A double whammy

High taxes and high inflation have caused adverse impacts on India’s alcobev industry in recent years. According to the International Spirits and Wines Association of India (ISWAI), the liquor industry of India has historically contributed 25-40 percent of revenues for state governments, but higher taxes without supplier price hikes is leading to a crisis situation for the industry.

An industry expert points out that the liquor industry of India is one of the fastest-growing markets worldwide for alcoholic beverages, yet it is caught between a rock and a hard place due to archaic policies, which are now threatening its growth.

According to another industry leader, raw material costs have spiralled out of control, and with high taxes delivering the killer blow, what hurts the industry most is the denial to pass on the high costs to the consumers. The latter, in all fairness, is willing to pay the price for quality.

The industry, it seems, is caught in a double whammy with no immediate signs of respite. Under normal terms of trade, like in any other sector, the industry would have passed on the rise in costs or taxes down the line, based on the strength of its brands. They say it is a levy actually meant to be paid by downstream users yet in India’s alcobev industry, the manufacturer is forced to absorb it more often than not to minimise end-price disruption. Trade bodies like the Confederation of Indian Alcoholic Beverages Companies (CIABC) try to mitigate matters on two fronts. The first is to persuade the state governments to entertain requests from companies for price increases to compensate for the inflationary pressure on costs. Since that is uncertain, in terms of quantum and timing, the next step is to nudge the industry to look for operational cost efficiencies as interim mitigation measures.

One manufacturer points out that the prices of fuel have escalated to a large extent, which in turn is adversely affecting transportation cost, which has gone up by as much as 25 to 30 percent. He goes on to point out that one of the biggest problems is getting the EDP approved by the Excise Commissioners of respective states. Because of the steep increase in the cost of inputs for alcobev products in India during recent years, the industry should get a sufficient increase in EDP, but that is sadly not the case in many cases.

The industry expert goes on to add that state governments in India are only interested in increasing revenues through taxation while they are least bothered about the difficulties alcobev manufacturers are facing.

Considering the fact that India’s alcobev industry is already highly capital-intensive, reduced margins make it challenging for smaller companies to survive. The state governments, insiders say, should reduce price control by its agencies, as is the case in other consumer goods markets. In other markets, prices are typically determined by market dynamics, COGS, etc. rather than being fixed by the government. An ideal solution would be to allow the industry the freedom to set prices without much government influence.

All in all, despite the Catch-22 situation, India’s alcobev industry is still courageously putting up with the difficult scenario and still notching up low profits, on an average. If the trade bodies and the state excise departments decide to sit across the table and come clean, there is still hope at hand.