Where gory warning fails, cash crunch prevails: Cigarette sales down 40% after demonetisation

Legal cigarettes, which represent 11% of tobacco sector, contribute Rs 29,000 crore to the exchequer annually

What the government was not able to achieve by increasing the size of pictures and statutory warning on cigarette packs, it seems to have achieved by demonetising 500- and 1,000-rupee currency notes. In the first few days after these banknotes ceased to be legal tender, cigarette sales were down 75-95 per cent. The extent of the decline a fortnight after Prime Minister Narendra Modi's November 8 demonetisation announcement is hovering at 40-60 per cent.

At a time when valid currency notes are in short supply, and people are seen standing in serpentine queues at bank branches and ATMs to get some cash, cigarettes have received a major jolt. This is primarily because of the nature of this business—It is mostly cash-based, and credit is, in most cases, a strict no-no.

Earlier, in order to lower cigarette consumption among citizens, the government had decided to increase the size of pictorial warning on the packs. The mandatory size of these warnings was fixed at 85 per cent of the total space on one side of the packet. But sales were hardly impacted.

However, cigarette retailers are now feeling the heat of the Centre’s demonetisation drive. With high-value currency going out of circulation and smaller-denomination notes difficult to come by, people have gone frugal on their cash expenses.

Cigarettes are one of the largest revenue contributors to the government's coffers. According to the Tobacco Institute of India, legal cigarettes, which represent 11 per cent of the tobacco sector, contribute as much as Rs 29,000 crore to the exchequer annually. Excise duties collected from tobacco contribute Rs 14,000 crore, or 10 per cent of all excise revenues. 
 

Wholesalers burden vendors
 

At a time when black money hoarders are reeling under the prospect of their pile of cash turning into worthless
pieces of paper, some wholesalers have found a way around this too, to fill their own pockets. 
 

“Earlier I would buy tobacco products worth Rs 8,000 every day, but now wholesalers have stopped accepting cheques; they are demanding cash in the denominations of Rs 100 only,” Pawan Jain, a Delhi-based cigarette vendor, said. “I could buy cigarettes worth only Rs 1,000-2,000 a day. I have been incurring huge losses since demonetisation.”
 

Black to White

Pawan told Business Standard that most wholesalers in Delhi were doing so to make a commission of up to 30 per cent. 
 

Some retailers, who earlier accepted 500- and 1,000-rupee notes, eventually began rejecting them to avoid standing in long queues outside ATMs and banks. “Am I supposed to make money for my family or stand in long queues?” said Rajesh Shah, another cigarette vendor. 
 

Wholesalers charge more per box

“Earlier I used to earn a margin of Rs 10 per box, but that has reduced to Rs 7, as wholesalers have increased the cost of all tobacco products by Rs 3-5,” Shiv Prakash Mishra, a vendor, told Business Standard. The overall cost of per cigarette has risen by at least one rupee. 
 

Consumers’ plight 
 

With the recent change of events, bizarre as they might seem, not keeping liquid cash has become a common phenomenon. Therefore, the sale of cigarettes at retail outlets accepting credit and debit cards has increased 100-400 per cent, although this is mostly confined to certain urbanised pockets.
 

However, a majority of distributors operating in cities and rural areas are the worst hit, with consumers beginning to cut down on discretionary spending soon after the announcement, leading to a huge stockpile and halt of transactions.
 

“Since I had limited cash available, I could barely smoke two cigarettes per day and sometimes also resorted to cheaper brands,” says Zeeshan Khan, a resident of Delhi. 

“I normally buy loose cigarettes. After I withdrew a Rs 2,000 note and was not able to get a change for it from my local paan shop, I had to buy a full pack,” says Saalim Khan, a resident of Mumbai.

Another Mumbai resident, Koustav Das, agrees: "My friends and I are also having to buy full packets as getting hold of Rs 100 notes has become a task.”

Experts take 
 

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 with cheque or online payment modes, which will reduce under-reporting, according to an earlier Business Standard report. 

Illicit cigarette trade: While authorised industries laud the move, it is pertinent to observe that illicit cigarette trading that has a large share of the market is not much affected by the move. According to industry body Ficci, the size of illicit markets in cigarettes and other tobacco products – primarily cigarettes, chewing tobacco, bidi, khaini, cheroot – grew 28.7% from Rs 8,965 crore in 2012 to Rs 13,130 crore in 2014. 
 

The road ahead: The plight of the prevailing cash crunch has left no retailer and consumer untouched. However, as cigarette is a highly addictive product, its consumption is non-discretionary in nature, so the extent of the impact on cigarette sales will be witnessed in days to come, particularly after the Budget 2017, where goods and service tax is likely to be imposed at 28% . 

Snapshot of cigarette market in India

2014-2015	Volume (in million kg)	Percentage share in overall industry
Total tobacco consumption	562	100
Total legal cigarette market	62	11
Total non-duty paid cigarette market	22.5	4
Other forms of tobacco consumption	477.5	85