DEVELOPING PRINCIPLES FORREGULATION OF

ALCOHOLIC BEVERAGESSECTOR IN INDIAEXECUTIVE SUMMARY

ARPITA MUKHERJEE | ADITYA PRAKASH RAO
ANGANA PARASHAR SARMA | NIBHA BHARTI | PREKSHA DUGAREXECUTIVE SUMMARY
The global alcoholic beverages market wasestimated to be at USD1.58 trillion in 2020
and is projected to grow at a compound
annual growth rate (CAGR) of around 3.5 percent between 2020 and 2023. India is oneof the fastest growing alcoholic beverages
markets globally, with an estimated market
size of USD52.5 billion in 2020 and the market
is expected to grow at a CAGR of 6.8 percent between 2020 and 2023. According to
the Ministry of Food Processing Industries,
production of alcoholic beverages in the
country increased by about 23.8 per centduring the period between 2015-16 and2018-19. The alcoholic beverages industry
contributes to around 1.5 million jobs inIndia and generated around USD48.8 billion
in sales revenue in 2019. The sector is open
to foreign investments and many statesoffer subsidies for local manufacturing (forexample, Maharashtra and Karnataka forwines). From the demand side, factors suchas rapid urbanisation, changing consumer
preferences and a sizeable and growing
middle-class population with increased
purchasing power have contributed towards
growth in demand for alcoholic beverages.
According to industry estimates, the numberof people consuming alcohol increased fromapproximately 219 million in 2005 to 293
million in 2018; it is projected to increase to
386 million by 2030. The share of the uppermiddle income group in alcohol consumption
has increased steadily from 7 per cent to 21
per cent and is expected to increase to 44 percent by 2030.

Alcoholic beverages are among the top
three sources of revenue earning acrossmost states. Yet there seems to be a lack oftransparency, predictability, and clarity inthe tax regime to ensure that the revenue
earning objective is aligned with otherobjectives of the government like ‘Make inIndia’ and exports from India. The governanceand pricing models for alcoholic beverages
vary widely across the states. The states
through their excise policies, control theentire supply chain of alcoholic beverages
from manufacturing and distribution toregistration and retail. There are frequent
and ad-hoc changes in these policies, creating
uncertainty and preventing manufacturers/
distillers to plan their investment.
Given this background, this report, based on
secondary information analysis and a primary
survey, provides an overview of the Indian
alcoholic beverages market, highlighting
market trends and contributions of the sector
to the economy. It specifically examines
the regulatory and pricing related policies
across select states and their impact on theindustry, its supply chain, quality of products
available to consumers and consequenteffects on health. Specifically, it examines thedifferent models followed by states such as
corporation model, wholesale model, directmodel and distribution model and theirimpact on designing an efficient supply chain.
It examines whether price control measures
have been successful in achieving thedesired objectives, namely (a) higher revenue
earnings and (b) consumer protection. The

DEVELOPING PRINCIPLES FOR REGULATION AND PRICING OF ALCOHOLIC BEVERAGES SECTOR IN INDIA

5

report also shows how policies and excise
duties have been sporadically changed during
the recent coronavirus (COVID-19) pandemic.
This report then makes policy
recommendations on how state
governments can learn from global bestpractices and customise them to therequirements of their respective states todevelop a predictable and transparent
pricing model that will enable thegovernment to meet its objectivesof earning higher revenue, address
consumer health and safety concerns,
increase investment in manufacturing
in line with the ‘Make in India’ initiative,
create employment, bring in foreign
direct investment and increase exports.

1. Key Findings
Global Trends
Since 2010, more than 78 countries have
imposed price controls on alcoholic
beverages through an increase in excise

taxes to protect consumer health. However,alcohol consumption globally, and in India,
is price inelastic, which implies that higher
prices may not deter consumption. Therefore,
governments through the right policies canguide consumers towards lower intake andhigher quality consumption. Citing examplesof regulations from a number of countries,
the report points out that such regulations
should be designed through extensive data
modelling and in a transparent manner. This
would protect consumers’ health and at thesame time would enable the governments toearn revenue and facilitate exports.

Changing Consumption Trends
The report highlights some interesting
market trends. While consumption of spirits
dominates the Indian market, its share involume terms has decreased from 55.02 percent to 50.31 per cent during 2013-2018 (seeFigure A). The share of beer consumption
has increased from 44.56 per cent to 49.25
per cent while that of wine has remained
almost constant between 0.42 and 0.50 per
Figure A

Consumption of Alcoholic Beverages in India by Product Categories
350000000s 9 Litre Cases

300000250000200000150000100000
50000
0
2013

2014
Wine

Source:62015
Spirits

2016

2017

2018

Beer

Compiled from International Wines and Spirits Record (IWSR) 2018. Domestic Volume Report. All Categories India.
DEVELOPING PRINCIPLES FOR REGULATION AND PRICING OF ALCOHOLIC BEVERAGES SECTOR IN INDIA

cent. The primary survey shows that over 70
per cent of the growth in alcoholic beverages
consumption in India in the next decade will
be driven by the lower middle and upper
middle-income groups, and there is a growing
trend towards product premiumisation.
Premium products have recorded a five-year
CAGR of 7.7 per cent in 2018, of which bottled
imported spirits recorded a CAGR of 10.9
per cent. By 2030, 50 per cent of consumers
are expected to buy more of the same
category of alcoholic beverages that they
were consuming, 26 per cent are estimatedto move to higher brands, and 24 per centare expected to spend on newer categories ofalcoholic beverages.

International Trade
India is a small player in global alcoholic
beverages trade. In 2019, India’s total sharein global exports of alcoholic beverages
was only 0.27 per cent, with a global rankof 32, much below a number of developing
countries. In the same year, India’s sharein global imports was 0.75 per cent with arank of 20. India has an export potential inthis sector, which can be addressed throughmeasures like tariff reduction and ensuringtransparency in regulations across states tosupport manufacturing and “Make in India”.

State Revenues from Alcoholic Beverages
An analysis of the receipts from state excise
across 10 states studied in this report showthat in the year 2017-18, the share of revenue
from alcoholic beverages varies across states,
but it is among the top three revenue earningcomponents for all the states. In 2017-18, theshare of revenue from alcohol was close to
99 per cent of the total revenue in majorityof the 10 states considered for the study;
the exceptions were Madhya Pradesh andRajasthan, which had a share of 77 per centand 94 per cent, respectively (see Figure B).

Figure B
Share of Alcoholic Beverages in the Revenue Collection of 10 States(Excluding Petroleum) - 2017-18

60

MadhyaPradesh77%

Rajasthan

94%

80

Assam
Delhi
Haryana
Karnataka
Maharashtra
OdishaTelanganaUttar Pradesh

99%

100

40

20

0
Source:State Budgets 2019-20.

DEVELOPING PRINCIPLES FOR REGULATION AND PRICING OF ALCOHOLIC BEVERAGES SECTOR IN INDIA

7

In terms of revenue collection, between 201314 and 2017-18, Telangana had the highest
CAGR of 30.39 per cent, followed by Odisha(12.92 per cent) and Assam (12.69 per cent).
Lowest CAGR was recorded in Maharashtra(6.29 per cent). However, in both 2013-14 and2017-18, Karnataka and Maharashtra had
the highest shares in revenue collection fromalcoholic beverages sector among the select10 states.
Revenue by product categories (see Figure C)
show that in 2017-18, in states such as Delhi(95.55 per cent), Karnataka (86.98 per cent),
Telangana (79.61 per cent), Odisha (69.18
per cent), and Maharashtra (55.50 per cent),
the highest revenue was earned under the‘foreign liquors and spirits’ category. In statessuch as Haryana and Assam, the highest

revenue earning was from the ‘country spirits’
segment with a share of 98.51 per cent and81.31 per cent, respectively. In Uttar Pradesh
and Rajasthan, revenue earnings from both‘foreign liqours and spirits’ and ‘country
spirits’ were almost equal, with a combined
share of 84.93 per cent and 75.6 per cent,respectively of total revenue from alcohol.
In Madhya Pradesh, the highest revenue
collection (67.76 per cent) was from ‘otherreceipts’ segment and not from alcoholic
beverages, per se.
The northern states such as Haryana andPunjab ensure the receipt of 80 per cent of
their projected revenues at the start of thefinancial year through a system of lottery/auction of wholesale and retail licence
and, once a certain number of licences are

Figure C
Revenue by Product Categories Across Select 10 States (2017-18)
Uttar Pradesh
TelanganaRajasthan
OdishaMaharashtra
Madhya Pradesh
Karnataka
Haryana
Assam
Delhi
0%

10%

20%

Country Liqour
Source:
8

30%

40%

Foreign Liqour

50%

60%

Malt Liquor

70%

80%

90%

100%

OthersCompiled and calculated by authors from the respective state budgets of 2019-20.
DEVELOPING PRINCIPLES FOR REGULATION AND PRICING OF ALCOHOLIC BEVERAGES SECTOR IN INDIA

granted for that year, the government isassured of revenue in the form of licencefees irrespective of the actual sale of liquor
by licensees. In such cases, revenue getsassured even during the recent COVID-19
related lockdowns. In some states, the tax
burden is on manufacturers while in others
like Delhi, the tax burden is passed on to theconsumers which may lead to a shift towards
consumption of lower quality products.

COVID-19 Related Ad-hoc Tax Increases:
Leading to Revenue Losses
During the COVID-19 pandemic, around21 states have increased excise duties,
additional excise duties, maximum retail price(MRP), bottling fees, and imposed COVID-19
specific fees, cess and surcharges to avoid
revenue shortfall and meet consumer healthneeds. Out of the 10 selected states in thereport, 8 have imposed such taxes and fees,
exceptions being Maharashtra and Madhya
Pradesh. In states such as Assam, Rajasthan,
Karnataka and Uttar Pradesh, changes werebrought in through hike in excise duty slabs;
while in states such as Delhi, Haryana, Odisha
and Telangana, specific COVID-19 related
cess/fees were implemented. The impact on
final prices of the products ranged between
5-25 per cent; except in Delhi, where prices
increased by 70 per cent initially due toimposing of a special corona fee of the same
percentage.
As per industry estimates during the survey,
between March and September 2020, panIndia sales volumes were lower by 25-30 per
cent. Consequently, revenue earnings werelower; specifically, Delhi had a loss in revenueof around 25 per cent, while it was around40-45 per cent in Odisha. The higher taxes led
to lower revenue collections, which eventuallyprompted the states to readjust the taxes andsome states started to offer sales throughonline channels. This exemplifies the need fora nuanced evidence-based and transparent
planning process for this sector.

Route-to-Market Channels
States decide the channels for alcoholic
beverages sales through their excise policies.
Majorly, there are four types of distribution
channels across states – (a) distributor model(company> distributor> retail) in states such
as Maharashtra and Assam; (b) corporation
model (company>corporation>retail) instates such as Rajasthan, Karnataka, Madhya
Pradesh and Tamil Nadu; (c) wholesalemodel (company>wholesale>retail) in statessuch as Haryana; and (d) direct model(company>retail) in states such as Delhi.
Prior to the pandemic, only in-premise
sales were allowed but during the COVID-19
pandemic, home delivery and e-commercechannels have been allowed in some statessuch as Odisha and Delhi.

2. Key Barriers• Regulatory Barriers:
Variations Across States
The survey found wide variations acrossstates in terms of their policies andimplementation. Some states lay down
new or updated excise policies every year
(generally during the beginning of the fiscal
year); in some states, excise policies may
not be revised for many years, including
no variations in the prices approved for
manufacturing companies or suppliers.
In some states, excise polices may not be
available online and, if available, may not be
updated or may not be available in English,
making it difficult for businesses to readand interpret. From the selected 10 states,
in Haryana, Maharashtra, and Odisha, thepolicies are available in English and for the
past five years; in Assam, Delhi, Karnataka,and Telangana, the policies are available in

DEVELOPING PRINCIPLES FOR REGULATION AND PRICING OF ALCOHOLIC BEVERAGES SECTOR IN INDIA

9

English but cannot be accessed online forthe past five years; and in Madhya Pradesh,Rajasthan, and Uttar Pradesh, the policies are
not accessible in English but are available forthe past five years.
Examples of policies taken from 10 states inthis report shows that different state policies,and regulations create differences in pricing
models, cost structure and taxes, governancemodels, route-to-market channels and setting
up of businesses. Among the 10 identifiedstates, in 2020, the lead time taken toissue licences was highest for Maharashtra(minimum 45 days) and Karnataka (40-45
days). The lowest lead time was recorded
for Uttar Pradesh at 7 working days, in spiteof the licences being issued manually. In
Assam, the registration and licence issuingprocesses is online but, the lead time wasrecorded at 20 days in the year 2019-2020.
Such measures reduce ease of doing businessand dilutes the basic premise of ‘DigitalIndia’. It converts India into more than 30
heterogeneous markets instead of a single
market. The state level variations are also
likely to be raised by India’s trading partners
like the Australia, European Union and theUnited Kingdom during trade agreement
negotiations.

• Price Control Barriers
The alcoholic beverages sector is kept outof the ambit of the goods and services
tax (GST) regime, and as such the state
governments have the freedom toimplement their independent price control
mechanisms, based on their priorities. This
creates variation in the pricing models andmethodologies applied across states. In caseof calculating the ex-distillery price (EDP) or
final price of the products, for whisky, theprocess of fixing EDP differs across states.
In Haryana, Uttar Pradesh and Rajasthan,lowest EDP among the neighbouring states
10

and in Madhya Pradesh, lowest EDP acrossIndia is taken into account; in Karnataka,
Maharashtra and Assam, a free pricing policy
is executed; in Telangana, EDP is determinedthrough open tender; and in Delhi, acombination of lowest EDP and free pricing isfollowed, based on the price of the product.
Price control is one of the core componentsof regulating the sector, and variation in taxes
and consequently in final prices of products
encourages illegal trade from neighbouring
states. Additionally, variation in definitions/terminologies for final price of products
creates barriers for businesses.
The survey highlighted that most states fix
their EDPs for whisky based on the lowest
EDP among the neighbouring states, and they
do not consider differences in production
costs across states. Further, the EDPs are notrevised periodically, ignoring the inflationarypressures. In all, the pricing mechanism is
non-transparent due to lack of evidencebased data-driven policy making.

• High Import Tariffs
High import tariffs and cess of 150 per cent,even for intermediate products, counters
the basic premise of “Make in India”. While
imports will not be more than one percent of
the domestic consumption even if tariffs arephased out, imported liquor prices in India
are significantly higher than 95 per cent of
the countries in the world and India’s trading
partners have repeatedly raised this as a key
barrier in their trade agreement negotiations.

3. Impact of the Regulations
and Pricing Mechanism
The survey showed that variation andsporadic regulations have (a) often led todecrease in or significant loss of potential
revenue for state governments (b) led to
the growth of illicit liquor market and death

DEVELOPING PRINCIPLES FOR REGULATION AND PRICING OF ALCOHOLIC BEVERAGES SECTOR IN INDIA

related to its consumption (c) increased
the requirements of multiple permits andcompliance burden for the manufacturers,
reduced ease of doing business and, (d)forced consumers to shift to lower quality
products leading to health hazards. Due toexcessive monitoring, policing and control
over the supply chain of products frommanufacturers to retailers, not many players
have come up in this sector, resulting in an
oligopolistic structure. Only around 30 per
cent of the logistics companies undertake
transportation of alcoholic beverages. The
sector has low value-addition and highdependence on imports. And, in spite of
the willingness of the industry, India has
not been able to develop its manufacturing
capabilities and export to its potential inthis sector, due to regulatory complexities.
Survey participants pointed out that India
will not be able to sign trade agreementswith key trading partners like the UnitedStates, European Union, United Kingdom orAustralia, if it continues with high tariffs andcess and state level non-tariff barriers.
Further, the survey found that theunpredictable nature of the state excise
policies and the variations in the timing of
their release adversely affects production
cycles of manufacturers/companies operating
across multiple states. The states have notbeen able to achieve their desired objectiveof collecting tax revenues due to the ad-hoc
nature of implementing policy changes, as
has been the case of imposing taxes during
COVID-19 in some states. Further, the policychanges are often not substantiated bydetailed analysis of sectoral data trends,
undermining evidence-based policymaking.
At a country level, India has not been able tobecome a leading exporter unlike China or
Chile, in spite of having significant potential
and in spite of subsidies offered by Centre
and states for select alcoholic beverages

production, due to complicated state level
policies.

4. The Way Forward
The report prescribes five-point policy
recommendations towards developing
transparent and predictable regulatory andpricing principles for the alcoholic beverages
sector. These are as follows •Adopt Clear and Predictable Policies:
The state excise departments should
lay down clear policies at predictableintervals of two to three years, which
can help businesses to expand, tomake long-term investments, andencourage new business models toflourish. To encourage transparency,
the excise departments should focus
on adopting a ‘cost-based’ EDP formulaover the ‘minimum EDP’ criteria andevaluate the impact of changes inpricing across various categories ofbeverages (like premium, standard,etc.) for effectiveness of taxation
policy. This report highlights somecore principles of developing a model
taxation policy, which are based onbest practices adopted globally and in
India. Such a model can help the state
governments to meet their objectivesof higher revenue, consumer healthprotection and addressing the issue oftax leakages and illicit markets. The tax
slabs need to be revised periodicallyin line with inflation and changes
in prices of raw materials. Greatertransparency and predictability would
encourage entrant of new players andcompetition.

•

Technology Interventions: The state
excise departments need to switch todigital methods of granting licences
and permits, which can prevent

DEVELOPING PRINCIPLES FOR REGULATION AND PRICING OF ALCOHOLIC BEVERAGES SECTOR IN INDIA

11

determination. To begin with, suchconsultations can be held at the level ofindividual states and on demonstrable
metrics being met, a bigger group ofstates can come together in identifying
uniform principles of taxation and to
set the stage to develop a transparent
and uniform model pricing framework.
The states should also consult andprovide inputs to national-levelagencies such as the Department ofConsumer Affairs, in helping themto establish definitional uniformity
regarding maximum retail price (MRP)/
maximum or minimum selling price(MSP) of products.

unaccounted transactions andcorrupt practices. Data analytics andtechnology-based solutions need tobe adopted by the states to monitor
the supply chain and develop front-toback traceability. Specifically, physicalmonitoring should be replaced bytechnology driven tracking and tracing
initiatives to monitor transportation of
products from the manufacturer to the
distributor to the retailer. This can beespecially helpful in case of inter-state
movement, where there are chances ofillegal sourcing of liquor.
•

•

12

Develop Data-Driven Models: To achieve
the desired policy objectives (suchas protecting consumer health orenhancing state revenues) and toenhance transparency, evidencebased pricing and taxation models
should be developed by states basedon detailed research and longitudinal
production and consumption data
analysis. There is a need to invest incollecting structured and periodic dataon household consumption patterns(by age, social indicators, area, type ofalcohol, etc.) and the impact of priceincrease or other policy changes on
consumption patterns. In this regard,state governments can refer to global
best practices for implementing suchmodels. This report has highlighted
how an effective model can be
designed.
Conduct Regular Consultations: State
excise commissioners, financeministers, and other stakeholders
should engage in regular indepth discussions to start off aprocess of transparent, predictable
and consultation-based price•Phased Tariff Reduction and Exports: The
government should focus on phased
tariff and other duties reduction
and Indian companies should be
encouraged to export to improve thetrade balance. Duty reduction forintermediate products can enhancevalue addition in India and boost
domestic manufacturing potential. Duty
reduction above a threshold level will
only allow entry of high-end produce,
which do not compete with domestic
production.

In conclusion, if the recommendations of thispaper are implemented, it can help the state
governments in meeting the objectives of
earning higher revenue, addressing consumer
health concerns, and creating employment.
Adoption of technology can enable removalof irregularities along the entire supply
chain, with limited government intervention.
The recommendations can help India inbringing in more investments into the sector,
encourage innovation, improve ease of doing
business, increase domestic manufacturing
capabilities and enhance exports.

DEVELOPING PRINCIPLES FOR REGULATION AND PRICING OF ALCOHOLIC BEVERAGES SECTOR IN INDIA

India is one of the fastest growing markets for alcoholic beverages. Various factors including a
sizeable middle-class population with increased purchasing power, rapid urbanisation, changing
consumer preferences, and reduction in cultural barriers to drinking, have contributed towards
growth in demand for alcoholic beverages. Revenues from taxation of sales in this sector are among
the top-three revenue earning sectors for the state governments and the sector generates signiﬁcantdirect and indirect employment.
The states through their excise policies, control the entire supply chain of alcoholic beverages frommanufacturing and distribution to registration and licensing processes, labelling and packaging
requirements, and retail.Price control is one of the core components through which the states
regulate this sector. However, the pricing policies and governance models vary across states, creating
diﬀerent route-to-market channels. There are frequent and ad-hoc changes in policies, creating
uncertainty and deterring manufacturers/distillers to plan their businesses in advance. The variations
in regulations and operating models across states have added to the compliance burden ofparticipants across the supply chain, leading to low ease of doing business. It has resulted in India
becoming a fragmented market, undermining the concept of India as a single market. Further, unlike
other countries such as Chile, India has not been able to leverage its export potential in this sector, inspite of having potential.
Given this background, this report, based on secondary information analysis and a primary survey
provides an overview of the Indian alcoholic beverages market, highlighting market trends andcontributions to the economy, the supply chain and the various routes-to-market followed acrossstates. The report outlines the regulatory framework governing the sector, both at the centre andacross states; and presents the changes eﬀected in the regulations, sales channels and duties, among
others, with the onset of the COVID-19 pandemic.The report is a ﬁrst of its kind, which speciﬁcallyexamines regulatory and pricing related barriers and their impact on the industry, its supply chain,quality of products available to consumers and consequent eﬀects on health, states, and the Indian
economy as a whole.
The aim of the report is to help the state governments to develop regulations based on certain
principles which makes the regulations predictable and transparent. The report suggests the way
forward on how the state governments can learn from global best practices in creating uniformity indeveloping their pricing models, building transparency and creating more predictable policy
environment through data driven and evidence-based policymaking. If the recommendations of thispaper are implemented, it can help the state governments in meeting the objectives of earning higher
revenue, addressing consumer health concerns, and creating employment. The recommendations
can help India in bringing in more investments in to the sector, encourage innovation, improve ease of
doing business, enable “Make in India”, enhance exports and the country can be a key player in global
value chains of alcoholic beverages.

The Work is published by AF Press
in association with Indian Council for Researchon International Economic Relations (ICRIER),
New Delhi.

ISBN 978-93-327-0570-8

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