The reported move by the government to allow foreign cigarette companies into India, alongwith FDI, will provide competition to existing players in the Rs 17,500 crore industry. The term ?players? in the previous sentence, some would say, is an exaggeration. There is really just one major player, a monopolist for most practical purposes, called ITC Ltd. Cigarettes being addictive, a marketshare of anything close to two-thirds is akin to a licence to print cash. Letting foreign companies set up full-fledged operations in India, via joint ventures or otherwise, may help restore some balance to the state of play in this domestic market. Philip Morris and British American Tobacco (Bat) have tried to gain smoke suction share in India, only to fail. Bat?s attempt to take management control of ITC famously floundered, while Philip Morris has been unable to gain much share with Marlboro imports.
Some observers have responded to the proposal with horror, citing a health scare in arguing for the retention of market restrictions. ?Why burden India?s public health infrastructure?? they ask. The question reveals a misunderstanding of how a free market operates. While more competition could mean an expansion of the market, it also incentivises companies to behave in a manner that could win the favour of assorted audiences, including smokers. The likelihood of safer tobacco innovations, or for that matter of more responsible surrogate advertising, is much higher if companies fear a loss of business to rivals. The Indian cigarette market, growing currently at a sedate 6% annually, will not go into overdrive only because foreign brands are easily available. In fact, new firms are likely to vie for the same smoker?s attention, with brand conversion being the name of the game. Competition is also likely to come as relief to roadside kiosks that have been under ITC?s thumb, and loosening the company?s distribution stranglehold might dampen resistance to change in the retail sector overall, which deserves a restructuring of business margins in favour of retailers. The anti-smoking lobby would obtain better results by insisting on effective public service counter-campaigns. The market has its mechanisms to curb the habit. Choking production, like driving sales underground, tends to have perverse effects, as alcohol prohibition in Gujarat has shown.
