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How govt can counter India's illicit trade menace

How govt can counter India's illicit trade menace

Today, there are five million retailers in the country with most of them selling illicit products (due to high margin) and are at the risk of losing their savings due to anti-illicit seizures

For years, Illicit and counterfeit has hampered economic growth, eroded brand reputation and impacted consumer trust For years, Illicit and counterfeit has hampered economic growth, eroded brand reputation and impacted consumer trust

As the world grapples with the changing environment, India too is doing everything within its might to adapt to the changing need of the hour. 

Over the recent months, the government has taken significant steps to improve economic recovery as well as augment consumer sentiment.
 
Despite progressive measures, India continues to battle countless roadblocks, standing in its way to revive and strengthen the economy. 

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During the peak of the pandemic, we saw an unprecedented health and humanitarian crisis, which also contributed to heightening of socio-economic evils like counterfeit, smuggling and other illicit trade activities.

According to the latest "State of Counterfeiting in India - 2021" report by Authentication Solution Providers' Association ("ASPA"), there has been an upward trend in counterfeiting incidents between January 2018 to December 2020. 

During this period, counterfeit incidents in India increased on an average of 20% year to year growth and at an astonishing 17% between 2019 to 2020, significantly damaging the economy and health and safety of people.

For years, Illicit and counterfeit has hampered economic growth, eroded brand reputation and impacted consumer trust. 

Sectors like the apparel industry, beauty industry and consumer products have faced the brunt of this from close quarters.

As an outcome of the pandemic and subsequent lockdowns, the situation has exacerbated the menace with sectors such as pharmaceuticals, tobacco, FMCG packaged goods, currency and alcohol also coming within its fold. 

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Today, these sectors constitute over 84% of total counterfeit incidents. A report named 'Invisible Enemy' published by FICCI, brought to the fore the deliberating impact of smuggling and counterfeit on the Indian economy with losses of Rs 5,726 crore in the textiles industry, Rs 5,509 crore in the readymade garments industry, Rs 8,750 crore in the cigarettes industry, Rs 18,425 in the capital goods industry, and Rs 9,059 crore in the consumer durables industry in the year 2017-18.

Of the affected sectors, cigarettes have emerged as the most lucrative sin product, often more profitable than drugs and gold, witnessing the highest jump in 2020 over 2019 and 2018. 

Due to low production cost and very high rate of taxes, cigarettes in India are one of the most expensive in the world.

According to the US Department of State, illicit trade in cigarettes has resulted in a loss of over $50 billion annually with India becoming a major hub for these illegal activities. 

A Euromonitor research (2019) stated that India has become the fourth largest and fastest growing illegal cigarette capital in the world with smuggled cigarettes accounting for a quarter of the domestic cigarette industry.

In recent months, owing to the concerted efforts of DRI/enforcement authorities have successfully seized illegally imported cigarettes worth Rs 1,772 crore between April 2020 and February 2021. 

That marks a significant increase compared with seizures worth Rs 187.6 crore in the previous financial year. This illegal trade has impacted even the biggest tobacco giants as well. 

Today, there are 5 million retailers in the country with most of them selling illicit products (due to high margin) and are at the risk of losing their savings due to anti-illicit seizures. 

This is unfortunately a harsh reality of the on-ground situation and its debilitating impact on these smaller players.

Over the years, government and enforcement agencies have recognised the danger of counterfeiting and have put in place systems, stronger enforcement and advanced technologies to combat this menace working closely with wholesalers, retailers and e-commerce players who are most at risk. 

Yet, however, as India readies to rebuild its economy as an aftermath of the pandemic, we need more stringent yet progressive tax policies to mitigate illicit trade. There is a need for regulation through controlled channels to prevent the growth of black market.

Apart from revisiting India's taxation policies and levies like National Calamity Contingent Duty (NCCD) imposed on cigarettes, we need the Centre as well as state governments to also put in place stricter measures e.g. the proposed regulations by Madhya Pradesh assembly evaluating higher fines, life imprisonment and serious punitive measures like death penalty owing to deaths caused by spurious liquor is an example of how seriously states are committed to addressing this issue.    

Additionally, we need to better leverage the new age technologies like AI and blockchain to identifying the loopholes, building safer supply chains and tracking mechanisms.
 
As India progresses on its path to build a self-reliant ecosystem, there needs to be a stronger collaboration with multiple stakeholders like the state governments, industry associations, enforcement agencies and local authorities to eradicate this threat and build a safer tomorrow.

(The author is Partner, J Sagar Associates.)