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Dire state: liquor bans may be popular, but are they affordable?

Neeraj Thakur | Updated on: 10 February 2017, 1:50 IST

Not           long ago, states saw liquor as an assured source of revenue. Now, many of them are out to kill this golden goose. Why? Mostly to win over women voters.

In the past two years, Kerala and Bihar have banned liquor, and J Jayalalithaa is promising to follow suit in Tamil Nadu if re-elected.

But should governments be banning alcohol in this country? It's a contentious debate, with arguments for as well as against.

According to a study by the Organisation for Economic Cooperation and Development, alcohol consumption in India increased 55% in the 20 years until 2012.

On one side is the social argument: that wide availability of liquor is a bane especially for poor women, who have to suffer physical abuse from and see their meagre savings wasted away by drunkard husbands.

Since such women are a significant voting population in any state, the ruling parties see much electoral gain in banning alcohol.

The counterargument is essentially economic: can states afford the revenue loss from banning the sale of alcohol?

At what cost?

According to a report by the RBI, state excise duties on alcohol and other intoxicants alone contributed over 15% of the tax revenue of 13 states and Union Territories in 2012-13. Tamil Nadu gets an estimated 5.1% of its revenue from alcohol sales, while Bihar gets about 3.9%.

Kerala generated Rs 8,433 crore, or 24% of its total tax revenue, from liquor in 2013-14 before it imposed an incremental ban on alcohol in 2014. Now the figure is down to 3.4%.

Why would any state take such a big hit on its revenues? For votes, of course, but that's not all.

The states are taking heart from their improved finances over the past few years.

According to Prof Pinaki Chakraborty of the National Institute of Public Finance and Policy, fiscal deficits of sates have improved vastly since the Fiscal Responsibility and Budget Management Act, 2003 came into effect.

The only way states can make up for liquor revenue loss is by improving tax collection. Can they?

However, Chakraborty warns, the states will see their finances deteriorate fast if the liquor ban becomes a craze. "Liquor is a major source of revenue for most states in India. How will they generate revenue when this stream dries up?" he asks.

Advocates of a liquor ban have argued that it would bring down the states' health expenditure. Chakraborty disagrees. "There is no way that the health expenditure will come down because of a liquor ban. Rather because of this, the state finances will collapse."

Indeed, state governments have often resorted to raising taxes on liquor and tobacco to beef up their finance.

Abhijeet Sen, a member of the erstwhile Planning Commission and an expert on state finances, agrees with Chakraborty.

"The only way states can make up for the revenue loss due to liquor bans is by improving tax collection. But that is a long term process which cannot be laid out or defined immediately," sen argues. "Moreover, once the GST is implemented, states will have fewer avenues to levy taxes, so the scope of making up for the loss of revenue only decreases."

Ultimately, Sen says, the states would have to cut expenditure on social sector schemes since they can't cut the salaries of their employees or the interest payments on debts.

So, the states must find alternative revenue streams in the next few years, or the revenue loss from liquor bans will start to really pinch. 

First published: 15 April 2016, 11:08 IST
Neeraj Thakur @neerajthakur2

As a financial journalist, his interface with the two dominant 'isms'- Marxism and Capitalism- has made him realise that an ideal economic order of the world would lie somewhere between the two.

Senior Assistant Editor at Catch, Neeraj writes on everything related to business and the economy.

He has been associated with Businessworld, DNA and Business Standard in the past.

When not thinking about stories, he is busy playing with his pet dog, watching old Hindi movies or searching through the Vividh Bharti station on his Philips radio transistor.