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A street vendor holds cigarettes as he serves a consumer in Jakarta, Indonesia, March 15, 2017. REUTERS/Beawiharta

(reuters_tickers)

By Eveline Danubrata and Agustinus Beo Da Costa

JAKARTA (Reuters) - Indonesia's parliament has proposed a draft law that could lead to a sharp increase in tobacco output in a country that is already a top producer with one of the heaviest rates of smoking in the world.

Indonesia's tobacco industry employs millions of workers and contributes almost 10 percent to government revenues through taxes, but has faced a backlash from the health ministry and anti-smoking organizations.

Health Minister Nila Moeloek said her ministry "definitely" opposes the tobacco bill as it has the responsibility to "safeguard the health of the people".

The bill, which covers production, distribution and excise taxes, has to be approved by President Joko Widodo.

Firman Subagyo, the parliament member who initiated the bill, played down health concerns, saying tobacco is a "strategic" commodity that can increase the prosperity of Indonesian farmers and state revenues.

"Health should not be used as an excuse to destroy people's livelihood," Subagyo, who comes from Indonesia's second-biggest political party, Golkar, said an interview on Wednesday.

Under the draft law, manufacturers of tobacco products have to use locally sourced tobacco for at least 80 percent of their production, while imports of ready-to-use cigarettes may be subject to an excise tax of 200 percent.

'RATIONAL PRICING'

Abdus Setiawan, a board member at the Indonesia Tobacco Growers' Association, said he welcomed the draft law as it could help to protect farmers. But an increase in production should be balanced with "rational pricing", he said.

Indonesia was the world's fourth-biggest cigarette producer with an output of 269.2 billion sticks in 2015, according to the latest data from research firm Euromonitor International. The market was valued at 231.3 trillion rupiah ($17.3 billion).

Nearly two-thirds of men are smokers in Indonesia, where an average pack of cigarettes costs less than $2.

Major cigarette companies operating in the country include Phillip Morris-controlled PT Hanjaya Mandala Sampoerna Tbk, Djarum Group and PT Gudang Garam Tbk.

Sampoerna, through its tobacco suppliers, has partnered with about 27,000 tobacco farmers in Indonesia and gets almost three-quarters of its tobacco domestically, said Elvira Lianita, Sampoerna's head of fiscal affairs and communications.

However, the industry's total tobacco requirements have outpaced the domestic growth in tobacco output, Lianita said. Restricting access to raw materials through import regulations or taxes would disrupt the "overall economic stability", he said.

"Partnership programs, not risky restrictions, would be the solution to bridging this gap and increasing farmer prosperity," she added.

Gudang Garam and Djarum declined to comment.

(Reporting by Eveline Danubrata and Agustinus Beo Da Costa; Additional reporting by Cindy Silviana and Jakarta Newsroom; Editng by Ed Davies and Bill Tarrant)

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