Tobacco Elasticites in India

Topics: Tobacco, Cigarette, Price elasticity of demand Pages: 5 (2065 words) Published: July 16, 2013
Tobacco Elasticities in India

The taxes imposed varies depending upon the type of product. In the market there are different kinds of cigarettes which are of different lengths and different quality. According to the table 3.5 ITC deals with 5 different kinds of cigarettes which have different kind of taxations and the fluctuations in price also varies according to market powers. As the table 3.1 shows the increase in the excise duty which might surely affect the price of the product. If we consider Unfiltered cigarettes of size < 60 mm there is a increase of 411 % during the time period of 2007 – 09, and if we consider the cigarettes of length 60 – 70 mm in the same given period, there is an increase of 154%. In case of filtered cigarettes of different lengths of greater than or equal to 70 mm to less than 85 mm and cigarettes of tobacco substitutes, the excise duties are constantly increased by 5% over the couple of years in the product tiers. In case of bidis other than paper rolls there is a decrease in the taxation by 7.6%, also in all other bidis which are machine made there is a decline of 6.25%. If we take in consideration gutka tobacco and other chewing tobaccos in the span of 3 years the taxation is constant. While checking the change in percentage it is clearly seen that only in the case of bidi there is a deduction or relief in the taxation provided by the government, because many small scale industries make bidis and give employment to more people. According to table 3.5 different kind of cigarettes have different kind of ups and downs. In cigarettes like India Kings and Gold Flake which are 75-85 mm had got increased from the time period 2001 to 2007. If we consider Navy cut a cigarette of 70-75 mm size has also seen a major fall in 2007 after a uniform hike from 2001 to 2006. Less than 70 mm cigarettes like Gold Flake small and Wills flake have different aspects of rise and fall respectively. Panama the oldest cigarette has got the minimum percentage of excise duty. If we consider the future prospects in rural market mostly there has been a decline in the excise duty of cigarettes else than India King and Panama. On rough hand the cigarettes which had declined in excise duty in last couple of years belongs to ITC. But considering the rural area the purchasing power of rural people is not that high. If we see the rise in excise duty in bidi from 2001 to 2007 it is near about double, but after 2007 for 3 consecutive years it declined. Since government understood that people who smoke cannot quit smoking, so the government thought that they should shift people from unfiltered cigarettes to filtered cigarettes as it would not be so harmful to peoples’ health as compared to unfiltered cigarettes. It is clearly seen that in 2008-09 the tax for unfiltered cigarettes and filtered cigarettes have been brought to 819 rupees irrespective of the size. As stated above we can infer that the rise in excise is more in bidi, but then also it would be cheaper for rural consumer as the increase in price is not that significant, so ITC should go with bidi and not cigarette to rural people because rural Indian cannot afford to purchase cigarettes but even if price hike occurs it can reduce little bit of their consumption and carry on with bidi without a large sacrifice in daily life with very minimum opportunity cost. Rural people have to stick with bidi because they don’t have any close substitute at that price. If ITC goes with cigarettes to the rural area and tax rate hike occurs like of year 2007-08 to 2008-09 it might result in heavy loss to ITC since taxation is not under its control. 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? Rural| Urban| Pooled Sample|

| Bidis | Cigarette| Lt*| Bidi| Cigarette| Lt*...
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