What limits value addition in India’s tobacco exports

Tobacco is one of our key agri-export items for which a designated export board, Tobacco Board of India, has been set up. India is the world’s second-largest producer and 5^th largest exporter of tobacco and tobacco products. In 2024-25, India exported $1.97 billion worth of tobacco and tobacco products globally, of which 26.2% was exported to the EU. The exports are heavily skewed towards unmanufactured (raw) tobacco, which accounted for 74.7% of India’s global total tobacco exports and 98.5% of exports to the EU. Manufactured tobacco accounted for 24.5% of global exports and 1.4% of exports to the EU, while tobacco/nicotine substitutes accounted for a meagre 0.8% and 0.1%, respectively. This is a cause for concern as there are limited exports of value-added products to the world and more so to the EU.

Value-addition in the country can lead to more investment, job creation and better earnings for farmers. Yet, India continues to export largely raw or minimally processed products, while processing, packaging, branding and market-specific preparation often takes place outside India. As global trade increasingly rewards value-added products over raw commodity exports, India’s competitiveness will depend on moving up the value chain.

Export markets like the EU ensure that value addition is in its member states through smart tariffs, which allows the entry of raw material and intermediate goods, but restricts the entry of value-added goods. While the India-EU trade deal has been able to reduce tariffs in many agri-commodities, tobacco and tobacco products are kept in EU’s sensitive list with no tariff reduction. This is done to meet the EU Tobacco Products Directive (TPD), which is aligned with the WHO Framework Convention on Tobacco Control (FCTC) and the EU’s 2040 tobacco-free generation goals under Europe’s Beating Cancer Plan. Although tobacco substitutes had high demand and relatively free play in many EU member states, creating export opportunities for some Indian companies to enter this segment, the EU is now planning to restrict entry of these products to meet its 2040 goal. Thus, the possibility of getting market access for value-added Indian tobacco exports through the trade deal is low.

An ongoing survey by the authors mapping Indian tobacco exports to the EU found that value addition is either happening in the EU or in other destinations like the UAE and then shipped to markets like the EU, UK and USA. The UAE’s Jebel Ali Free Zone offers an example where manufacturers get duty-free access to source tobacco varieties from multiple countries and blend them to meet product specifications and consumer preferences. Consequently, activities such as blending, packaging, branding and market-specific preparation happen here after sourcing raw and unmanufactured product from India. India has import tariffs that prevent value-addition in the country. Like the UAE, we do not have export processing zones.

Another challenge is the evolving EU regulations. For instance, in August 2026, the EU came up with the Packaging and Packaging Waste Regulation (PPWR), on sustainable packaging, and adhering to this and other forthcoming regulations is an issue for Indian producers. The EU’s Corporate Sustainability Due Diligence Directive (EUCS3D) will be implemented soon, which requires EU importers to do detailed environmental and social audits of their backward and forward supply chain. Indian companies are trying to cope with the changing regulatory requirements, and investing in moving up the value chain for the export market has taken a back seat.

India has strong capabilities in tobacco cultivation, curing, processing, and developing value-added products, which mostly cater to the domestic market. The domestic market is growing, and hence the industry and Tobacco Board of India are happy with business-as-usual scenario.

Where legally permitted and technically viable, processing tobacco into finished goods within India may benefit farmers through higher prices or cooperative processing mechanisms. India could assess transitioning into a producer of finished, branded, and standards-compliant tobacco and nicotine products for select international markets. Tobacco Board of India may work with companies to identify markets for value-added products. Stakeholders have to work together to enhance and secure India’s position as a credible supplier of differentiated, traceable and sustainable tobacco and tobacco products. India’s tobacco sector should urgently transform into a technologically modern, globally competitive, and economically significant agri-industrial system.

Moving up the value chain requires investment, technology, state-of-the-art processing capabilities and stronger linkages between farmers, processors, exporters and importers. In tobacco, regulations governing manufacturing, licensing and investment are designed to balance economic activity with public health objectives. However, value addition for exports can also fit into this objective, as seen in some companies in Gujarat that have moved into nicotine processing for smoking-cessation applications and exports. Therefore, Tobacco Board of India should identify legally permitted and commercially viable pathways to create and retain greater value domestically.

Experiences from India’s competitors like Brazil and Zimbabwe demonstrate that integrated production systems, supported by technical assistance, quality improvement, processing infrastructure and assured market linkages, can enhance value capture while improving farmer participation in export-oriented supply chains.

For India, the priority should be to identify value-addition opportunities that are legally permitted, commercially viable and consistent with public health objectives. This includes strengthening domestic processing capabilities, improving quality-based pricing, enhancing traceability and fostering closer coordination between farmers, processors and exporters.

The authors are Professor, and Research Associate, Indian Council for Research on International Economic Relations (ICRIER), respectively.

Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.