and investments in R&D.
The penetration of organised crime into otherwise lawful economic sectors also has a pernicious impact on public morality. As contraband market develops, it puts significant pressure on retailers to either participate or go out of business. If they decide to join these activities, they could be forced to do other kinds of business with organised crime.
Basically, smuggling and counterfeiting destabilises trade, discourages innovation and potentially restricts growth and competitiveness of the economy. Here, it is imperative to talk about the direct correlation between terrorism, smuggling and counterfeiting. In a knowledge report by Ernst & Young titled Nexus between Terrorism and Proceeds of Counterfeiting & Smuggling, high taxation is mentioned as one of the key drivers of smuggling. This along with other factors is at play in most countries especially those in Asia, Africa and Eastern Europe and must be addressed urgently.
The author is chairman, Ficci Committee Against Smuggling and Counterfeiting Activities Destroying Economy