India is one of the world’s largest consumers and producers of tobacco, with 267 million (26.7 crore) people using some form of it.
Published Oct 09, 2024 | 7:00 AM ⚊ Updated Nov 26, 2024 | 2:22 PM
Representative image
There is a common belief in India that the government does not ban tobacco products because it generates a large amount of revenue from taxes, which is then spent on public welfare.
However, a study by Indian health economists presents a different view. While they acknowledge that reducing tobacco consumption may initially impact the country’s GDP, they argue that in the long run, it will lead to an increase in GDP.
The study found that a 10 percent reduction in tobacco consumption would initially negatively affect GDP and employment. Specifically, a tax on tobacco consumption would reduce GDP by 0.14 percent and employment by 0.44 percent. Similarly, taxing raw tobacco would result in a 0.12 percent decrease in GDP and a 0.42 percent reduction in employment.
However, these initial losses are offset by the positive economic effects of averted premature deaths caused by reduced tobacco use. When factoring in the increased labour force participation due to fewer tobacco-related deaths, the net impact on GDP is a 0.22 percent increase, with a net gain of 1.36 million jobs over five years. Under a less conservative assumption, where 50 percent of tobacco users are assumed to die prematurely, the net GDP gain rises to 0.37 percent, with employment increasing by 1.51 million jobs.
“The tobacco industry has always exaggerated the importance of its sector in the Indian economy, sometimes even using published, non-transparent reports. However, it has never considered the positive gains from tobacco control policies and the resulting health benefits at a macroeconomic level. This study shows that reducing tobacco consumption through tax increases—whether on final tobacco products or raw tobacco—has a positive impact and will increase GDP when health gains are factored in,” the authors stated.
The study was led by Kerala-based health economist Dr. Rijo M. John, along with Badri Narayanan from Boston College, USA, with funding from the WHO.
India is one of the world’s largest consumers and producers of tobacco, with 267 million (26.7 crore) people using some form of it. The country ranks second in tobacco consumption after China, making up 19 percent of the world’s adult tobacco users. Additionally, India is the third-largest tobacco producer, contributing significantly to the economy through employment, tax revenue, and trade.
In 2021, the combined contribution of bidis, cigarettes, and smokeless tobacco to India’s total production was 0.32 percent, while their share of total consumption was 1.05 percent. The tobacco sector accounted for 2.2 percent of total employment, with the bidi sector employing the largest number of workers. However, cigarettes were the biggest contributors to tax revenue, making up 91 percent of the sector’s total tax contributions.
Despite these economic benefits, tobacco use has significant health and economic costs. India suffers from approximately 9,30,000 deaths annually due to smoking-related diseases, and an additional 350,000 deaths linked to smokeless tobacco use, amounting to 3,500 deaths each day.
The economic burden from tobacco use is staggering, estimated at Rs. 1.77 lakh crore, or 1 percent of India’s GDP. This includes direct healthcare costs and indirect costs like lost productivity due to illness and premature death.
The authors of the study note that the affordability of tobacco products has increased since the introduction of the Goods and Services Tax (GST) in 2017, with marginal tax increases in 2021 and 2023. This rise in affordability is a concern as it counteracts efforts to reduce tobacco consumption.
Although tobacco contributes economically, its severe impact on public health and the resulting economic losses have prompted calls for stronger tobacco control policies. The National Health Policy (NHP) 2017 set an ambitious target of reducing tobacco use by 30 percent by 2025 to address these concerns.
This study investigated the economic effects of reducing tobacco consumption in India to 10 percent by the year 2026, using fiscal measures like tax increases. To do this, researchers employed a Computable General Equilibrium (CGE) model based on the Global Trade Analysis Project (GTAP) framework.
A CGE model is a tool used by economists to see how changes in one area of the economy impact other sectors. For instance, if the government raises taxes on tobacco, the model predicts how this change would affect jobs, prices, production, and other parts of the economy beyond just the tobacco industry. It essentially shows the “ripple effect” of such policies, helping policymakers understand the broader implications of their decisions.
The study examined various macroeconomic outcomes of the 10 percent reduction in tobacco use, focusing on impacts on GDP, employment, and tax revenue.
Two policy options were explored to achieve this reduction:
By analysing these two approaches, the study aimed to provide insights into which fiscal strategy would best balance economic and public health outcomes.
The study found that the proposed tax increases on tobacco products would generate substantial additional revenue for the Indian government. A tax on tobacco consumption is projected to bring in an extra US$2.7 billion, while taxing raw tobacco would generate an additional US$2.1 billion. These figures highlight that fiscal measures aimed at reducing tobacco consumption would not only improve public health but also provide a significant financial boost to the government.
When examining the sectoral impacts, the study reveals that reducing tobacco consumption would result in job losses, particularly in the bidi industry, which employs the majority of workers in the tobacco sector. Employment in the bidi sector is expected to decline by 8.4 to 9.3 percent, leading to approximately 640,000 to 709,000 job losses over five years. The cigarette industry would face job losses of 8 to 8.4 percent, resulting in around 74,000 to 78,000 fewer jobs. The smokeless tobacco sector would experience smaller job losses, ranging from 23,000 to 26,000.
However, these job losses are more than compensated by job gains in other sectors. The health sector, for instance, would see a rise in employment as demand for healthcare services increases due to improved public health outcomes. Additionally, the overall increase in labor supply from averted deaths would contribute to job creation across various sectors of the economy.
“For the government of India to achieve its target of significantly reducing tobacco consumption, it is essential that tobacco taxes be increased more substantially and regularly across all tobacco products,” said the authors. They also emphasised that such tax increases would be a win-win for the country, delivering long-term macroeconomic benefits through net increases in both GDP and overall employment.
(Edited by Neena)
