India: Consumers prefer hard spirits over beer during lockdown

During the coronavirus-induced lockdown consumers in India have stocked up their supply of hard spirits at the expense of beer, India’s beer market leader United Breweries (UB) reported.  The demand for beer has shrunk in comparison to the demand for hard liquor because beer has a reduced shelf life in comparison to spirits and Indian consumers are not used to store larger quantities of beer in the family fridge, especially during the pandemic when consumers started to hoard food at home. Vodka, rum and regular whiskey does not need to be cooled and can be easily stored outside the fridge.

"It is not that people don’t want to drink beer. But the opportunity to drink beer becomes complicated by the fact that it needs to be consumed chilled and some of that gets converted into liquor,” Shekhar Ramamurthy, Managing Director at UB told the Economic Times.

However, this seems only to be half of the truth. During the Corona-lockdown when people lined up in front of liquor stores, the government in 18 of India’s 36 states imposed an extra tax on retail liquor purchases which ranges from 10 per cent to almost 75 per. The "special corona fee” was meant to deter large gatherings at stores and to slow the spread of the coronavirus.

India’s capital Delhi set its fee on May 5 at 70% on all categories of liquor with the consequence that liquor sales have fallen drastically in Delhi by 58 per cent on a year-to-year basis.  On the other hand, sales in neighboring states of Uttar Pradesh and Haryana which increased taxes comparatively moderate by not more than 10 to 15 per cent have seen their liquor sales bouncing back.

“After the drastic price hike in some states, the industry has registered about 80 per cent decline in overall beer volume in May - a peak season for beer - versus last year,” said Kartikeya Sharma, President – South Asia, Budweiser Brewing Company APAC. In India, beer is taxed 60 per cent higher than stronger spirits despite the lower alcohol. Therefore the special corona fee which came on top of the existing taxation was an extra burden for beer.

Next to the effect on beer prices which in some cases nearly doubled per bottle and the lower volume sales, the tax had also a positive effect because it helped to boost the government’s revenue.  Taxes on alcohol are a key contributor to the revenue of many Indian states . They urgently need funds because the pandemic has caused a major disruption in economic activity.

Brewers and spirit maker fear now that the increased tax will stay forever. They point to Germany which has a tax for sparkling wines which was introduced in 1902 to finance the imperial navy. However, even after Germany lost the First World War and the Germ Empire ended in 1918, the tax stayed on and still exists until today.

“The reversal of tax increases, once initiated, is the rarest of the phenomenon. One, it is seen as politically and socially challenging for a government to be aiding alcohol consumption. Secondly, once the state treasury gets a taste of higher tax inflows, giving it up it is difficult," says an analyst at Dolat Capital Market.

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