Duty Hike On Liquor : Need To Take A Balanced View

While some states have hiked the duty on liquor hoping that it would lead to increased revenue, facts have shown that this idea is fallacious as the demand and consumption of liquor is highly elastic.

Pravir Kumar, IAS (Rtd)

As the Covid-19 lockdown entered its third phase in India, the clamour from a large section of the population which depended on liquor grew louder and louder. How would they drown their sorrows every evening or celebrate happiness except by drinking? Ultimately, the government succumbed to this demand and included it as an “essential” item that could be sold during the lockdown not only in “green” zones but “orange” and “red” zones too.

The response to the opening of liquor shops was nothing less than shocking. There were serpentine queues of buyers outside shops and some could be seen carrying numerous bottles as they desperately replenished their stock not knowing how long this relaxation would last. At many places, there were violent clashes and skirmishes to buy liquor, which was both funny and tragic given the threat of further spread of Covid-19 and the outright flouting of social distancing guidelines. 

Social media was quick to react and expressed its anger and anguish at these outrageous scenes and blamed the government for allowing the sale of liquor for increasing revenue rather than caring for human lives. Many people sarcastically said the government was giving more importance to daru (liquor) than to dawa (medicine). Some jokingly called those buying alcohol as “Economy Warriors” as they were prepared to sacrifice their lives for “saving” the economy and generating revenue for the government. 

In fact, after seeing the massive rush at these liquor shops, many states such as Delhi and UP were quick to seize the opportunity and promptly hiked the excise duty on liquor. This hike served a dual purpose for the government. While it seemed to show that the government was discouraging the sale of this “sinful” substance and thereby achieving a desirable social objective, it would also generate more revenue for cash-starved governments in these hard times. On the face of it, it looked like a “win-win” situation for the government, but there was more to it than met the eye. 

There is logic, philosophy and procedure behind the regulation of the liquor business. The government closely monitors, controls and regulates each and every aspect of this business–manufacture, storage, transit and sale of not only liquor but also its raw material, which is primarily molasses in India. One has to have a separate license for every single activity associated with the liquor trade. 

The reason for such strict regulation is not revenue alone. The main objective is to ensure that there is no diversion or leakage of liquor or its ingredients at any stage that may lead to the manufacture and sale of illicit liquor. The logic was that if drinkers really need to consume liquor, they should buy it from a licensed shop. Further, the liquor sold from these shops should be of good or at least acceptable quality and should be available at a reasonable price so that drinkers are not forced to find alternate and illegal sources which could be toxic or even fatal as seen in many cases in the past. In fact, many a time the criminal elements brewing illicit liquor nix it with chemicals and other toxic materials in order to increase the “kick”. In the worst scenario, methanol is mixed in this illicit liquor. The result of such adulteration is devastating and fatal for all those who consume it. Even if these victims are somehow saved, there are high chances of severe morbidity and blindness.

The subject of liquor has often led to the flowing of creative juices. In ancient Hindu literature, it was called som rasa, a tonic of sorts, which was consumed by the Gods for pleasure and energy. Famous Hindi poet Harivansh Rai Bachchan (who incidentally was a teetotaller) extolling the virtues of liquor in his famous poem Madhushala wrote: “Mandir Masjid bair karate mel karatee Madhushala (While temples and masjids create enmity, a liquor shop leads to unity).” Urdu poetry too would lose much of its charm without delving upon the joys of liquor–hangama hai kyun barpa, thodi see jo pee lee hai (why all the fuss, I have just taken a small quantity)” said one poem. Hundreds of Bollywood songs also melodiously describe the effects of alcohol, while movies such as Devdas and Sharabi are centered on the theme of alcoholism. Who can forget the famous quote of Winston Churchill: “I’ve got more out of alcohol than alcohol has taken out of me.” 

The consumption of liquor is also a cultural phenomenon that varies from place to place and country to country. While it is considered a sinful activity in India, in most of the western world, it is a way of life and there is no stigma attached to it. 

In India, there has been a lot of debate on the subject of prohibition, including in the Constituent Assembly that framed the Constitution. After much deliberation by this august body, it was resolved to include prohibition as a part of the Directive Principles of State Policy. Article-47 of the Constitution lays down that the State shall endeavour to “prohibit the consumption of intoxicating drinks and drugs which are injurious to health”. While most states are yet to implement this policy for various reasons, Gujarat has been a notable exception and has implemented prohibition policies for a long time. Bihar too introduced prohibition a few years back as part of the election promise made by the Nitish  Kumar government. 

There are strong arguments on both sides of the prohibition policy. Those supporting it highlight the social benefits–more money available to meet the basic needs of the family–and health ones too. While alcohol abuse is a major cause of domestic violence, liquor consumption is also responsible for a large number of deaths in road accidents. 

On the other hand, those opposing prohibition stress the sizeable loss of excise revenue and smuggling and bootlegging that inevitably stem from it. There is also an apprehension that in the absence of liquor from authorised shops, habitual drunkards may consume dangerous, illicit liquor or even drugs. Not surprisingly, it is alleged by many that it is the powerful liquor smuggling mafia which is clandestinely the strongest supporter of the prohibition policy in Gujarat. Similarly, there have been reports that due to strict implementation of prohibition laws in Bihar, there has been a rise of the excise mafia and consumption of drugs. 

Also, the idea that hiking excise duty will lead to an increase in revenue collections is quite fallacious as the demand and consumption of liquor is highly elastic. The consumption of country liquor, mostly by the poor, is particularly price sensitive and even the smallest increase (or decrease) in price has a significant impact on its consumption. Foreign liquor demand is also not totally inelastic and its consumption is likely to go down with the increase in prices.

The actual excise revenue collected by the government is the multiplication of excise duty rate and consumption. Therefore, it is quite possible that revenue collection may go down as a result of this hike in excise duty. Further, there is always an apprehension that poorer consumers may drift towards illicit liquor or drugs. 

This puts policy makers in a delicate situation. While hiking excise duty would definitely serve the social objective of reducing the consumption of liquor and may partly fulfill the Directive Principles of State Policy, it may or may not lead to an increase in excise revenue. At the same time, there is always a risk of smuggling, illicit liquor, drugs and associated dangers. Hopefully, the policy makers will take a balanced and calculated view after taking note of all the pros and cons.

The writer is a retired IAS officer who worked as Secretary to the Government of India as well Chief Secretary and Chairman, Board of Revenue in the government of UP. He also served as Excise Commissioner, UP from 1999-2002. The views expressed are personal.