UP’s liquor business revives to impressive growth

Uttar Pradesh has had its fair share of bad press for a host of issues, i.e. starting from law & order issues to liquor & mining mafias to governments playing favourites with a couple of industrial houses and so on and so forth. But despite all these flak from the media, the present UP government’s successful endeavour in strengthening the liquor business in UP deserves commendation.

Yogi Adityanath inherited an excise policy in which almost the entire value chain of UP’s alcoholic beverages industry was with the late Ponty Chaddha’s family; from the year 2007 & right through to the end of FY 2018.

Extensive Cartelisation

To understand the liquor trade of UP better let me take you back a bit in time.

In the UP’s alcoholic beverages industry of the 90s, Kishan Lal Wadia, his son Ashok Wadia, Ponty Chaddha, Jawahar Jaiswal, his brother Pal Jaiswal, Har Prasad Jaiswal (no relation to Jawahar Jaiswal), Tilak Raj Sharma (Har Prasad & Tilak Raj were partners & till date have a number of businesses together) were already big names and they were controlling the wholesale & retail part of the state’s alcoholic beverages businesses.

This kind of monopoly or oligopoly meant that the syndicate operators only purchased the  cheapest available alcoholic beverage product & sold them at maximum possible prices; this meant that the true demand of the alcoholic beverages market in UP never came to surface or was not allowed to come to surface and consequently the excise department never knew on what basis they were to fix their revenue targets.

Growth and Bottlenecks

This unhealthy revenue situation continued till the then UP CM, Rajnath Singh, changed the UP’s excise policy for the 2001-02 fiscal and broke the monopoly of these big guns. The state opened up its liquor distribution andmade it a level playing field under which anybody & everybody could apply for a retail liquor shop and also open wholesale liquor distribution business in any part of the state, subject to revenues of each retail outlet being met.

The opening up of the liquor policy in UP met with a fair degree of success. The consumers started getting more alcoholic beverage products of their choice, the state revenues from alcoholic beverages rose from Rs.1979 crore in FY2000-01 to Rs. 3962 crore in FY 2006-07 at a CAGR of 10 percent. This was impressive growth as compared to a CAGR of 4 percent in UP’s state liquor revenues during the previous seven years.

In 2007, inexplicably the Mayawati-led UP government changed the policy & went to another extreme. The then government administered the entire alcoholic beverage trade of the state of UP via a unique model of 51-49 percent JV of a private player & a UP State Sugar Federation; created a special zone in western UP unto Bareilly to prevent alcohol being smuggled in from other states. All players in the state had to buy alcoholic beverage products in UP from this JV.

The JV was with a private entity called Blue Water who had a paid up capital of Rs. 10 lakh. Yet it was deemed suitable enough for this corporate to take on this responsibility. UP’s revenues from alcoholic beverages during the Mayawati led Government grew at a CAGR of 12 percent.

Even with a change in government in 2012 the same model continued, but to be fair to the Akhilesh Yadav led Government, a major reform happened in the structure of the value chain by which the state mopped up sizeable revenues in the year 2014.

A Slew of Progressive Reforms

Now to cut the clutter, what these CAGR & absolute numbers hide are the basic backbone of the excise revenue model of the state of UP, which is built on the Minimum Guaranteed Quota (MGQ) of country liquor one has to sell in a year.

From FY 07-08 till FY 11-12, the MGQ in UP went up by 4 percent, whereas the duties went up by 25 percent. Thus the demand growth for liquor was kept at an artificial low & duties were increased. This trend continued till the excise policy of UP for FY 18, when finally the system realised that a major change was needed.

Faced with high prices across all liquor categories i.e. country liquor, beer & Indian Made Foreign Liquor (IMFL) / Imported Foreign Liquor (IFL); rampant smuggling from other neighbouring states where the MRP was significantly lower; with an all time high excise duty structure, the Yogi government took the bull by the horns & reset the entire alcoholic beverages business model of the state.

The key liqour business reforms in the Yogi government are:

1. Break away from the past and opening up the liquor trade in UP to one & all. We witnessed a transformation from large swathes of 3 zones but 1 syndicate to individual liquor shops in UP.

2. Any distillery / brewery who survived the monopoly years with low margins was allowed to produce & distribute liquor products all over the state like in any other food or beverage business.

3. Rationalised the entire MGQ system to get the suppressed consumption out in the open & get true representation of sales as per the area/demographics of the area and purchasing power.

4. Innovative products like the UPML i.e. 100 percent ENA-based UP made liquor in tetra packs were introduced.

5. In Cl, from some 15 skas it was cut down to a more pragmatic & manageable 6 skas to finally 3.

6. Enforcement became stronger & thus over time interstate smuggling of liquor was reduced.

All the above translated to a phenomenal growth in liquor revenues in UP and a 54 percent CAGR in CL/ UPML MGQ.

Need to Track and Trace

Where the present UP government still needs to get its act together is in introducing technologies like track & trace system of every liquor bottle produced within UP & other parts of India but consumed within UP’s geographical boundaries, so that any revenue leakage is plugged. Unfortunately this key reform is pending since 2018 due to inept handling by E&Y, who were the project manager for the same.

The Yogi Adityanath government has firmly established deep roots in the liquor business in the state & broad-based it and thus the government is well on the road to achieve such humungous revenue growth combined with actual consumption growth. The state is eventually getting freed from the previous 11 years of muddled & inexplicable liquour policies that were in place.