Price Elasticity of Tobacco Products Among Quintile Groups in India, 2009-10
27 Pages Posted: 5 Jul 2013
Date Written: July 3, 2013
Background: Globally, policy-makers are currently grappling with both economic and non-economic measures to combat tobacco consumption. Among economic measures, advertising/sponsorship ban, alternative cropping and alternative livelihood measures are considered, in addition, to imposing heavy taxes on all tobacco products. However, the price responsiveness of major tobacco products has not been extensively studied empirically in the Indian context, especially by income status of consumers.
Objective: The key objective of this study is to examine the pattern of price elasticity of major tobacco products (bidi, cigarette and leaf tobacco) by income quintiles.
Methods: The study utilizes data from Consumer Expenditure Survey of households, a nationally representative data collected by the National Sample Survey Organization (NSSO) for the 66th (2009-10) round. The sample size was 100,855 households, of which 50,074 were tobacco using households. The study draws its theoretical framework a model developed by Deaton (1988, 1997) to estimate own and cross price elasticity of three types of tobacco products. The model uses the augmented utility function of consumer behavior, with a two-stage two-equations system of unit values and budget shares. The price elasticity is estimated after correcting for the effect of any measurement error in unit values and budget shares arising due to differences in quality of products.
Results: Unit values were highest for both bidis and cigarettes in the richest quintile groups (Rs 0.363 and 2.52, respectively). Highest unit value for leaf tobacco was Rs. 3.27 in the second richest quintile group. Budget share regression coefficients show that an increase in household size will increase the budget share of both bidis and leaf tobacco by 0.001% for both urban and rural areas (p-value<0.001). Overall price elasticities were: bidi -0.721; cigarette -0.241; and leaf tobacco -0.55. Price elasticities for bidi was highest in the richest quintile (-0.511) and lowest in the poorer quintile (-0.247). For cigarettes, the lowest elasticity was in the middle quintile (-0.082) and highest in the richest quintile (-0.280). For leaf tobacco, highest elasticity was in the poorest quintile (-0.408) and lowest in the richer quintile (-0.178).
Conclusions: Overall, rural elasticities were higher than urban, indicating that rural consumers are more price responsive. Bidis were the most price elastic of all tobacco products, suggesting that increases in bidi prices will deter bidi consumption. Leaf tobacco displayed moderate elasticity, suggesting that increases in tax may result in a tradeoff between consumption decline and government revenue. Elasticities for cigarettes were the least of all products, suggesting that cigarette smokers are more resistant to price changes. However, elasticities by quintile groups indicate high price responsiveness in the wealthier quintiles for cigarettes and bidis, suggesting that increases in prices will also affect their consumption patterns. Overall, while a broad spectrum rise in tax rates across all tobacco products are critical, simplifying tax structure and tax governance must receive utmost importance in the current policy regime against tobacco control.
Keywords: Tobacco, Bidis, Cigarettes, Price Elasticity, India
JEL Classification: I18
Suggested Citation: Suggested Citation