Even as the Indian government does everything it can to help the economy recover from the impact of Covid-19, it is also battling another issue resulting in loss of revenue to help support public and social welfare programmes: contraband and counterfeit goods.
The growing menace of contraband and counterfeiting of goods
The 2019 “Invisible Enemy” report by the Federation of Indian Chambers of Commerce and Industry (FICCI), revealed that contraband and counterfeit goods caused losses of government revenue to the tune of ₹5,726 crore in the textiles industry, ₹5,509 crore in the readymade garments industry, ₹8,750 crore in the cigarettes industry, ₹18,425 crore in the capital goods industry, and ₹9,059 crore in the consumer durables industry during fiscal year 2017-18.
Additionally, a report by Authentication Solution Providers’ Association, indicated a 24% increase in counterfeiting incidents in 2019 as compared to 2018, while a 2019 report from Euromonitor ranked India as the fourth largest and fastest growing illegal cigarette capital of the world. Illegal trade in cigarettes has more than doubled from 12.5 billion sticks in 2005 to 26.5 billion sticks in 2018, resulting in an annual revenue loss of ₹13,000 crore to the Indian government.
Impact of illicit trade on livelihood, health, and society
Illicit trade led to the loss of almost 5,01,000 jobs in the aforementioned five industries in 2019, with readymade garments and cigarettes suffering the largest losses. Illicit trade has also negatively impacted farm-based industries. The only beneficiaries of illicit trade are manufacturers of counterfeit goods, smugglers who bring these goods into the country, agents that facilitate the distribution of these goods, and the financiers of these transactions, who operate hawala networks.
When buying illicit goods, consumers inadvertently contribute to a parallel cash economy. The cash often used to purchase illicit goods is frequently diverted towards criminal activities. Moreover, consumers who buy counterfeit products for the “imported” tag may be putting their own health and safety at risk. Often, the buyers or retail sellers of such “imported” products are unaware that they might be contraband or counterfeit.
The issue of contraband cigarettes in India
Contraband cigarettes are primarily smuggled into India through countries such as Nepal, Bangladesh and the U.A.E. There is no single criminal syndicate in India that smuggles cigarettes into the country. While the broad contraband cigarette supply chain structure is similar across the region, the key players vary from city to city.
The Indian government has implemented several anti-illicit trade measures over the years and is more engaged in this effort with the advent of Covid-19. Seizures of illegal cigarettes from June-October 2020 increased by almost 800% as compared to the same period in 2019. Furthermore, the current lockdown has contributed to restrictions surrounding the supply of contraband cigarettes into and within the country.
Arbitrage between legitimate and illicit products
Taxes typically constitute over 60% of the sale price of a pack of 20 cigarettes in India. According to a 2019 report, “Causes & Control of Illicit Tobacco,” there is a 98% correlation between the levels of taxation and retail prices, which impacts the affordability of cigarettes. Contraband cigarettes evade taxes and duties while exploiting arbitrage through illicit trade. Stricter action against illicit trade can reverse the risk-reward ratio and arbitrage to help deter illicit trade.
The message is clear. Illicit trade has significant economic and social costs that are detrimental to the nation. Despite strong measures taken by the government, illicit trade continues to scar the economy and restrict its growth. It would be wise to prioritise implementing an integrated approach based on stronger enforcement, strategic industry partnerships, and concerted efforts to strengthen consumer awareness. As India charts its path towards economic revival and growth, the pillars of teaming, education, and enforcement could help prevent illicit trade from becoming an intractable menace.
Views are personal. The authors are managing directors in Alvarez & Marsal’s Disputes and Investigations Practice.
