Cos up in arms as Centre mulls ban on FDI in tobacco

The government is likely to ban foreign direct investment (FDI) in wholesale trade in tobacco shortly at the insistence of the health ministry.

The government is likely to ban foreign direct investment (FDI) in wholesale trade in tobacco shortly at the insistence of the health ministry. The Department of Industrial Policy and Promotion (DIPP) may notify the changes once inter-ministerial consultations on the subject, currently underway, are over.

However, the move is sure to be opposed by a clutch of domestic as well foreign tobacco firms, which see it as a step to encourage monopoly by a single cigarette manufacturer. Even trade bodies, such as the US-India Business Council (USIBC), have opposed the move, saying that if the argument is ?health?, how can differentiation be done between domestic and foreign firms.

Those opposed to the move also argue that India may end up risking trade rules of the World Trade Organisation, something that may see several countries blocking tobacco exports from the country. For instance, India’s trade pact with Singapore under the Comprehensive Economic Cooperation Agreement (CECA) allows for wholesale trade in tobacco. How the government handles it remains to be seen. Sources said that commerce and industry minister Anand Sharma is visiting Singapore later this week and may seek a review of this clause.

Critics of the move say that India?s annual tobacco exports are around R4,000 crore against imports of only R100 crore, so the government should carefully think before taking any such step.

Since 2010, foreign direct investment (FDI) in cigarette manufacturing is not allowed. Cigarette manufacturing is a licensed industry, which means that manufacturing cannot be done even domestically unless the government gives licences to manufacturers.

The policy has been generally of not encouraging cigarette manufacturing by giving either fresh licences or allowing incumbents to increase their capacity.

Industry sources said that the last time licences were given was some 8-10 years back.

The total manufacturing licensed capacity in the country currently is around 1 billion, but only 30-40% of this is being utilised. This means that apart from banning FDI in cigarette manufacturing, the policy framework neither allows any new domestic player to enter the fray nor permits the existing ones to expand.

However, in wholesale trade through the cash and carry format, 100% FDI is allowed under the approval route. After the 2010 ban on manufacturing, the health ministry has been wanting a ban on wholesale trade too. Even the law ministry has favoured the move.

Under wholesale trade, companies import products and retail them. However, most companies with cash and carry outlets, such as Godfrey Philips, follow a hybrid model ? they import tobacco, manufacture within the country and then export. Besides, they also have brand licences with MNCs to do domestic manufacturing and they also import and retail through their cash and carry formats.

If the ban in wholesale trade sees the light of the day, they would need to re-organise their business models.

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First published on: 14-05-2013 at 03:08 IST