India: A One-Stop Destination for Tobacco

India is one of the leading tobacco producers and exporters in South Asia – and with a huge variety of tobaccos to boost. Tobacco Asia’s Thomas Schmid picks the brains of some of the key players.

By Thomas Schmid

The Tobacco Board of India, headquartered in the city of Guntur on the east coast, was established in 1976 under an act of parliament (Tobacco Board Act, 1975) and is under the overall control of the Ministry of Commerce.

The board’s responsibilities, duties, and functions are manifold and numerous (see side box). The 26 board members are selected and appointed by the ministry, their individual terms usually being three years, according to current board secretary, Addanki Sridhar Babu.

Controlling, Regulating, and Supporting

As a governing body, the board is the sole authority in India to have total control over FCV tobacco crop regulations, crop development, production, curing, and marketing of FCV within the country and abroad. It determines and sets the targeted FCV crop sizes for the two main FCV-growing states of Andhra Pradesh and Karnataka and registers commercial nurserymen, tobacco growers, and barn operators.

Until the crop year 2014/2015 the FCV crop size was set at approximately 300 million kg (300,000 tons) nationwide, but was then significantly reduced from 2015/2016 onwards in response to a global contraction in demand. “In India, FCV is the only agricultural crop which is subjected to stringent restrictions on area planted and the quantity of tobacco produced and marketed. Moreover, excess production of tobacco is subject to heavy penalties, aimed at deterring farmers not to produce in excess of authorized area and crop size,” explains Sridhar Babu, adding that objective is to prevent an oversupply due to which farmers may suffer on the price front.

FCV and a Whole Lot More

But just like her enormously vast and diverse landscapes and multi-ethnic population, India doesn’t restrict herself to FCV only. While the states of Andhra Pradesh and Karnataka may be most renowned for that particular crop, numerous other tobacco varieties for a wide range of products are also cultivated. For example, burley, Natu, and Lanka besides from Andhra Pradesh and Karnataka also come from Telangana state.

Bidi tobacco mostly hails from Karnataka and Gujarat. Cigar and cheroot tobaccos are grown in Bihar and West Bengal states, while hookah tobaccos are an agricultural specialty in Assam, West Bengal, Bihar, Uttar Pradesh, and Gujarat. Chewing and snuff tobacco are produced in Tamil Nadu, West Bengal, Bihar, Assam, Uttar Pradesh, Gujarat, and Madhya Pradesh. DFC is a domain of Telangana, and Picca tobacco is primarily cultivated in Orissa.

Smallholders are Backbone of Supply Chain

Crops in India are generally grown by smallholders and marginal farmers. “There are no large estates and big farmers constitute less than 1% of total tobacco farmers,” says Sridhar Babu, adding that “a typical smallholder farmer dedicates about 1.2 to 2 hectares of their land to FCV cultivation.”

About 70-75% of all cigarette-type tobaccos produced in the country is exported, whereas only about 12-15% of non-cigarette tobaccos finds its way abroad in the form of whole leaf, lamina, strips, and others, the rest being utilized domestically. For foreign customers, India is a sheer mecca, of course. “I can safely say that our country truly is a one-stop destination for an extraordinarily varied range of tobaccos with year-round supply as they can be constantly produced across our different climates and soil zones,” Sridhar Babu elaborates.

Extensive Government Assistance

To assist growers, the government through the board is implementing a number of sustainability and development programs. For instance, it supports farmers with crop development advisory services and marketing facilities, encourages GAP towards crop yield and quality improvement, IPM, elimination of NTRMs, PHPM, grow-your-own curing fuel initiatives, and improved curing practices, just to name a few.

Meanwhile, the introduction of new tobacco varietals is taken up through the Central Tobacco Research Institute (CTRI), the National Institute of Plant Health Management (NIPHM), as well as the research and development departments of individual tobacco companies. “The board also organizes input and crop loans through banks to FCV growers, with input loans for purchasing fertilizers being arranged at lower rates,” Sridhar Babu explains. There are further schemes aimed at reducing cultivation costs, as well as for energy conservation in curing and post-harvest product management.

At present, 168 firms are registered with the tobacco board as leaf exporters, with another 282 companies registered as exporters of finished tobacco products. But out of these, only 64 leaf exporters 133 product exporters of tobacco products have actively exported during the just concluded year (2016/2017), Sridhar Babu discloses.

ITC: Pioneer and Undisputed Export Leader

The country’s by far largest exporter of leaf tobacco is the agribusiness wing of ITC group, a multi-business enterprise with a market capitalization of US$50 billion and an annual turnover of about US$8 billion. ITC pioneered the cultivation and development of leaf tobaccos in India, introduced natural and engineered Virginia and burley varietals to the country, and pursues very active partnerships with its contract farmers. “Although only a meager 0.24% of the country’s total arable land is dedicated to tobacco cultivation, the crop and its products generate more than INR340 billion (US$5.3 billion) in tax revenues alone. In addition, exports of leaf and tobacco products garner around INR60 billion in foreign exchange earnings annually,” elaborates HN Ramprasad, vice president export & supply chain at ITC Limited’s agribusiness division. “Tobacco is an extremely important commercial crop, providing livelihood to an estimated 45.7 million farmers and farm laborers and their families, with a total annual harvest [across all varieties and types] or around 800,000 tons,” he adds.

Impressive Export Data

ITC’s total export figures encompassing all tobacco types are nothing short of remarkable (see table). In 2017, when Indian unmanufactured tobacco exports accounted for around 200 million kg dry/packed weight in total, ITC alone shipped 72 million kg, equivalent to about 35% volume share and a staggering 43% value share of all exports, with FCV making up the bulk. Still, in 2017 the company used some 40% (by volume) of all its acquired tobacco in its own factories while supplying another 5% to other domestic companies. By comparison, just 1% of the company’s internally used tobacco was imported from Zimbabwe, Brazil, Greece, and Turkey, according to Ramprasad. The company currently exports to more than 45 countries worldwide, with the most important markets being Europe, Asia, Africa, South America, and North America – in that order but irrespective of tobacco type exported.

Still Room for Expansion

But Ramprasad says there are still a few individual markets that ITC would like to penetrate or regions where the company would like to expand its presence. “Across the world there are 172 countries involved in tobacco trading and 87 of them import tobacco from India. Following an in-depth study of these countries, we feel China and Iran are potential markets for Indian tobaccos. We are currently working closely with government agencies and trade bodies to establish contact with the government monopolies in China and Iran to discuss tobacco exports from India. And while Europe is growing quite similar tobacco types as India, European tobaccos are also becoming costlier. Thus we feel that India has a great opportunity to service European customers. ITC is having a strong backward integration program which can meet the stringent requirements of European customers.”

Sustainable Sourcing and Manufacturing

ITC sources its tobaccos through both auctions regularly conducted by the Tobacco Board of India and – for non-FCV crops – purchases them directly from farmers at the company’s own buying points strewn across the vast country. The leaf tobacco business partnership ITC has cultivated with farmers is almost 100 years and in the words of Ramprasad “is done with a spirit that truly embodies the company’s slogan ‘Commitment Beyond the Market’. Accordingly, ITC’s concentrated crop development efforts indirectly benefit over 120,000 farmers, while the company directly works with more than 60,000 farmers covering 352 model villages. “The company’s sustainable crop production practices in the model villages have created a vibrant rural ecosystem empowering farmers socially and economically. It is our rural development approach that has helped ensure surplus income generation for farming communities and which drives overall village development.” Read more on ITC’s sustainability and development initiatives in the table and our side box.

World-Class Facilities

In terms of infrastructure, ITC operates three world-class tobacco processing facilities in the two major FCV-growing states of Andhra Pradesh and Karnataka. The facilities compare with the best in the world in meeting sustainability, environmental, and customer standards. Over 85% of the total electrical energy requirements of the facilities are met from wind energy, and 100% reuse and recycling of waste and zero effluent discharge are further key aspects of the facilities, according to Ramprasad.

GPI: An Important Midfielder

Incorporated in 1936/1937, Delhi-based Godfrey Phillips India Ltd. (GPI) is positioned in the midfield among India’s cigarette manufacturers and exporters, its products being available in 90 countries worldwide. The company also exports about 20 million kg (20,000 tons) of leaf tobacco of various descriptions every year, which represents approximately 50% of its annual total export business. All of the tobacco is exclusively sourced within India (see tables).

Declining FCV Export Volume

Although the company declined to divulge exact value figures, vice president D.S. Jithendra Kumar that for 2018 he anticipates a decline in export volume “mainly due to a reduction in FCV volumes [harvested in India] and major customers withdrawing from purchasing from India.” Meanwhile, GPI also sources and imports minor amounts of additional tobaccos from its trading partners in Malawi, Brazil, and Bangladesh to be used in its own cigarette production business. Of its India-sourced tobaccos, the company retains 40% for its own use and exports or trades on the remaining 60%, according to Kumar. “We use Indian tobacco mostly as a filler in cigarette manufacturing, mainly because of the cost advantage and also because many [cigarette] importers treat the Indian market as an opportunistic purchasing source whenever production in other markets falls short.”

Taking Farmers by the Hand

GPI acquires a respectable 80% of its tobacco through auctions, but the remaining 20% is sourced from contract farmers within the company’s integrated production system. “For deliveries of Vinukonda burley we have 4,703 farmers under contract; for HDBRG it is 76; for Kurnool SCC it is 74; and for Lalchopadia we have 82 farmers supplying us,” details Kumar. “We take them by the hand and extend technical guidance at all crop growth stages,” he asserts. Contracts are issued at the beginning of each season, which include purchasing guarantees. Apart from that, the company has set up various initiatives to increase yields, improve product quality and farm safety, as well as the farmers’ overall socio-economic conditions.

Increasing Productivity for Higher Competitiveness

Although GPI has a presence in almost all significant tobacco markets around the globe, Kumar discloses that the company still “would like to increase [its] market penetration for the leaf business in the Confederation of Independent States and in Southeast Asia.” As per increasing competitive pressure emanating from China and other regional countries, Kumar observes, “The country is without doubt one of the biggest producers and can export tobacco at a more competitive price than India due to large production volumes and huge carryover stocks. But in [other competing] countries like Indonesia, Malaysia, and Pakistan tobacco is grown under contract farming systems through suppliers, therefore blue-chip companies have obligations to purchase from those countries.” India, he says, nevertheless still has big potential, but the country needs to become more cost-competitive. “The only way to ensure a marketing edge is by increasing productivity across all the verities and offer tobacco at more competitive prices than other countries.”

A Broad Product Range to Serve Discerning Customers

In terms of processing facilities, GPI is well endowed, with facilities located in Guntur and Prakasam districts of Andhra Pradesh state. There, the company has the technical set-up readily available for producing redried threshed lamina, hand strips, straight-laid leaf, tangled leaf, butted straight-laid leaf, and butted tangled leaf and, as Kumar insists, “any other type of packing required by the customer.” The company also deals in reconstituted tobacco filament but plans to shift to sheet to meet prevailing export demand. A further plan is to produce higher volumes of burley tobaccos to cater to a wider range of customers. “This will enable us to offer a more advantageous price over other international tobacco-growing markets and sellers,” says Kumar.

ITC’s Sustainability Performance: Leader in the STP Audit

ITC’s approach to sustainability in the tobacco value chain has recently been acknowledged by the Sustainable Tobacco Program (STP) review conducted by AB Sustain, a third-party international independent auditor on behalf of International tobacco manufacturers. In STP, a leaf suppliers operation is measured for sustainability performance covering areas such as governance, crop, environment, facilities, and people. In the first STP audit conducted at the end of 2016, ITC’s operations secured a score of over 81% score for FCV and burley crop growing regions. Specifically, the Mysore FCV-growing region secured 86% and the processing unit scored 92%. The scores attained by ITC were the best achieved by any Indian supplier and are also globally benchmarked across all pillars of STP. The STP scores are a reflection of the self-sustaining ecosystem that ITC has created with farmers through a strong team of agronomists, agriculture experts, engineers, field technicians and development managers over years.