The areca nut with an identity crisis

**Akshara** (0:04)
In today's episode, we'll break down an interesting story about the arachanut with an identity crisis.
Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Monday, 24th August.
Coming to the story.
So, arachanut sits at the centre of paan, gutka and a whole family of chewing products. India also protects its domestic area growers with steep import duties, and that has created a big incentive to find ways around them. Recently, the Directorate of Revenue Intelligence, or DRI, uncovered one such scheme. And according to the agency, a raka sourced from Indonesia, Thailand and Malaysia was first shipped to Bangladesh. And there, it was allegedly repacked and given fraudulent certificates showing Bangladesh as its country of origin. Now, the DRI says this helped importers evade more than rupees 2,500 crore in customs duty over the past few years. So, what made the Bangladesh label so valuable? Now, the obvious guess is that the country doesn't grow enough of it. But India is actually the world's largest producer of areca nuts, accounting for about 63% of global output. Karnataka alone produces 10 lakh tons. More importantly, a lot of livelihoods sit behind this crop. The Agriculture Ministry estimates that roughly 60 lakh people depend on areca farming for work. So India grows so much areca because it also consumes a lot of it. Areca is chewed as plain supare and goes into paan, paan masala and gudka.
Paan masala manufacturers are major buyers, and their demand can move prices in producing markets. But there's also an uncomfortable wrinkle. Areca is associated with serious health risks, including oral cancer. So the same crop that supports millions of livelihoods also feeds products that create a public health problem. Imports add another pressure point. Areca grown in countries such as Indonesia can be cheaper than the domestic crop because production costs and local prices differ across countries. If those cheaper nuts entered India freely, they could undercut Indian growers. So India has built a fairly high wall around the market. For most countries, imported Areca normally faces a 100% basic customs duty, and most imports also cannot come in below a minimum import price of Rs. 351 per kilogram. But there's an important exception. A genuinely Bangladeshi Areca nut can avoid a normal 100% customs duty. It still has to satisfy the Rs. 351 minimum import price, but the duty saving alone is enormous. That is what made the alleged fraud attractive. Cheaper supply existed outside India, demand was strong inside it, and a Bangladesh label offered a way around the most expensive part of India's import wall. The exception comes from the South Asian Free Trade Area, or SAFTA. This is a trade agreement between India, Bangladesh, Pakistan, Sri Lanka, Nepal, Bhutan, the Maldives and Afghanistan that lowers or removes duties on eligible trade between these countries. For qualifying Arakka nuts from Bangladesh, the basic customs duty can be 0%.
Now Bangladesh does grow Arakka, but cheaper and more plentiful supplies are available elsewhere in Southeast Asia. So the incentive was obvious. Source the nut from one place and somehow make it qualify as if it came from another. Let's take a look at what happened in the Bangladesh case. The nuts were first routed through an Export Processing Zone or EPZ in Bangladesh, and investors say the containers and bags were changed there, which helped make the cargo look less like the same shipment that had arrived from Southeast Asia. After that came the paperwork. Fraudulence after certificates of origin were allegedly arranged, allowing the nuts to be presented to Indian customers as Bangladeshi origin goods. This is where rules of origin come in. So these exist because shipping a product through a country doesn't automatically make it a product of that country. To claim the trade benefit, the product has to satisfy specific origin rules, either because it was produced there, or because enough qualifying production happened there. Now imagine an areca nut grown in Indonesia and shipped raw to Bangladesh. If Bangladesh simply changes the bag and sends it on to India, the nut doesn't suddenly become Bangladeshi. It's still an Indonesian nut that happened to pass through Bangladesh.
But now imagine that something actually happened to it there. It's processed, value is added, and it's then exported to India. This is where the rules start asking harder questions. Was what happened in Bangladesh substantial enough? Did enough local value get added? Did the processing satisfy the particular origin rule that applies to that product? Only if those conditions are met, can the nut genuinely claim Bangladeshi origin and the SAFDA benefit. That is why a certificate of origin matters. But it's also why the certificate cannot always be the end of the story. So in 2020, India introduced Carota, which gives customers a way to ask what sits behind that certificate. If something doesn't add up, the importer can be asked to show how the goods actually satisfy the origin rule. And that's what makes the Bangladesh case more than a forged certificate story. The paperwork said Bangladesh. And DRI's case is that the nuts themselves had begun their journey in Indonesia, Thailand, and Malaysia. But there's another complication in our example. Suppose that Indonesian nut was not merely repacked in Bangladesh. Suppose it was roasted there. Customs now has two different questions to answer. The first is about origin. Did enough happen in Bangladesh for the nut to become Bangladeshi under SAFTA?