Alcohol Revenues and the State

United Breweries suspended beer supply to Telangana recently, the reason being:

“Despite our continuous efforts over the past two years, there has been no increase in the base prices offered for our products. This has resulted in escalating losses.”

This got Pranay Kotasthane thinking. Why couldn’t the company increase beer prices in the state?

 

The answer is revealing. State governments don’t just want the tax revenue that comes from alcohol; they also want that revenue to be predictable.

“In Karnataka, for example, alcohol-related duties alone comprise 11 per cent of the total budget.”

Being such a significant contributor, one can see why state governments would hate to see fluctuations in it. And fluctuations are inevitable if alcohol prices can be set by alcohol companies. After all, an increase in alcohol prices could result in additional revenue for the state; or it may cause a drop in demand and thus a dip in tax revenues to the state.

 

So state governments set up mechanisms to fix alcohol prices.

“In many states, the wholesale procurement of spirits is monopolised by a government-owned company. All alcohol companies must register themselves and sell their spirits to this firm. This wholesale company then sells to retailers.”

The government then sets fixed prices in the entire alcohol supply chain:

“The ex-distillery price (what the wholesaler pays the manufacturer), the wholesale price (what retailers pay the wholesaler), and the MRP (what consumers pay retailers).”

 

Such price-fixing ensures predictable tax revenue for the government. Since they can’t predict the impact of raising alcohol prices, they keep them fixed for years together. Anything for predictability.

 

Of course, such forced price fixing means the manufacturer will take losses if his cost of production increases and the state won’t increase the prices. This then is what happened to United Breweries in Telangana.

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