Just came across one report called Economics of Tobacco and Tobacco Taxation in India (a Bloomberg initiative) which claims that almost two crores lives could be saved in India over the next few decades if the taxes are raised on bidis and cigarettes. It also says that internationally 65-80 percent of cigarette’s retail price could be attributed to taxes which are very low in India i.e. 9 percent for bidis and 38 percent for cigarettes.
Basic theme of the report is that higher prices will discourage youth from taking up smoking and force current smokers to quit. Report also goes on to mention some figures as to how the revenue of the government will increase manifold and thousands of lives will be saved after doing this: 10% rise in the price of tobacco is expected to reduce bidi consumption by 9.1% and cigarette by 2.6% and if India increases its tax rate on bidis from Rs 14 to Rs 98 per 1000 sticks (from 9% to 40% of retail price) and on cigarettes from Rs 659 to Rs 3691 per 1000 sticks (from 38% to 78% of retail price), 18.9 million lives will be saved.
But I have my own reservations about the claims made by the report. One of them being the price elasticity mentioned in it as I doubt whether a 10% increase will have any impact on cigarette sales as mentioned (I am not considering the bidi sales as non-cigarette tobacco products accounting for 85% of the tobacco consumption contributes only 15% of the total tobacco taxes) as someone who has been smoking for a while is not likely to quit smoking just because the price has increased. Even if we assume that this data on elasticity is true, the increase in price that is suggested in the report is practically impossible to implement overnight. One worse scenario that is possible is something which happened in Canada when similar price increase was undertaken. Suddenly there was a boom in the contraband cigarettes market there. Illegal sale of cigarettes not only led to the loss of revenue for the government in the form of taxes, it also made it possible for minors to buy cigarettes easily and cheap in the black market. Occurrences of cigarette butts being found near schools and playgrounds increased drastically. So obviously illogical increase in the retail price of cigarettes could lead to the same in India as well and at the same time minor increase in the price just for the sake of it would not impact consumption. It will increase revenue for sure but may not serve the actual purpose i.e. decrease in consumption.
Basic theme of the report is that higher prices will discourage youth from taking up smoking and force current smokers to quit. Report also goes on to mention some figures as to how the revenue of the government will increase manifold and thousands of lives will be saved after doing this: 10% rise in the price of tobacco is expected to reduce bidi consumption by 9.1% and cigarette by 2.6% and if India increases its tax rate on bidis from Rs 14 to Rs 98 per 1000 sticks (from 9% to 40% of retail price) and on cigarettes from Rs 659 to Rs 3691 per 1000 sticks (from 38% to 78% of retail price), 18.9 million lives will be saved.
But I have my own reservations about the claims made by the report. One of them being the price elasticity mentioned in it as I doubt whether a 10% increase will have any impact on cigarette sales as mentioned (I am not considering the bidi sales as non-cigarette tobacco products accounting for 85% of the tobacco consumption contributes only 15% of the total tobacco taxes) as someone who has been smoking for a while is not likely to quit smoking just because the price has increased. Even if we assume that this data on elasticity is true, the increase in price that is suggested in the report is practically impossible to implement overnight. One worse scenario that is possible is something which happened in Canada when similar price increase was undertaken. Suddenly there was a boom in the contraband cigarettes market there. Illegal sale of cigarettes not only led to the loss of revenue for the government in the form of taxes, it also made it possible for minors to buy cigarettes easily and cheap in the black market. Occurrences of cigarette butts being found near schools and playgrounds increased drastically. So obviously illogical increase in the retail price of cigarettes could lead to the same in India as well and at the same time minor increase in the price just for the sake of it would not impact consumption. It will increase revenue for sure but may not serve the actual purpose i.e. decrease in consumption.
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