Entry of foreign players will encourage best practices in liquor sector: Study

Research by a Kochi-based think tank has suggested liberalisation of India’s liquor industry to facilitate entry of foreign players, considering the sales growth in imported spirits across the country.

With the growing demand for imported liquor, a liberalised environment would help reduce high import tariffs and benefit major stakeholders in the industry, the report prepared by the Centre for Public Policy Research (CPPR) said.

An average consumer of domestic as well as imported liquor pays five to six times the production cost and much of this is charged as taxes by the State governments, it said.

According to CPPR, the liquor market in India is the third largest and fastest growing. A significant part of this demand is met by domestic production. However the market operates under strong regulatory framework and this has led to corruption, cronyism, exorbitant prices, black-marketing and public health concerns, thereby affecting the liquor quality.

Rahul V Kumar, Associate Research Consultant, and D Dhanuraj, Chairman, CPPR, who prepared the report pointed out that some of the State governments are even liberal in allowing private players in retail sales, while others are more restrictive.

However, all the States have protected the local market from liquor imports. Though India allows 100 per cent FDI for distillation and brewing of potable alcohol through the automatic route, not many investors turn up due to restrictions and taxes at the State level.

The complete control over production and distribution networks has enabled some of the States to earn huge revenue from liquor sales. For instance, Tamil Nadu earned ₹21,000 crore while Kerala fetched ₹8,000 crore during 2012-13 fiscal.

The imported liquor is in the costliest category with a flat rate of 150 per cent in domestic customs duty. For the most consumed whisky, the consumer ends up paying approximately five times the average import price. Thus, the FDI in liquor remains less exploited due to various State-level taxes, even though the imports are climbing at the rate of 33 per cent.

Though the regulatory framework in the States was intended to discourage consumption, the report pointed out that it had led to problems such as unexpected price rise, artificial supply shortage, ban on product advertisements, black market etc.

Quoting an Assocham study, CPPR said the imported liquor market, including duty-free ones, would cross 5-million mark by 2015 with the entry of foreign as well as domestic investors in the sector. Competition with foreign brands in the domestic market would prompt the adoption of best practices and encourage healthy drinking practices among consumers.

The report also said the States have clear incentives to curb illegal liquor production and to encourage registered and branded products. Rather than directly being involved in selling as in the case of Kerala, it could control the sector with an efficient regulatory framework. This will ensure access to quality products at competitive prices, the study said.

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