How Pranab-da can kick butt, save lives and get high on taxes

by Emmanuel Guindon, Arindam Nandi, Frank J. Chaloupka and Prabhat Jha

“Sugar, rum, and tobacco, are commodities which are no where necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation.”

-Adam Smith, The Wealth of Nations, 1776.

Tobacco smoking and chewing are both common in India, but the individual risks from smoking are markedly greater. A large, nationally-representative study of mortality in over 1.1 million homes indicates that already 1 in 5 of all adult male deaths and 1 in 20 of all adult female deaths at ages 30-69 are due to smoking. India will soon have a million smoking deaths a year.

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The study also suggests that the relative risk of death from any medical cause does not depend on educational level, but rather on whether bidis or cigarettes were smoked, and the amount smoked. The risk ratio for a given number of bidis or cigarettes smoked was greater for cigarettes than for bidis.

For example, compared to non-smokers, the risk of dying as a result of smoking 1-7 bidis per day was 30 percent higher, compared to an increase in risk of 80 percent from smoking the same number of cigarettes per day.

Increasing tobacco prices has been found to be the single, most-effective method to reduce smoking. Yet, bidis, the most common form of smoked tobacco in India, are largely untaxed, while cigarettes are taxed at about 40 percent of retail price, well below the 65-80 percent rate noted by the World Bank in countries with effective tobacco control policies.

Moreover, low and stagnant tax rates have occurred in a period in which all tobacco products have become more affordable with income growth. Like many taxation policies in India, tobacco taxation reflects years of accumulated influences, lobbying, exemptions, and in some cases, even attempts to do social good. The current result is a complex, even chaotic tax structure on smoked tobacco.

[caption id=“attachment_165932” align=“alignleft” width=“380” caption=“Increasing tobacco prices has been found to be the single, most-effective method to reduce smoking.Reuters”]  [/caption]

There is a small but growing body of research that examines the effect of tobacco prices on tobacco use in India specifically and more generally in countries of South Asia. Rijo M John, using data from two quinquennial rounds of the National Sample Survey of India conducted in 1993-94 and 1999-2000, finds negative and significant own-price elasticities for bidis (that is, the percentage change in quantity of bidis demanded in response to a 1 percent change in price of bidis) with effect sizes ranging between -0.7 and -0.9, with no substantial differences between rural and urban households.

However, the same studies find little evidence that changes in cigarette prices affect cigarette use.

Research conducted using data from Bangladesh, Nepal, Pakistan, Sri Lanka and time-series cross-sectional data from seven Southeast Asian countries (Bangladesh, Burma, Indonesia, Maldives, Nepal, Sri Lanka, and Thailand) suggest that individuals in South Asia are responsive to changes in the prices of cigarettes and bidis. Effect sizes, however, vary substantially within and across studies.

The scarcity of India-specific research, the heterogeneity in methods and findings of other South Asian studies, the very limited research exploring socioeconomic differences in the impact of prices on smoking, and the complementarity or substitutability between different tobacco products (such as bidis and cigarettes) and between tobacco and alcohol products, calls for additional research.

In a recent paper,we attempt to fill some of this research void. First, we use data from the most recent three quinquennial rounds of the National Sample Survey and a two-equation system of budget shares and unit values that attempts to correct for quality and measurement error.

Second, we pool data from the most recent nine survey rounds (NSS 55-57, 59-64, conducted between 1999-2000 and 2007-08) and use a simple share-log functional form.

Our analyses of single and repeated cross-sections yield own-price elasticity for bidis that are roughly in keeping with the limited existing evidence. We find that a 10 percent increase in bidi prices would reduce the demand for bidis by about 6 to 9.5 percent.

We find, however, that own-price elasticity for cigarettes in India is substantially larger than previously thought. Our estimates suggest that cigarette users are at least as responsive as bidi users to price changes. On the whole, our analyses suggest that poorer households are more responsive to price changes.

Our analyses also uncovers important and policy-relevant, cross-price effects. We find that cigarettes and country liquor are likely substitutes and that the substitutability tends to be larger among poorer households.

We also find that cross-price elasticities between bidis and cigarettes may vary by income and by urban/rural strata. Our findings suggest there may be some substitutability between cigarettes and bidis among rural and poor households and some complementarity between cigarettes and bidis among richer households.

Findings from this study provide additional evidence of the effectiveness of tobacco prices at reducing tobacco use. Increasing taxes on both bidis and cigarettes in India can be expected to have large effects.

As cigarettes are slowly replacing bidis as the preferred form of smoked tobacco, even independent increases in cigarette taxes can be expected to yield large reductions in cigarette use.

The links between prices, tobacco, and health are not theoretical. Consider the French example: France’s uptake of smoking was chiefly after World War II and its prevalence rose until the mid-1980s. From 1990 to 2005, cigarette consumption fell from about 6 cigarettes per adult per day (which is comparable to the per capita adult male consumption in India today) to 3.

This sharp decline was mostly due to a sharp increase in tobacco taxation starting in 1990 under then-President Jacques Chirac. These price increases raised the inflation-adjusted price three-fold. Among men, the corresponding lung cancer rates at ages 35-44 fell sharply from 1997 onward.

Emmanuel Guindon is Scientist at the Propel Centre for Population Health Impact, University of Waterloo; Arindam Nandi is Post-doctoral Scholar at the Center for Disease Dynamics, Economics and Policy; Frank J. Chaloupka is Distinguished Professor at University of Illinois at Chicago and Director of the UIC Health Policy Center; and Prabhat Jha is Endowed Professor in Disease Control and Canada Researh Chair at the Dalla Lane School of Public Health, University of Toronto. This article originally appeared in voxeu.org.