There are millions of consumers all over
India who pay a very high price for liquor. Domestic tax on liquor can be,
in one way or another, well above 200 per cent! Customs duty is also huge at
150 per cent. And, it is also the licence raj that is problematic. There is a
need for an overhaul of policies on liquor across the country. It is true that
there are vested interests that can come in the way. However, often vested
interests thrive on the basis of the mindset of the public. So, it is important
to see where the more important misconceptions lie.
A common belief is that state governments
impose a very high tax on liquor in the public interest. This is not entirely
correct. It is a very soft option to collect large tax revenues! Though a big
tax can reduce the consumption of liquor to some extent, it is a blunt policy.
It affects the budgets of many households for all things other than liquor. Now
very many drinkers enjoy responsibly with friends and family every now and
then. So why punish them? And, the licence requirements on serving liquor at
eateries and social gatherings can be literally taxing, restrictive, and
harassing. Also, as liquor becomes expensive due to very high taxes, people
tend to very gradually and subconsciously shift to lower-quality and cheaper
brands. At the bottom of the income pyramid, the consumption of low-quality
country liquor and illegal liquor rises. This has an adverse impact on health.
Another common belief is that state
governments just cannot do without a very high tax on liquor. This is not quite
true. Even a poor state like Bihar has imposed prohibition on liquor. The point
is not that this is a good policy; the point is that the state government is
making attempts at managing its finances without any tax on liquor. There is a
lesson here for other governments that too can explore other sources of
revenues. Of course, it is important that the central government helps state
governments in this endeavour. A beginning can be made if the Centre cuts down
substantially on cess and surcharge, and it increases its regular taxes.
The former accrue to the Centre only while
the latter need to be shared with the states. Yet another widespread belief is
that liquor cannot be brought under goods and services tax (GST). This is
questionable if we allow for the possibility of a legislative change. If liquor
is under GST, just as cigarettes are, this will also serve a larger purpose as
this will unify and simplify the overall tax structure. The public authorities
can charge the highest 28 per cent rate under GST. Of course, since part of the
GST goes to the Centre, it is necessary that the latter compensates the states
adequately.
Last but not the least, a common view is
that instead of the state government itself having the monopoly to sell liquor
through its own stores, it is better to conduct auctions to give licences to
private companies to sell liquor. But wait a minute. While the regulation of
consumption is understandable, it is not clear why there should also be any
involvement of the government in the distribution of liquor. The distilleries
can deal directly with private distributors or retailers. The good old market
mechanism can be useful here as well. All that is needed is regulation like the
minimum age for the consumer and no driving after drinking, and other steps
like serious checks on spurious liquor. It also helps if the government
provides funds to organisations like Alcoholics Anonymous.
Returning to auctions of licences, in any
case competition there often gets restricted in one way or another to
participants who have “contacts”,
muscle power, black money, etc., given the way the whole complex and
non-transparent system operates. There are barriers to entry for an ordinary
businessperson. And, online sales are not routinely allowed. Overall, the
so-called competition is not very meaningful. And, all this vitiates the
atmosphere for business, tourism, economy more generally, and even the polity.
In conclusion, the
liquor policy in India has gone too far over time. There is a need to avoid huge
taxes and undue licensing. All this can also reduce corruption and even doubts
about corruption. Then, the limited state capacity, the media, and the
electorate can be focused on more important matters.
The author is an
independent economist. He taught at the Indian Statistical Institute (Delhi),
and Jawaharlal Nehru University and Ashoka University.
This is an article that
appeared in the Business Standard on 25th April 2024 written by Prof
Gurbachan Singh. Read it carefully and then respond to the following question.
Question
What according to you is
the main point in the article? Do you agree with it? Why or why not? In your critique be sure to
use economic terms as liberally as possible. A few terms we discussed in class
are:
1.
Market Mechanism
2.
Market Failure
3.
Monopoly
4.
Competition
5.
Externalities
6.
Auctions
7.
Allocation of Resources
8.
Sin Tax
9.
Deadweight Loss
10. Licence Raj
11. Elasticity
12. Demand
13. Supply
This is only an indicative list. Your submission
should use each of these 13 economic
terms at least once, and repeat as many times as necessary for your critique.
The centre piece of the analysis should be the market. The usage of the terms should be relevant and contextual.
Use of real data to prove or reinforce arguments will earn you credit. Whatever
you write needs to have an underlying logic and consistency. The real world almost
always lies within the extremes rather than at them, although that does not
imply you can get away by saying anything. You should say what you believe, but
remember to develop the argument logically and concisely using as much data as
you can gather. There is no word limit, but irrelevant polemic wastes
everyone’s time. I expect to see a list of the references you use for your
analysis.
