Dr. K. Gopal, Chairman, Tobacco Board | We are familiar with the tagline ‘smoking is injurious to health.’ And it indeed has been the cause for many ailments. On the other hand, it is contributing to the health of India’s forex reserve. So, to understand the dynamics of India’s tobacco trade The Dollar Business caught up with Dr. K. Gopal, Chairman, Tobacco Board

Satyapal Menon | @TheDollarBiz

TDB: Let me first, on behalf of The Dollar Business, congratulate you and the Tobacco Board for bagging the prestigious Golden Leaf Award 2014...

KG: Thank you! The Tobacco Board received the award in the ‘Most Impressive Public Service Initiatives’ category. We consider it as a global recognition and appreciation of our e-governance initiatives and extension activities to ensure total transparency and quality control, right from the farm level.

TDB: Give us a brief overview of India’s tobacco exports.

KG: Flue Cured Virginia (FCV) tobacco is a major ingredient in cigarettes. India produces two distinct varieties of FCV – Neutral Filler and Semi Flavour. While Neutral Filler can be blended into any variety, Semi Flavour does not suit all requirements. India is the only country, which produces both these varieties. Brazil and Zimbabwe produce the best Semi Flavour varieties. As far as Neutral Filler is concerned, many countries, including China, produce it. But since India produces both the varieties, the momentum in our exports is consistent.

TDB: Which key factors attract global buyers towards Indian tobacco?

KG: India’s Neutral Filler is considered as one of the best in the world. Our USP is that we have all varieties and all chemistries of tobacco available, in addition to various price ranges, to cater to all tastes and requirements. We have two seasons for tobacco production, unlike other countries, which have only one season. Apart from these advantages, we also have value-for-money and premium segments. These two varieties are used in two different types of cigarette-making processes – the British model and the American model.  

TDB: Which major international cigarette brands use Indian tobacco?

KG: This is a closely guarded secret of cigarette manufacturers. It is difficult to pinpoint and say that a certain brand uses Indian tobacco. Blend secrets are not divulged by most global cigarette manufacturers. Apart from India, they also purchase the leaf from other countries. These manufacturers have experts and smoke panelists, who in accordance with the chemistry and requirement, go for micro blending. From the process involved, it is difficult to make out or identify a specific ingredient in the mix.

TDB: Tobacco Board has been instrumental in creating a well-defined and organised system for the promotion of tobacco production and exports. Which factors attract stakeholders to this common platform?

KG: We have created a level playing field for tobacco growers, traders and manufacturers. We ensure that every stakeholder gets the best in terms of both price and quality. Our electronic auction system has revolutionised the sale and procurement procedures. The entire sale and purchase process is transparent as well as accessible to everyone. Several measures have been implemented to streamline the entire chain from production to marketing. Further, whoever wants to do business in FCV, including growers, traders and manufacturers, has to register with the Tobacco Board. This is to ensure that the entire process, from production to marketing, is systematically recorded and monitored.

TDB: So, you have a monopoly over the tobacco segment!
KG: Yes, definitely! We are regulators, we are promoters, we are developers and we are also mentors. The first and foremost priority was, basically, to set the rules. Today, everyone has to bring the leaf to the auction platform and everyone has to purchase from there. There used to be outside sales and purchases, but we have ruthlessly controlled this practice. Tobacco growers should have a registration for cultivation and curing. Every trader, small or big, exporter or manufacturer, has to register with the Tobacco Board. We have also created an e-filing platform or e-trade report system to monitor all activities involved in tobacco production and marketing.

TDB: What steps have you taken to ensure that the quality of tobacco, which is exported, is in tune with global standards?

KG: Global customers are highly sensitive to pesticide residue, NTRM (Non Tobacco Related Material) and unnecessary fumigation. Specifically, in Europe and United States, imports are subjected to stringent scrutiny. To ensure the highest quality, we enforce strict procedures. We conduct training programmes for farmers about methods to maintain product and brand value integrity.

TDB: How do you ensure product integrity?

KG: Product integrity means that tobacco leaf should maintain its original character. The basic chemistry of the leaf should not be altered and it should be fungus-free. The leaf should not have any discolouration and unwarranted smell. Apart from this, we apply traceability procedures through which we can track the product from the farms to the markets.
  

 
TDB: There is no MSP for tobacco farmers. So, what goes into price fixation on the auction platform?

KG: Minimum Guarantee Price (MGP) and Minimum Export Price (MEP) are some of the few concepts we are injecting into the trade. Right now, we do not operate on the basis of MGP or minimum support price (MSP). Earlier, the MSP for tobacco was very low. For example, the MSP for the best grade of tobacco was not more than Rs.80/kg, when on the auction platform they were fetching almost Rs.180/kg. Farm prices also fluctuate from season to season. This year, we had record prices in Karnataka and AP, which might have been due to strong international demand for the Indian leaf. However, there is every possibility of demand witnessing a downtrend next year. Therefore, providing remunerative prices is our basic objective.

TDB: How exactly do you perform these tracking and traceability procedures?

KG: It is an enormous task. We provide Jute bale pattas, with details, codes and registration numbers pasted on them, based on which we are able to trace and assess the material. Even in the case of of material which has been exported and sent back, we would still be able to trace it back to the grower. But we can do so, only if the entire transaction was done through our auction platform. There are always possibilities that the tobacco might have been procured directly from farmers in grey market or outside the auction platform.

TDB: Have these measures enabled you to achieve the desired results?

KG: We have implemented product integrity and traceability methods and have launched a massive campaign to eliminate NTRM. It has proved to be effective and successful in both Karnataka and Andhra Pradesh. Our initiatives have also won accolades and appreciation from global buyers.

TDB: Can you gives us an idea of the margins involved in tobacco trade – from the farm to export markets? Which factors affect these margins?

KG: The cost of cultivation is the basis. The cost is calculated on how much amount a farmer has spent to produce 1 kg tobacco, which is also known as the farm price. On an average, the cost of cultivation is between Rs.80/kg and Rs.120/kg, depending on soil and various other factors. Next, we focus on the return farmers get from the auction. The return varies on the basis of quality, grading and classification. We do this entire classification on the auction platform, asses the quality and quantity and then put the starting price in the electronic devices, through which buyers respond. Now, if the farm prices are Rs.120-180/kg – last year it was Rs.200/kg – the amount over and above this is the margin for cultivators.  The margin for exporters, after logistics and processing costs, would be around Rs.60-90/kg, i.e., about 30-40%. The total cost of leaf marketed on our platform in both Karnataka and Andhra Pradesh, for the two seasons, would be nearly Rs.4,000 crore. The converted final product fetches around Rs.28,000 crore for the exchequer  in the form of central excise, VAT and   foreign exchange earnings.

TDB: India’s is a signatory to the Framework Convention on Tobacco Control (FCTC) for reduction of tobacco farming and use. Has this affected tobacco production and export?

KG: We have to respect health concerns. As per FCTC norms, we are supposed to go for alternate crops, wherever possible. According to FCTC, the focus is on demand reduction, not exactly supply reduction. It has sought supply reduction to be done in a phased manner. To achieve this, we are also encouraging farmers to go for alternate crops. But there hasn’t been any significant impact on exports yet.