Towards the end of 2016, the Commerce Ministry sent a note to the Cabinet proposing a blanket ban on foreign direct investment (FDI) in the tobacco sector . Although India banned FDI in tobacco manufacturing in 2010, foreign tobacco companies are allowed to invest through technology collaboration, licensing agreements and by forming a trading company. The Commerce Ministry’s proposal, which NITI Aayog has opposed, would put an end to all kinds of participation of foreign companies in the tobacco sector. The government cites the World Health Organisation (WHO) Framework Convention on Tobacco Control (FCTC) as the reason for this step. As per this convention, India is under an obligation to reduce high consumption of tobacco products which pose a grave public health danger.
However, this proposal has not gone down well with the American tobacco giant, Philip Morris International (PMI), which has invested in the Indian tobacco market through a licensing agreement with Godfrey Phillips India. Additionally, the Swiss affiliate of PMI has also entered into a joint venture with some Indian companies to form a wholesale trading group involved in selling tobacco products. As recently reported, PMI, keen to maintain a foothold in the $11 billion Indian tobacco market, has written letters to the Commerce Minister and to NITI Aayog arguing that such a ban would be ‘discriminatory’ and ‘protectionist’.
Risk of investor-state dispute settlement claims
It is quite possible that PMI might challenge any such blanket ban under India’s bilateral investment treaties (BITs). This is especially so given the two recent instances of PMI opposing anti-tobacco measures of two countries under BIT’s investor-state dispute settlement (ISDS). First, Philip Morris Asia (PMA) challenged Australia’s plain packaging regulations under the Hong Kong-Australia BIT. However, the ISDS tribunal refused to hear this case for lack of jurisdiction. Second, PMI challenged Uruguay’s regulation requiring tobacco companies to put pictorial warnings on 85% of the area on cigarette packets, under the U.S.-Uruguay BIT. The arbitration tribunal, rejecting the claim of PMI, held that it was within the sovereign regulatory powers of Uruguay to impose such restriction to protect public health.
Though PMI cannot bring a BIT case against India because there is no India-U.S. BIT, its Swiss affiliate could surely bring a claim under the India-Switzerland BIT, which protects not just direct investment but also shares, stocks and other forms of participation in a company. As PMI has already indicated, the FDI blanket ban could be challenged as being discriminatory by favouring domestic tobacco investors over foreign investors. India might be asked why it didn’t consider adopting other less foreign investment-restrictive regulatory measures to meet the objective of reducing tobacco consumption. The reported termination of this BIT by India will not impact any such claim because the treaty contains a survival clause promising protection to existing foreign investment for the next 10 to 15 years.
Plain packaging regulation
In view of this, India should consider alternative regulatory measures, which will better achieve the objective of reducing tobacco consumption and be less investment-restrictive as well. One such measure is adopting plain packaging regulation. This is better than banning FDI completely for two reasons: one, while the FCTC does not contain any provision on banning FDI as a means to reduce tobacco consumption, it specifically talks about countries adopting packaging and labelling requirements to create better awareness about the harmful effects of tobacco consumption. Thus, even if Philip Morris or any other investor were to challenge a plain packaging regulation, India would be on a much stronger legal wicket in defending it than defending a complete ban on FDI. Second, we are unsure how prohibiting FDI through licensing arrangements, etc. would help reduce tobacco consumption. Domestic players could occupy the market freed up by foreign players. Also, did banning FDI in tobacco manufacturing in 2010 result in reduced tobacco consumption? On the other hand, studies from Australia show that smoking rates plunged by 12.2% after plain packaging regulations were introduced.
In the past, some efforts have been made to introduce plain packaging regulations in India. In 2012, Baijayant Panda introduced a bill in the Lok Sabha to amend the Cigarettes and Other Tobacco Products Act (COTPA) proposing plain packaging of cigarettes in India. However, the bill failed. In 2014, the Allahabad High Court allowed a petition on plain packaging regulation and said that the Central government must implement it. A petition on this was also filed in the Supreme Court last year. However, the plain packaging regulation still remains a pipe dream.
Another effective measure is to increase taxes on tobacco products. Though they have increased over the years, some studies argue that overall taxes on cigarettes in India are still low relative to other countries. Also, for strange reasons, bidis have often been exempted from increase in excise taxes despite being the most commonly used tobacco in India. The 2017-18 Budget has only marginally increased the excise duty on handmade bidis, from ₹21 to ₹28 per thousand.
We also need a proactive government that does not drag its feet when it comes to adopting tobacco regulations as it happened in the case of implementation of the 85% pictorial warning requirement on cigarette packets. Despite notifying this regulation in October 2014, the government didn’t implement it because it was ostensibly red-flagged by Parliament’s committee on subordinate legislation, which had the owner of a bidi empire as one of its members! This notification was finally implemented from April 1, 2016 after the Supreme Court’s intervention. In sum, the government needs to demonstrate strong political will and carefully choose policies to deal with the menace of high tobacco consumption.
Prabhash Ranjan and Pushkar Anand are Assistant Professors of Law at South Asian University and University of Petroleum and Energy Studies. Views are personal.