Price Elasticity Estimates for Tobacco and Other Addictive Goods in India

Rijo M John
JEL codes: 
Working Paper Series No. WP-2005-003

The tax base of tobacco in India is found to be heavily depended on about fifteen per
cent of the tobacco users who represent cigarettes smokers. Non-cigarette tobacco
products used by the majority of tobacco users are largely out of the tax net. Analysis
of the price elasticity of various tobacco products would bring out the potential of tax
as an instrument to control tobacco use of any kind. In this context, this paper
examines how the demand for a variety of tobacco products and addictive goods
such as pan and alcohol respond to changes in prices. The spatial variations of
prices that are obtained from a cross section of 120,000 households spread across the
country have been used for this purpose. Estimates of price elasticities showed that
the own price elasticity estimates of various addictive goods in India ranged between
-0.5 to -1.0 with bidis, leaf tobacco and alcohol having elasticities close to unity,
cigarettes being the least price elastic of all. As against the general notions regarding
the complementarity between cigarettes and alcohol, our study finds that these are
substitutes at least in urban India. We also observed that, over a five year period,
the addictive goods such as bidis and leaf tobacco in India have become slightly more
price responsive while elasticity of cigarettes and pan have stabilized. With some
assumptions, it is shown that taxes on cigarettes can be raised nearly 2.5 times the
current level while that of bidis can be raised tenfold without any fall in revenue.