Kurush Grant, Chief Executive Officer of the tobacco division of  ITC is of the opinion that if state tax remains constant then the increasing trend in cigarette consumption as well as stable growth momentum should continue. "We are watching if other states including Punjab and Rajasthan increase value added tax (VAT) in their budgets."

Q: Could you tell us how price elastic is the consumer for cigarettes. One would say, “Fine, you will increase the VAT.” Is there any price elasticity at all? Have you seen any impact of the increase on the consumption of cigarettes as such, which means, does your bottomline or the unit sales remain the same even if the next six states, as we have been talking about, may go ahead and increase the VAT from 12.5% to 20% or whatever they have at the moment?

A: It is very interesting. Tobacco per se is remarkably price inelastic. Within tobacco, however, cigarettes are distinctly elastic. The reason for this is very simple. Nearly 60% of all cigarette consumers are what are called dual consumers—they consume cigarettes, biddies or other forms of tobacco such as chewing tobacco. So, what happens is that when cigarette prices rise because of increase in taxes, the same consumers start consuming a little bit less of cigarettes and a little bit more of biddies or chewing tobacco. Hence, the cigarette industry is quite clearly price elastic whereas the overall tobacco industry is relatively price in elastic. For example, over the last 15-20 years the cigarette share of tobacco consumption which was at 21% is down to less than 15%. However overall tobacco consumption in India has continued to grow it is still continuing to grow.

Q: What kind of a growth are you looking at in the current year? A lot of analysts are factoring a 20% growth would they be in the right region?

A: I think it will be inappropriate for me to comment upon the percentage of growth at this point of time. However, it suffices to say that if other state taxes remain stable, I see no reason why the original trend of cigarette industry of up trading consumption from other forms of tobacco to the most modern form of tobacco, cigarettes, should not continue. The rate of increase of the cigarette industry has actually varied quite dramatically depending upon what happens in the taxes. It can go up to as high as 15-20% in one year, come down to 5-6% in the other year, or remain flat. It depends entirely on taxation on cigarettes. Overall, as the economy improves, as more and more money comes in to the rural economy and the overall economy and as the economic status improves people tend naturally to migrate from cheaper forms of tobacco consumption like biddies and chewing tobacco to the more modern form of tobacco consumption which incidentally is also the most tax efficient form of tobacco consumption that is cigarettes.