Bengaluru: Beer makers expect a short-term hit on sales of the brew in Karnataka after the state government announced an excise duty hike on the category in its budget last week.

Policy challenges in key beer-guzzling states, including Karnataka, had already weighed down sales in 2018. The state excise department has been promoting spirits over beer since mid-2018, leading to supply constraints, beer makers had told Mint earlier this year.

“Across the board only beer prices will go up, but prices of spirits will stay the same. Consumers will find the hike very steep and the industry will clearly be impacted in the short term. Whenever there is a steep price increase, growth tapers off," said Shekhar Ramamurthy, managing director of United Breweries Ltd (UBL), the country’s largest beer company.

The budget plans to increase duties on bottled beer to 175% from 150%. That means, on average, the end consumer will pay around 9.4% more for a 650ml bottle of a mild beer and 9.6% extra for a strong beer. The actual increase will vary depending on the individual brand, price segment, and on whether the retailer and manufacturer decide to chase higher margins.

"The proposed excise duty hike in Karnataka would make beer, which is mostly a moderate recreational drink, more expensive for the consumer, and could lead to consumers shifting to products with stronger alcohol content," said Ben Verhaert, president of South Asia at AB InBev.

Karnataka also proposed to increase the duty on draught beer to 150% from 115%. That is expected to push up the end-consumer cost for a 330ml glass of draught beer by 15%, according to industry executives.

The government expects additional revenue from the hike of between 400 and 500 crore, a senior official at the excise department said on condition of anonymity. While there are no restrictions on beer distribution, the department normally takes the ratio as one case of beer to two cases of Indian-made foreign liquor, the official added.

Despite housing India’s microbrewery capital, Karnataka earns very little by way of revenue from microbreweries right now (around 15-20 crore). The state government’s budget proposes to double the excise duty on these establishments in rupee terms. And Bengaluru’s microbrewery owners are somewhat divided in terms of how it could impact consumption going ahead.

“Whatever duties we were paying annually, we are going to pay twice as much. So it’s not small and how that impacts the end-consumer behaviour, we will have to see," said Sibi Venkataraju, co-founder of Toit, one of the city’s first brewpubs.

But Ajay Nagarajan, the chief executive of another well-known brewpub – Windmills Craftworks, believes it is not going to have that much of an impact from a consumption perspective. Across brewpubs, the end-consumer price will probably go up by around 25 and that is not much for a consumer who’s paying 200-300 for a pint, he said.

“In the case of Karnataka, in my opinion, some consumers are bound to be upset. But given the overwhelming beer demand across the state, as long as the price increase comes with unrestricted supply, people will eventually be happy with the adjustment," said Javed Murad, founder of packaged craft beer brand White Owl.

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