According to industry sources, the micro segment is particularly price sensitive and in trying to protect the "fledgling" micro segment the industry decided to subsidise it by passing on the hike to the premium segment.

A recent study of the relationship between excise duty and cigarette prices shows that following the 1997-98 Budget, the increase in excise per 1000 sticks was 2.80 per cent in the case of Classic and Gold Flake filter kings brands of ITC. Their market prices for a pack of tens, however, increased by 16.67 per cent and 8.57 per cent respectively. In the case of Wills Filter, price increase was 14.62 per cent against 2.50 per cent rise in excise. The hike in market price was steeper at over 20 per cent in the case of filters brands like GoldFlake, Capstan and Bristol where the excise levy was 16 per cent higher. Interestingly, in the micros segment increase in prices was less than the excise increase. Price of Scissors rose by 8.7 per cent only against a 20 per cent hike in excise.

Although industry sources claim that the cigarette industry has already reached a "point where the law of diminishing returns would set in", the collection trends have a different story to tell.

Cigarette sales during the period from 1990-91 and 1997-98, based on estimates of the Tobacco Institute of India, has grown from 86.1 billion sticks to 102 billion sticks while revenue grew from Rs 2084.4 crore in 1990-91 to Rs 4277.7 crore as per revised estimates for 1996-97 and budget estimates of Rs 4762.4 crore for 1997-98.

The strategy of the cigarette companies to go for larger increase in prices of the premium segment is unlikely to continue. Industry sources maintain, "since the total volume in that segment is small, stiff price increase would hamper theincremental growth. This is even more significant when the incremental growth is only 3.4 per cent year-on-year between September 1995 and September 1996."