Understanding Why Alcohol Prohibition Lifted in India: On May 4th the Central Government lifted the prohibition on liquor sales. What followed was a parade through all news outlets exhibiting Indians risking their lives in thousands just to feel half-seas over. Media focus on movie box office records has been replaced by alcohol day to day sales records being reported during the pandemic. Today we try to unravel why the center decided to do so and what possible implication it could lead to.
What does alcohol mean to the government?
— Alcohol and the Soviet Union
Mikhael Gorbachev, although some might know him as the Soviet Union President during its collapse, our generation will famously remember his character played in the TV show Chernobyl ( Another disaster he oversaw as President). In 1985 Gorbachev started an anti-alcohol campaign due to its ill effects on health and crime in society.
In the first half of the 1980s, 13000-14000 deaths were drunk accidents. Over 800,000 people were caught for drunk driving and by 1985 these numbers kept increasing. The soviet union faced multiple problems due to the influence of alcohol. Accidents at work were common and at a period the condition worsened to a point where crops were not even gathered due to intoxicated farmworkers (Socialism, SMH).
Gorbachev’s campaign was a success and the government claimed increased life expectancy in males and even reduced crime rate. But all this was just a silver lining to a darker cloud. The loss of 100 billion rubles of revenue from alcohol sales led to an economic crisis after the alcohol sales moved to the black market. The campaign ended in 1987. The Berlin wall fell in 1989. The Soviet Union collapsed in 1991.
— Alcohol and India
(Image Credits: Finshots)
The data presented above shows the revenue a state earns from the sale of alcohol. Alcohol revenues make up to 20% of a state’s revenue. In the midst of the pandemic states like Delhi have faced a 90% fall in their revenues. For the state governments to fight the virus without any source of income will only lead to a nationwide economic crisis.
Punjab was the only state to officially request the government to ease restrictions over the sale of alcohol. Several other states like Karnataka, Maharashtra, Haryana, Rajasthan, Kerala, Tamil Nadu, Goa, and those in the Northeast raised the issue informally.
The states named in no way represent a stereotype of the people’s dependence on alcohol but instead how the state governments depend on alcohol. Investing in alcohol has been the simplest and most profitable source of income for the state governments. In 2017 as per the Kerela State Beverages Corporation (BEVCO) earned around Rs.600 for every Rs. 100 spent on alcohol. This example sums up why a government would actually consider investing in alcohol-based businesses. It incomes earned also explain why the prohibition on alcohol sale had to be lifted.
Problems with alcohol prohibition
Gujarat, Bihar, Nagaland, and Mizoram are the states in India that have prohibited all sale of alcohol to its citizens. It can already be estimated that just like Delhi, these states too will face a huge loss of revenue due to the lockdown. But these are just the beginning of their financial troubles as they would not be able to raise revenue from alcohol sales either.
If we believe that these dry states are successful in the prohibition of liquor it would present us to be too naive. By banning liquor the governments have only succeeded in diverting the funds from their pockets to the black markets.
Similar bootlegging practices can be expected in a nationwide prohibition. But what is even more troubling features of the prohibition are the thefts and the scams. An alcohol store, for example, was looted for 4.18 lakhs in Bengaluru. Scams promising delivery of alcohol had already begun to see the light of day during the 40 days of prohibition.
Even the manufacturing of illicit liquor saw an increase. The consumption of such illicit liquor is much more dangerous and harmful to health. All these crimes have resulted in wastage of police resources. The energies that could be focussed on controlling the virus were spread to solve these cases which could have been avoided.
Raising the price of Alchohol
After the confusion and the idea of social distancing being flouted on the first day of the alcohol prohibition being lifted, the government resorted to discourage guzzlers by raising the taxes. The Delhi government added a 70% corona tax. The state of West Bengal levied a 30% tax. However, the highest increase in the prices was from the Andhra Pradesh government. The prices were 75% higher after 3 revisions. The Karnataka and Tamil Nadu government also raised the excise on alcohol.
— The relation between prices and Alcohol
The reasons for the increased price lie in obtaining the twin objective of raising revenues and discouraging alcohol purchase. This is so that lesser people venture out of their homes in search of alcohol. A survey conducted in North West England with 22,780 in 2008 speaks differently. It was conducted to explore alcohol consumption changes if the prices were adjusted.
According to the survey, 80.3% considered a lower alcohol price would increase consumption. 22.1% considered that rising prices would reduce consumption. This meant that alcohol consumption was lower price elastic. This meant that you could lower alcohol prices to increase its consumption but an increase in price would still keep consumption at the regular levels. In other words, you can increase the harm by reducing the prices but not reduce the harmful effects of alcohol by increasing prices.
— Alcohol and Growth
( Source: The prices above are from the year 2017. The government would earn over 600% in the case above)
In India, a major portion of alcohol consumption is from the middle and lower-income groups. An increase in the prices of alcohol would not discourage a habitual drinker as discussed earlier. This increase would just decrease the disposable income or savings available for essential goods. Their spending on alcohol would deprive their children of nutrition and families of other essentials.
We just had a look at the impact of increased prices from an individual’s perspective. Let us have a look at what would be the case if due to this the consumption of essential goods is reduced in the economy. At the end of the day, it is essential goods that have the ability to kickstart the economy and not alcohol products. It is the demand for essential products that will enable industries to employ more labor. A study of the US states between 1971 to 2007 found that a 10% increase in per capita beer consumption resulted in a 0.41 percentage point drop in the annual income growth. The government has successfully increased its revenue but unfortunately directed demand away from essential products.
Which Direction to head in?
The points raised above have built walls to every decision taken in association with alcohol prohibition being lifted. The only exception being the decision to lift the prohibition itself.
Firstly the economy is too dependant on alcohol. The government cannot harvest any other source of income and liquor stores increase the risk of contraction. Secondly raising taxes does not discourage drinkers. Instead, it slows the opening of the economy. Thirdly a complete alcohol prohibition will only finance the black market and increases other crimes.
The following action taken by some state governments or possible consideration would help the government find a middle ground. Their application through states would result in being beneficial to both the government and the people.
— Open Alcohol outlets only after planning for appropriate social distancing measures.
The Supreme court on May 1st suggested the states to consider home delivery of alcohol. This would not only encourage social distancing the increased demand for home delivery would increase employment in the home delivery service. The food delivery company Zomato has already shown interest. This can be taken up by other delivery apps too. In a worst-case scenario even if any one of the parties comes in contact with someone who has contracted the virus, the linkage would be able to be traced by the app. This, however, should only be applied after ensuring age restriction are in place. West Bengal and Chattisgarh have already adopted the home delivery model.
The Delhi government has started issuing E-Tokens to buy liquor. Allowing only limited people at a set time only at particular stores with the pass. This also could also enforce social distancing but still involves the risk of venturing out.
— Reduce the price to levels the same as before the lockdown
The price increase has to be curbed. It is understood that the government is in dire need of income. This, however, will not even benefit the economy in the long term perspective as all revenue will stop once people run out of their savings. A habitual drinker will continue drinking even at higher prices. Also, the present condition involves people losing jobs and taking salary cuts. The price increase would do greater harm than good.
— Set a limit on Quantity
Settling a limit to the quantity available person is a very important step. We have already seen the survey earlier which concluded that a reduction in the prices would lead to increased demand. Hence applying the previous point without ensuring this will only negate all benefits. When clubbed with the first point, tracking the quantity via App or an online portal makes it easy.
All decisions being taken with the expectation of the worst would help us better prepare and forsee such situations. With no vaccine in sight for a year, all decisions must enable us to live accordingly for at least a year. The pandemic already has and will keep changing the way we live forever. Online Delivery with limits is the new Black!
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.