Shifting demand patterns must guide state excise policy design

Indian consumers are changing. Growing urbanization and rising incomes, coupled with the availability of innovative products and technology has the potential to transform the bell-curve of the market from price-sensitive to a quality-conscious consumer base. The younger to middle-age demographic focuses on nutrition content and brand value, with an increasing willingness to experiment with products. International travel and exposure to global products and brands have enhanced their awareness, now reflected in their purchase choices and behaviour. In the case of food and beverages, Indians are now comfortable with international cuisines. This has made India an attractive market for global manufacturers and retailers, many of whom want to launch and market their products before establishing local plants for one of the largest consumer markets in the world.

Governments, both at the Centre and states, want to attract foreign investment in manufacturing and maximise revenue collection, but sometimes their policies miss the demand side of the story. Let us take the example of alcoholic beverages. A survey-based study by the authors, Developing Principles for Regulation of Alcoholic Beverages Sector in India, found that attitudes have changed towards the consumption of alcohol. Drinking, even among women (earlier considered a taboo), is now accepted in many social interactions. The country is one of the fastest growing markets for alcoholic beverages globally, with an estimated market size of $52.5 billion in 2020, expected to grow at a compound annual growth rate of 6.8% between 2020 and 2023. Premium products recorded a five-year CAGR of 7.7% in 2018, of which bottled imported spirits recorded a CAGR of 10.9%. The data collected and collated by the authors showed that the share of upper-middle income consumers is projected to rise swiftly from about 28.6% in 2018 to nearly 36.7% in 2025 and to almost 47.4% in 2030. This group is quality and brand conscious, and is driving premium-product consumption. While this data does not capture our informal or illicit liquor market, it does provide directions for state excise departments to plan their revenue projections based on consumer demand.

The data also shows that by 2030, half of all consumers would buy more of the same category of alcoholic beverages that they were consuming, 26% are expected to move to higher brands, and 24% are projected to spend on newer categories of alcohol (for example, craft beer, craft gin, etc). Globally, governments from time to time use such data to maximize revenue collections and guide consumers towards “quality liquor consumption”. For example, after analysing shopping patterns, the Scottish government on 1 May 2018 changed its duty structure in a way that the maximum impact of taxes was on low-priced, high alcoholic-content drinks, which are mainly sold in supermarkets and shops. These guided consumers towards premium/high-quality produce, and at the same time limited the quantity consumed. A detailed study by R. Griffith, M. O’Connell and K. Smith in 2019, Tax Design in the Alcohol Market, using UK market data for two years (2010 and 2011), with a representative sample of 18,713 households, found that on average, heavier drinkers tend to purchase stronger types of alcohol. They suggested that an alcohol tax system that increases the relative prices of strong and cheap products may successfully target the consumption of heavy drinkers. However, consumer preferences vary. Hence, the findings will depend on: (i) how strongly different households (e.g., light versus heavy drinkers) switch away from products in response to an alcohol tax rise; (ii) how strongly and what alternative alcohols they switch to; and (iii) what fraction of drinking externalities are accounted for by heavy drinkers. All these factors must be considered by governments as they design alcohol policies.

In India, the judicious use of consumer-purchase data to design tax rates for specified outcomes (enhancing revenue and protecting health in case alcoholic beverages) was a rarity in the past. A lack of organized systems of data collection and collation only exacerbated the problem. This led to ad-hoc and non-aligned changes to excise policies, models and duties. Lately, states have been taking bold measures to see the impact of policy changes on consumption and revenue collection. For example, West Bengal has proposed a downward re-alignment of previously-increased excise duties on Indian Made Foreign Liquor (IMFL) to allow consumers access to better-quality produce. Given that demand for beer is growing, the state came up with a policy for non-alcoholic beer to promote the production of beer with an alcoholic strength not exceeding 0.5% v/v, which has no adverse impact on health, unlike beverages with high alcohol content. These are smart moves, the on-ground impact of which is likely to take shape in terms of higher and stable revenues with increasing investments along with better consumer health.

There is an urgent need for our states to move away from solely current year revenue-centric ad-hoc models to an analysis of consumer demand patterns while designing their excise policies. A wrong policy may push consumers towards lower-quality products and illicit liquor, causing health hazards and irreparably reducing revenues. Consumer demand, welfare and health should be a priority for policymakers. Longitudinal data on consumer shopping and consumption will help our states design appropriate excise policies.

Arpita Mukherjee & Aditya Prakash Rao are, respectively, professor, Indian Council for Research on International Economic Relations, and partner, PLR Chambers. These are the authors’ personal views.