Phones, booze — illicit trade in 5 sectors costs India 16 lakh jobs, Rs 58,000 cr tax, says FICCI

New Delhi: Trade in illicit products in five key industries was estimated at Rs. 2.6 billion for the 2019-20 financial year, according to a report released Thursday by the Federation of Indian Chamber of Commerce and Industries (FICCI).

In total, counterfeit goods cost the Treasury a tax loss of Rs 58,521 crore.

The report, “Illegal Markets: A Threat to National Interests”included five key industries — cell phones, alcoholic beverages, tobacco products, fast-moving consumer goods (FMCG), household and personal goods, and FMCG-packaged foods — for the nationwide survey.

The research was conducted by the Thought Arbitrage Research Institute, a Delhi-based think tank, for the FICCI Committee Against Smuggling and Counterfeiting Activities Destroying the Economy (CASCADE).

In addition to valuation and tax losses, the report also calculates employment losses and recommends possible steps to solve the problem.

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What is illegal trade? How is it calculated?

According to the report, an illicit market “includes any goods sold outside of authorized trade routes. In addition, it can also include artisan products made outside the legal framework and the resale of expired products”.

The lack of organized affairs data makes the assessment “extremely challenging,” but the authors relied on “demand and supply gaps.”

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Its data sources include the Department of Statistics and Program Implementation, Private Consumption Expenditure and the Directorate-General for Commercial Intelligence at the Department of Trade and Industry.

The research showed that consumers in each of the five sectors consumed more than what was offered by the organized markets – hence the remaining consumption was possible due to a supply of illicit goods. The proportion of illicit consumption was calculated by dividing the demand-supply mismatch by the consumption expenditure incurred for each product.

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Illegal trade dominates FMCG goods

Of the Rs.2.6 crore illicit trade, about Rs.2 crore was reported in the FMCG sector.

Illegal trade in FMCG packaged foods (such as confectionery, dairy, soft drinks) amounted to Rs 1.42 lakh crore. The authors estimated that this amount accounts for about 25 percent of the market.

The illicit commercial value of the FMCG household and personal goods (skin care, oral hygiene, hair care, fabric care, etc.) has been estimated at Rs 55,530 crore, which is lower than that of the packaged FMCG goods. However, in terms of market capture, these illicit goods captured about 34.25 percent of the market share — the largest among the five industries studied.

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Illicit trade in alcoholic beverages was estimated at Rs 23,466 crore, followed by illicit tobacco products at Rs 22,930 crore and mobile phones at Rs 15,884 crore.

Graphics: Ramandeep Kaur |  The pressure
Graphics: Ramandeep Kaur | The pressure

The reason FMCG (household and consumer) tops the charts in terms of market share is because branded products command a higher price, the report said.

“Established brands and premium products often suffer the most, as look-alikes are available at cheaper prices and are often passed off as originals due to misspellings etc. of the brand,” it said.

Similarly, for FMCG (packaged foods), the report said that not requiring an industrial license for agricultural or food-based micro and small-scale industries could be one of the factors behind product counterfeiting.

“Counterfeit products are mostly made in unregulated markets and by low-wage workers; low IPR (intellectual property rights) requirements and inadequate enforcement mechanisms coupled with large informal markets continue to fuel the growth of the illicit market,” the report says.

According to the report, a total of 15.96,000 job opportunities were lost due to illegal trade, including around 11,000 in the FMCG sector alone. These figures were calculated using the input-output model developed by Wassily Leontief, winner of the Nobel Prize in Economics.

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Using the same model, the authors were able to calculate how much more revenue (in taxes) the government could have earned if the illicit trade had been conducted through formal channels – Rs 58,521 billion for 2019-20.

Graphics: Ramandeep Kaur |  The pressure
Graphics: Ramandeep Kaur | The pressure

The way ahead

The report also recommends various policy steps needed in different directions to curb the illicit trade.

From strengthening domestic manufacturing and streamlining tariffs to reducing tax arbitrage, police surveillance and tougher penalties, the authors propose a ten-point agenda in their chapter “Way Ahead”.

“In order to instill fear of the law in criminals, it is important not only to prosecute them persistently, but to ensure that the system does not allow them to walk free without appropriate punishment,” the report says.

“Freeing India from illicit trade will require strong multi-stakeholder collaboration and innovative action. Smuggling and counterfeiting are rampant and industry, government and society bear the brunt directly,” said FICCI President Sanjiv Mehta.

(Edited by Theres Sudeep)

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