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Does it help to hike tobacco prices?

india Updated: Jul 10, 2014 20:24 IST
Vishakha Saxena
Union Budget 2014-15

Around the world, the tobacco industry has always been the favourite whipping boy of finance ministers looking to mop up revenues. It’s an easy horse to flog without any moral compunction. So it was no different when finance minister Arun Jaitley raised prices of tobacco products steeply, especially that of cigarettes in his maiden budget on Thursday.

The moral justification of burdening the tobacco industry with high taxes year after year is that it would act as a deterrent for smokers or chewers. But, in reality, does hiking prices reduce tobacco use?

To use an economic yardstick, much like a country’s demand for petroleum products or essentials like salt, the demand for tobacco is ineslastic, meaning that demand for these products does not increase or decrease with a fall or rise in their price.

While essentials such as salt and sugar are staple, tobacco consumers are addicts who may bear the brunt of repeated hike in prices but not necessarily give up consuming the products. At best some may moderate their use, which does mean there is no significant drop in tobacco use.

In all this, the winners are the tobacco companies whose bottom line is hardly affected because of higher taxes and governments who rake in revenues.

In his maiden budget, Jaitley proposed to increase the specific excise duty on cigarettes in the range of 11% to 72%. He also announced an excise duty increase on pan masala from 12% to 16%. Similarly, duty on unmanufactured tobacco was increased from 50% to 55% and from 60% to 70% on gutka and chewing tobacco.

"I didn't have much sympathy for cigarettes, pan masala, gutkha,” Jaitley told Lok Sabha TV in an interview, banging the same moral drum that many finance ministers before him have.

“You can live without them."