According to reports, the India's Commerce Ministry, on the request of Health Ministry, has proposed to put a complete FDI ban in the sector.
In a letter to the Indian Ambassador to the US, Nirupama Rao, the US industry organisations said: "Some proponents of further restrictions have apparently cited public health as a justification, but since there is absolutely no difference in the health effects from consuming Indian or foreign tobacco products, that argument cannot be taken seriously".
Noting that the Indian market is dominated by domestic companies, it is hard to understand any concern about the ability of Indian industry to compete.
It said that 99.6% of the market is held by domestic Indian companies and one large Indian company controls 80% of the market.
"We fail to see the problem with companies investing in a manner that is consistent with Indian law.
"In short, the arguments of the proponents of additional restrictions do not contain a valid rationale, unless one considers valid the parochial political notion that India should be rid of even the minuscule foreign company competition that currently exists," the letter said.
The US organisations said that this issue raises serious concerns about India's willingness to stand by its proclamation to welcome foreign investors per current policy and calls into question India's adherence to its international obligations.
"With respect to the argument that the lawful wholesale business model enables foreign companies to invest in India in wholesaling and somehow this is viewed as problematic, we presume the Indian government intended to structure the law to enable foreign companies to invest in a wholesale business, while we recognise India's government has precluded investment in manufacturing," it added.
Further it said, India is a leading exporter of tobacco, and its manufacturing industry also sells tobacco products internationally, including in the US.
"In addition to the reported consideration of further restrictions on FDI in the tobacco wholesale business which on their face raise international obligation issues, we understand restrictions are also being considered in regard to the importation of tobacco products, including a possible import ban," it said.