Opinion
How trade deals can take our beverages to global markets
Summary
India’s export potential for non-alcoholic drinks is vast but achieving it would require us to redesign taxation accordinglyCountries like Brazil, China, Japan, the US, UK, Thailand and Mexico use their trade agreements to promote processed food exports (including non-alcoholic beverages). India is one of the largest global producers of horticulture products; production was 334.6 million tonnes in 2020-21, an increase of 4.4% from 2019-20. Fruit production was around 102.5 million tonnes in the same year, by figures of the department of agriculture and farmers welfare. The country leads the global production of bananas, mangoes, lemons, lime, papaya and also other ingredients needed for non-alcoholic beverage processing like milk and sugar. Yet, a recent study by us, titled ‘Contribution of Non-alcoholic Beverage Sector to Indian Economic Growth & Atmanirbhar Bharat’, found that beverage processing in the country is low and our rank was 19th in terms of revenue in 2019, below China and other developing countries like Mexico, Brazil, Indonesia, and Nigeria (see table). With our strength in raw material availability and government incentives like the production linked incentive scheme, can we unleash our strength in beverage processing and use trade agreements to seek greater market access for our exports
Where are we today? India’s large and growing domestic market is a key driver for scaling up beverage processing as well as investment in research and development and product innovation, which can lead to much larger exports. Our survey of companies, their supply-chain partners and farmers found that less than 10% of the fruits grown in this country are used for beverage processing. In recent times, established companies and startups have been trying to come up with innovative products; 35% of these companies have introduced new products, which include zero-sugar/sugar-free products, fruit-based, tea/coffee-based drinks and organic/ayurvedic drinks. While consumers are experimenting with these products, overall per capita sales revenue continues to be low, due to high prices. We hardly export any beverages. In 2020, India ranked 59th among global exporters of fruit and vegetable juices (HS code 2009), while Brazil ranked first. Foreign investment is only around 1%. Around 25-30% of India’s fruits and vegetables are wasted along supply-chain paths, a figure that’s below 10% in countries with strong beverage processing industries.
Beverage processing can help increase farmer incomes. Our survey of 500 farmers (divided into two equal groups of those linked to supply chains of beverage companies and those producing the same fruits and located in the same district but not linked) found that apple farmers in non-alcoholic beverage company supply-chains got a 20% higher yield per hectare following training by beverage companies, 5% higher prices, and earned 59% more income per harvest season vis-à-vis their counterparts in the same district. In the case of mangoes, supply-chain participant growers had an 8% higher yield and got 23% higher prices. However only around 5,000-6,000 fruit growers in India can connect with these companies, as weak domestic sales are making it difficult for businesses to scale up. One of the reasons for this is high taxes.
Top-bracket GST rate inhibits scale expansion: India has the highest GST rates among countries with which it has trade agreements (or FTA plans), which adversely impacts the competitiveness of our firms in export markets. Australia, for example, has a standard 10% tax on all goods. In India, zero-sugar carbonated drinks and carbonated fruit-based drinks attract 40% tax (20% GST + 12% compensation cess). Natural/mineral water and aerated water are taxed at 18%, but water packed in a 20-litre bottle is taxed at 12%, discouraging smaller purchases. In most countries, mineral water is taxed at an average of 5%, irrespective of pack size, as clean and safe drinking water is a part of the United Nations’ sustainable development goals. Fruit juices typically have a tax of 12%.
We must unleash the potential of India’s beverages sector: In the past, India kept most of its food processing industry, including beverage processing, outside its trade pacts. However, this will be a key area for discussion in trade agreements with the UK, Canada and the EU. Given our strength in raw materials, we need to enhance our domestic manufacturing capabilities at a fast pace and adopt a well-planned export strategy to promote Brand India in export markets. To support the growth of this sector, our study found that a moderately high GST of 28% on carbonated sugar-sweetened beverages, along with lower taxes on zero-sugar drinks and the lowest tax rate of 5% on nutritious/essential drinks like fruit juices and packaged water, will increase domestic market sales, enhance tax revenue collections from the sector, and enable our companies to scale up and export.
The experience of countries like Denmark shows that innovative tax policies can earn better revenue. Until 2013, Danes were taxed at €0.22 per litre of sugar-sweetened soft drinks, but in 2014, Denmark eliminated its sugar tax because Danish residents travelled to neighbouring countries and border shops to purchase untaxed sugary foods and beverages, which adversely impacted the country’s manufacturing sector, leading to job losses. While the scrapping of that sugar tax led to a loss of about €60.35 million per year in revenue, this money was not only recovered, but the government earned more overall as it also reduced sales of illegal soft drinks, increased investment in manufacturing, and stopped people crossing the border to buy cheaper soda. India, with 80% of its beverage processing still in the informal sector, could look at such examples to redesign taxation.
These are the authors’ personal views.
Arpita Mukherjee & Eshana Mukherjee are, respectively, professor and research assistant at the Indian Council for Research on International Economic Relations
