By M.V.Ramakrishnan

Wednesday, July 26, 2017

Manifestation Of The British Tobacco Empire In Independent India

In the preceding post (When & How Chairman Haksar Wrote His Monumental Essay On Art & Culture), I had described the Sangeet Research Institute, Calcutta, as follows:-

A music-research unit in India's leading tobacco company  (ITC) : a corporate contribution to Indian culture, meant to dilute adverse impressions arising from certain negative aspects of the company's cigarette business.

The Company is also regularly organizing an annual festival of Indian classical music in major Indian cities by rotation, creating a highly visible spectacle, as part of its clever cultural camouflage.
Another way the company tries to obscure its true character is by diversifying its business into other fields like consumer goods and hotels, and also by abandoning its real name Indian Tobacco Company, and (rather naively!) calling itself simply ITC.  Actually its original name before 1970 was Imperial Tobacco Company of India, but hardly anyone remembers that fact!

The negative aspects of the British-influenced company's cigarette manufacturing business concerned the alarming health hazards it was posing, and also the harm it was causing by paying ridiculously low prices to indigent Indian tobacco farmers. Moreover, severe distortions in the context of raw tobacco leaf exports (effected through a subsidiary firm) had very sinister economic, social and moral implications.

I had thoroughly researched the whole export scene in the early 1970s from a performance-audit angle, and had recalled that exercise in my column India of C-A-G in THE HINDU in 1995:-


Glossary and annotations  
(in same order as in text)

The Capital  --  New Delhi.

One lakh tonnes  --  In India, even when we write in or speak English, in two cases of numerals we adopt or adapt native Hindi-language expressions.  Thee are :-  lakh (same as in Hindi, meaning a hundred thousand, written down as 1,00,000), and crore (anglicized form of karod in Hindi. meaning ten million, written down as 1,00.00.000).  There are no plural forms, and even in English we have to say '2 lakh' or '3 crore', and not '2 lakhs' or '3 crores' -- though in actual practice both versions are used.  As for the singular, we never say 'a lakh' or 'a crore', but invariably 'one lakh' or 'one crore', just as in Hindi.

Andhra Pradesh  --  A tobacco-growing State in South India.

Madras  --  Old name of Chennai, to which some of us Madrasis desperately cling even now.


14 April 1995

India of CAG

Tobacco, tobacco!

The late Mr. A. Baksi, who was the Comptroller and Auditor-General of India from 1972 to 1978, was a chain smoker.  He was fond of thin cigars and long cigarillos.  He would light them one after another and keep puffing away endlessly.  There was always a gray, warm haze of tobacco smoke in his room in the office, which used to make some visitors feel quite uncomfortable!

During Mr. Baksi's  entire six-year tenure as CAG, I was working in a field audit office in the Capital, and undertook certain innovative audit investigations, particularly in the context of the Government of India's financial assistance for exports.  In 1975, Mr. Baksi held a meeting with Mr. G.N. Pathak, Accountant-General and myself, to discuss certain significant aspects of India's tobacco exports, about which a very adverse impression had crystallized in the course of my research.  Mr. H.B. Bhar, Deputy CAG, was also  present. And the story I told them was certainly intriguing!

Mother and sister companies

Flue-cured Virginia (FCV) is the most important category of tobacco in the world, and is the basic leaf in the manufacture of cigarettes.  In 1973 India was the fourth biggest producer of FCV in the world, after China, the U.S. and Canada.  Raw tobacco (mainly FCV) was a major item of India's exports in the Seventies, the United Kingdom being the largest importer of Indian tobacco.

In 1973-74, India produced about one lakh tonnes of FCV, and exported about 70,000 tonnes.  Of this, 28,000 tonnes went to the U.K., while substantial quantities were exported to other countries where subsidiaries or associates of the London-based Imperial Tobacco Company and British American Tobacco Company were located.  The National Council of Agriculture in India had once cited the 'common knowledge' that India's FCV was among the best in the world.

There was no tobacco cultivation in the U.K., which was the world's second largest importer of raw tobacco, after Germany.  Nearly all British cigarettes were manufactured from high-grade FCV, imported mainly from the U.S., Canada and India.  India's share of such imports was 12.5 per cent in 1972.  Imperial Tobacco Company (ITC) controlled more than 65 per cent of the British tobacco industry, which earned the highest profits among all British industries that year.

British American Tobacco Company (BAT) was very closely associated with Imperial Tobacco Company, and was looking after the latter's foreign trade.  BAT held a substantial share of the equity of India Tobacco Company (now called simply ITC).

Colonial setting

India's biggest exporter of FCV tobacco in the Seventies was the Indian Leaf Tobacco Development Company (ILTDC), located in Andhra Pradesh.  This firm was wholly owned by India Tobacco Company ;  in other words, it was also under the full control of BAT and the indirect influence of British Tobacco Company.  (Later on it was merged with India Tobacco Company as the ILT Division).  Year after year it used to win the Commerce Ministry's trophy for the best tobacco export performance.

The prices at which ILTDC used to export unmanufactured Indian tobacco of the highest quality to its major markets abroad had been conspicuously low for a very long time, compared to the prices of similar grades of tobacco exported by other countries. Moreover, during 1966-72,, when the prices of U.S., Canadian and Korean FCV exports to the U.K. shot up by 50 to 100 per cent, the price of Indian FCV exports to that country went up -- believe it or not! -- by less than 10 per cent.

ILTDC was also paying extremely low prices to the tobacco-growers, as indeed ITC and all other cigarette manufacturers in India were doing.  Surely that was how it was able to export raw FCV tobacco to associated cigarette manufacturers abroad at absurdly low prices!

Floor prices, a farce

From 1963 the Government had been fixing minimum export prices (MEP) for unmanufactured tobacco, thereby giving a wrong impression to the world at large that India was securing very reasonable export prices.  These values used to be specified annually by the Commerce Ministry on the basis of recommendations made by the Tobacco Export Promotion Council, Madras. .

The Chairman or Vice-Chairman of the Council used to be the Managing Director or some other senior official of ILTDC, which had a strong bias for setting extremely low prices for its allied firms abroad.  (The Tobacco Board was constituted in 1976, and one of its functions was to fix proper export prices, but the trade continued to exert great influence).

The Government had traditionally been specifying minimum support prices for procurement of commodities like cotton, jute and sugarcane, where the usual beneficiaries were the owners of large estates and plantations.  But in the case of tobacco, where the growers were generally small and self-employed farmers, the Government had no such procedure.

CAG's jurisdiction

When Mr. Baksi had heard the whole story -- grimly smoking a cigar chain and subjecting me to a grueling cross-examination -- he seemed to be quite fascinated.  "Go ahead and process the case!" he exclaimed, with unconcealed enthusiasm.  But Mr. Bhar's reaction was quite different, and he asked me what exactly the audit point was.  He said that since the issue could not be directly related toany expenditure of the Government, it would not warrant any criticism in the CAG's Audit Report.

Mr. Pathak and I argued that the Government was spending vast amounts of money as export incentives on many other items in order to increase  the country's foreign-exchange earnings, and that it could save a substantial part of that expenditure if proper prices were secured for tobacco exports -- and therefore, the export of Indian tobacco at prices deliberately pitched low by the exporters (with the Government's tacit approval) did call for comment in the Audit Report.  The CAG was inclined to agree with this view, but he could not make up his mind because of Mr. Bhar's strong conviction to the contrary.  In the event, he left the decision to the Deputy CAG, who told us afterwards not to proceed further in
the matter.

Subsequent scenario 

In 1980, there were reports in London newspapers that British Customs officials had found the grades of several imported consignments of Indian tobacco were much higher than those shown in the invoices. This development was quite consistent with the overall tobacco exports picture in India as we had observed five years earlier!

It is true that in recent years the Indian Government has been announcing minimum support prices (MSPs) for procurement of FCV, based on the recommendations of the Commission for Agricultural Costs and Prices -- and has also been fixing minimum export prices (MEPs) on the recommendation of the Tobacco Board instead of the Tobacco Export Promotion Council.  But the MSPs have been abysmally low (sometimes even below the cost of production!) -- and the MEPs continue to be far below the export prices secured by other countries for similar grades.

In 1988, the Government suddenly started paying a cash subsidy for FCV exports, at five per cent of the export value.  And the distortions in the export prices were still continuing.  Now, the whole rationale of sanctioning cash assistance for exports (technically termed 'cash compensatory support' or CCS) was to enable exporters to reduce their prices effectively vis-a-vis foreign competitors.  To sanction a 'compensation' for export prices willfully settled at low levels by the exporters in a system of colonial exploitation was to introduce another severe distortion in the scenario!

Four years later, he whole policy of sanctioning CCS for exports -- which had been bristling with many serious anomalies ever since its introduction in 1966 -- was given up by the Government..  Meanwhile, the subsidy attracted by FCV exports made when the CCS was available was more than Rs. 25 crores.

The battle of BAT

A sensational issue in the Indian business scene today is the desperate manner in which the British American Tobacco Company has been trying to wrest back complete control over ITC.  What exactly is bothering BAT?  To find the correct answer, you have only to take a look at the export trends in the past 20 years or so.

India's exports of raw FCV tobacco, which were 70,000 tonnes in 1973-74 steadily declined in the Eighties, hitting an all-time low in 1088-89 at 29,000 tonnes.  Then it picked up to reach 50,000 tonnes in 1991-92.  The exports to the U.K., which were 28,000 tonnes in 1973-74, declined to 6,000 tonnes in 1988-89, and rose to about 10,000 tonnes in 1991-92.

Meanwhile, India's exports of cigarettes have been expanding -- from about 800 tonnes in 1973-74, they rose to 2,700 tonnes in 1983-84, and 3,200 tonnes in 1993-94.  I do not have the latest figures for FCV exports, bbut it is quite clear that ITC's policy thrusts during and since the Eighties have been such that a traditional and once-reliable source of cheap but fine tobacco for the British cigarette industry and its world-wide operations has been threatening to dry up gradually!

So then, it would appear that BAT's true objective in the ongoing power struggle is to restore the original role of ITC's Leaf Tobacco Division (formerly ILTDC) as a passive supplier of excellent low-priced Virginia tobacco for cigarette manufacturers in the U.K. and British-controlled cigarette factories in foreign countries other than India.


PostScript, 2017

Logic and perceptions

One of the reasons why this vintage article may be worth close attention even today is that it raises vital questions of logic and perceptions, and shows how an all-too-rigid interpretation of the rules of the game can be extremely counter-productive.

It would be obvious to any intelligent observer that the tobacco muddle was a very valid topic for severe audit criticism, as it concerned the ruthless exploitation of one of the nation's important natural resources and the community of unorganized and poor tobacco farmers, in a setting so reminiscent of the former British colonial regime.. This was all the more so because there was no direct Government expenditure or specific loss of revenue, allowing the whole scam to escape the CAG's audit scrutiny in the normal course.

I had great regard for Mr. Bhar, Deputy Comptroller and Auditor-General of India, who had a passion for taking a rational view of all issues arising in the course of our work. Particularly in the context of our pioneering efforts to undertake innovative audit investigations, he used to subject us to a grueling cross-examination, to survive which we had to have a very comprehensive insight into the scenarios we surveyed.

It therefore came as a great shock that Mr. Bhar took such a rigid view of the question of the CAG's jurisdiction in this context, though the CAG himself was inclined to take the broader view.  The serious error in perception could only be attributed to the pitfalls of extreme conservatism.

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