ECONOMICS Taxation of Tobacco in India

SECTION C- GROUP NO. 6

GROUP MEMBERS

Aditya Jain Adwait Khare Darshan Ganatra Pranshu Sharma Sarang Sorte Sushant Arora Tushar Kango Vikrant Gosain

- 13A1HP046 - 13A1HP075 - 13A2HP009 - 13A1HP017 - 13A3HP013 - 13A3HP044 - 13A1HP069 - 13A3HP047

Question #1 Interpret table 3.1 and 3.5. Evaluate the future prospects of ITCs tobacco products in the rural areas based on the numbers in these two tables. Write a brief report explaining ITCs rural market potential based on the numbers in the case. The future prospects and market potential of ITCs tobacco products are as under: #1 Unfiltered cigarettes The taxes on unfiltered cigarettes has exponentially increased by 411.87 % for length <60mm and 154.42 % for length 60-70 mm. Due to this rise in taxes the demand for unfiltered cigarettes will go down making this product relatively elastic in nature. Hence, ITC should put the production of unfiltered cigarettes on the backburner. #2 Filtered Cigarettes There has been a meager 5% rise on the taxes of filtered cigarettes of various lengths. The demand remains relatively inelastic in nature as the consumption of filtered cigarettes is only 16 % in rural area. Hence, ITC should concentrate on upscaling the production of filtered cigarettes. #3 Bidis Consumption of Bidis is relatively high in rural areas. Taxes have been decreased on Bidis and the retail price of tobacco used in Bidis is 0.48. Conclusion To check falling sales, ITC Ltd should explore opportunities to launch a new category of cigarettes and is also raising the prices of some brands. ITC should create a new filter cigarette segment of less than 60mm size. This proposal will help the company tap non-filter smokers and bidi consumers.

Question #2 Based on the price elasticity estimates in table 4.2, explain own and cross price elasticities for the tobacco products (bidi, cigarette and leaf tobacco). Assume a hike of 5% on bidis and 15% on cigarettes, how would the young consumer react?

Based on the price elasticity estimates of table 4.2, if the price of bidi increases by 5% the demand will decrease by 4.6% thus inferring that bidi is relatively elastic in nature. Let us now consider the price elasticity of cigarette with respect to youth, it is relatively elastic in nature. As the price of cigarettes increases the demand among youth will be decreased relatively. So if the price of cigarettes increase by 15 % the demand will decrease by 5.22 % The price elasticity of leaf tobacco is -0.833 thus assuming that if there is a 10 % hike in its price then the demand will be reduced by 8.33 %. Thus price elasticity of leaf tobacco is perfectly elastic in nature.

Bidi 5% Increase in price of Bidi

Cigarette 0.3% Decrease in Demand

Leaf Tobacco 0.001% Decrease in Demand

3% decrease in demand of 15%Increase in Price of 0.03% Increase in Demand of Bidi Cigarette Tobacco leaf

A 5 % hike in bidis price will result in 0.3 % decrease in demand of cigarettes and 0.001 % decrease in demand of leaf tobacco, thus suggesting that the cross elasticity is negative in nature. A 15 % hike in the price of cigarette results in 3 % decrease in demand of bidi but a 0.03 % increase in demand of tobacco leaf. So the cross elasticity of cigarette and bidi is negative in nature and cross elasticity of cigarette and tobacco leaf is relatively positive in nature.

Young consumers will not react to the increase in price as we see that the own elasticity of these products is relatively inelastic. Question #3 Raising taxes on tobacco products saves lives and increases government revenue. What are the pros and cons of such a view point? Health Benefits - Smoking taxation will result into lesser consumption and thereby lesser instances of deaths and hospitalizations Helps to Quit Smoking - Smoking taxation as a law will automatically reduce the number of cigarettes that an individual smokes per day. Saves Money - On the individual level, money is saved as lesser (or no) cigarettes are purchased. This money may, in turn, be utilized for some other productive purposes. Decreases Pollution and Fire Hazards The smoke that is exhaled by an individual while smoking contains harmful substances that pollute the air around. Fire is a risk when more and more people smoke because we are surrounded by innumerable flammable materials The Cons The following are some of the cons of the taxation: Economic Impact It is the hospitality industry that the smoking taxation seems to affect the most. People who smoke, are often major patrons of cafs, bars, and restaurants, and the number of these patrons tends to diminish when a smoking taxation is imposed. The reduction in the number of patrons would earn them lesser profits, thus leading to financial difficulties. Moreover, if these difficulties go on increasing by the day, some of the businesses might also consider permanent closure. In such cases, the risk of more and more employees losing their jobs is elevated. The job market would, in turn, generate much lesser jobs, leading to a rise in unemployment. The government earns a lot of revenue through the sale of tobacco and cigarettes. The taxation results in a major drop in this revenue.

Personal Right Nonsmokers, in order to avoid inhaling the smoke, may prevent themselves from going to places that allow smoking. High taxing only smoking as a potential health hazard is a little absurd as there are some other substances as well (alcohol), which pose similar health hazards. Difficult to Implement Though a smoking taxation may seem like a brilliant idea to control the potential dangers, it is not always easy to implement at all places.

Question #4 Public health vs Increased revenues. What are the opportunity costs of this trade off? The term opportunity cost refers to a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. A trade off would refer to the most preferred alternative given up by fully weighing both the upside and downside of a particular choice. It involves a sacrifice that must be made to obtain a certain product, rather than other products that can be made using the same required resources. In context of public health vs increased revenues for the tobacco products, the opportunity costs for choosing public health could be the compromise on revenue. However, studies show that, Tobacco tax is a highly reliable and predictable source of revenue. While developed countries often have several avenues of generating revenue, low income countries often receive little revenue from taxes and may seek to increase a 'sin tax' mainly to raise much needed cash. In such cases, the reduction in tobacco consumption may be a positive by-product. It is relevant examine the impact of tobacco use on the standard of living of low income households and the second-hand effects on the family members of tobacco users, apart from the detrimental health effects. Tobacco users, especially from lower socio-economic strata invest scarce household expenditures on tobacco, rather than on essential expenditures. Studies have also found that tobacco expenditures have high opportunity costs and reduce the nutritional status of low income households by reducing expenditures on food in lieu of tobacco products