Policy Changes And Their Impact On The Liquor Industry
It is true that the demand for liquor is inelastic, however the industry is not immune to policy impact that can affect its ability to maintain prices or supply
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Half a Millennia ago the Florentine Republic was undergoing a change in both its political and social mindset-At its’ helm was Niccolo Machiavelli, a Master Tactician who proclaimed- The one who adapts his policy to the times prospers, and likewise that the one whose policy clashes with the demands of the times does not.
Much like Florence, India’s federal policy has seen a massive shift over the past three decades - We are part of the WTO, the increase in income of the middle class has seen the rise of consumerism and the change in guard at the helm of our republic has triggered a spate of changes in our policies. It is now more than ever that we need to understand and evaluate the impact of these policy changes.
In India, Federallaws govern the liquor industry, which translates to a gamut of regulations and policies that are revised every year and may include changes to the licensing fees and other taxes.
One such major policy change from the recent past is “De-Monetization”. This unprecedented decision by the central government created a liquidity vacuumand affected adversely the public ability to purchase liquor. The FY 2016-17, Delhi Excise saw revenue shrink by 0.38 %, against an average YoY growth rate of 13%. This translates to roughly INR 560 Crores of loss to the Delhi State exchequer.
The problems are compounded when the Judiciary steps in like when they with the “Highway Ban on Sale of Liquor”. This “shock” impact caused Retail outlets, Hotels and Restaurants within a 500 m radii of National highways to turn away customers. The impact of this move can be best highlighted by the loss ofINR 14,000 Crores (approximate) to the Maharashtra State Government.
Both these policy changes came as a shock and could not be factored in by Liquor companies. This lack of clear communication from policy makers results in the industries’ inability to mitigate risks. In the figure (See Fig 1) we can clearly see that both minor and major policy changes have resulted in significant deviations from the average with only 4 years registering average growth since data collection began in year 1994-95. Though De-Monetization and the Highway Ban are so –called “Black Swan” events and help us highlight the plight of the industry, we can clearly see that even minor changes have an impact on industry health.
On the contrary not all policy changes are “Adverse”. Policy changes in the past have helped open up industries by introducing preferential tariffs, infusing capital or lowering barriers to entry. Such changes can have a positive impact on any industry.
The FY 96-97 saw a 33% growth rate in revenue collection by Delhi Excise. Can you guess what the underlying trigger was?- India Signed the WTO agreement on 1st Janaury 1995. While this date is just notional- it did signal the emergence and opening up of India as a potential mutli-billion dollar market. Even though the import duty was to remain at 233% up until 2003, it did create the opportunity to exlpoit Indias market potential.
It is true that the demand for liquor is inelastic, however the industry is not immune to policy impact that can affect its ability to maintain prices or supply.
So the next time you see an increase in price of your favorite tipple, You’ll now know why!
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