India’s decision to prohibit foreign direct investment (FDI) in tobacco manufacturing was both timely and necessary. It was rooted in the understanding that tobacco is not an ordinary industry: it carries public health consequences, yet also supports a vast livelihood chain in India, especially in rural communities. As of early 2026, the sector is estimated to support around 45.7 million livelihoods, including nearly 20 million farm labourers and millions more in processing, manufacturing and distribution.

India’s tobacco regulatory framework has, by and large, struck a careful balance between two important responsibilities: protecting public health and safeguarding the economic interests of those dependent on the sector. This approach is consistent with India’s commitments under the WHO Framework Convention on Tobacco Control (FCTC), which recognises the sovereign right of countries to adopt strong measures to reduce tobacco consumption.

However, while the policy intent has been sound, its effectiveness is now being quietly tested — not through direct violation, but through systematic circumvention.

The loophole that can’t be ignored

India’s FDI ban applies to capital account inflows into tobacco manufacturing. But in practice, multiple indirect routes remain open. In addition, complex ownership structures and contract manufacturing models are enabling multinational companies influence domestic markets while technically remaining outside the definition of FDI.

This is not an isolated phenomenon. It is a growing pattern.

What this creates is a regulatory paradox: while India has formally restricted foreign participation in tobacco manufacturing, it continues to allow economic influence through alternative channels that achieve similar outcomes.

In tobacco control, partial restrictions do not reduce risk — they often increase it by creating incentives for regulatory arbitrage.

Globally, multinational tobacco companies have demonstrated a consistent ability to adapt to regulatory constraints. In many markets, this has led to the introduction of so-called “innovative” or “harm reduction” products, aggressive brand-building strategies, and the use of indirect channels to maintain market presence. These strategies are often positioned as innovation, but in reality, they tantamount to regulatory evasion.

India is not immune to this playbook. A 2003 report by the Campaign for Tobacco-Free Kids, based on internal industry documents, argued that major cigarette companies had used smuggling to enter new markets and bypass taxes. It described an “umbrella” model in which small legal imports provided cover for much larger illegal distribution networks. Such structures create a veneer of legitimacy while enabling rapid market expansion through parallel supply chains, often supported by higher retailer margins and tax arbitrage.

Smuggling of cigarettes

Illicit cigarettes now account for more than 25 per cent of cigarette consumption in India. These products do not use Indian tobacco, which directly hurts farmer incomes, does not carry statutory health warnings, erodes tax revenue, and weakens enforcement. The scale of the problem is also becoming more visible in enforcement data. Directorate of Revenue Intelligence figures show that seizures of smuggled cigarettes rose by over 107 per cent in volume and more than 110 per cent in value between 2019-20 and 2023-24. Expert estimates suggest that combined seizures by DRI, Assam Rifles, CRPF and other agencies crossed ₹600 crore in FY25.

In a country with porous borders and a large price-sensitive consumer base, the problem gets compounded. International brands enter through informal channels and are available across price points, from premium to low-cost, incentivising both retailers and consumers. This not only expands illegal market access but also normalises consumption. A FICCI CASCADE report underlines the growing scale of the problem, estimating that the illicit tobacco market grew by 17.7 per cent, from ₹25,495 crore in 2018-19 to ₹30,012 crore in 2022-23.

Cross-border influence

The challenge today is not limited to physical trade. With the rise of digital media, international tobacco companies are increasingly using cross-border electronic channels to promote their brands. Social media, digital advertising, and global content platforms have made it easier to beam messaging into domestic markets, often beyond the reach of traditional regulatory controls. This creates a new layer of complexity. Even where domestic regulations are strong, external influence can shape consumer behaviour in ways that are difficult to monitor and even harder to regulate.

India has made significant progress in tobacco control through sustained policy effort. The country is on track to exceed the WHO target of a 30 per cent relative reduction in tobacco use by 2025, with prevalence projected to decline from 38.3 per cent to 21.8 per cent — a reduction of about 43 per cent, surpassing the WHO Global Action Plan target.

This progress cannot be put at risk. Any weakening of the framework will have serious consequences. Millions of farmers depend on the stability of the domestic tobacco ecosystem, and when illicit trade expands or market structures are distorted, they bear the immediate impact through reduced demand and income uncertainty.

India’s cautious approach has been appropriate. But caution must now be matched with completeness.

The government’s stance on prohibiting FDI in tobacco is correct and well-judged. However, policy is only as effective as its implementation. When loopholes allow indirect participation, the integrity of that policy is compromised.

It is time to extend the scope of the FDI framework to address these gaps. Indirect inflows — through licensing, franchise arrangements, technology agreements or wholesale trading structures — must be regulated where they effectively replicate investment.

This is not about restricting legitimate business activity. It is about ensuring that public policy intent is not diluted in practice. If left unaddressed, these gaps will not only distort markets but also undermine the credibility of India’s tobacco control regime.

India has taken the right first step. It must now follow through and decisively close these backdoor routes.

The writer is Secretary General, Think Change Forum

Published on April 7, 2026