May 10, 2020 ☼ The Intersection ☼ Covid-19 ☼ economics ☼ public policy
Government over-control and excessive taxation of liquor might satisfy our hypocrisy but could make real problems worse
This is from The Intersection column that appears every other Monday in Mint.
The long queues outside liquor stores last week attracted a lot of attention, commentary and government reaction. Many people were dismayed that among the first things their compatriots did after the relaxation of the lockdown was to make a beeline for the liquor store. In an unusual demonstration of alacrity, the Delhi government immediately imposed an additional 70% tax on retail liquor sales, ostensibly to put some brakes on demand and reduce coronavirus outbreak risks. The sense of moral outrage was compounded after a Bangalorean customer triumphantly shared a ₹52,000 liquor store receipt on social media. This too caused the Karnataka excise department to rapidly rise to the occasion and come down hard on the retailer concerned for exceeding the maximum quantity that can be sold to a person at a time.
Actually, both the moral panic and the governmental overreaction are unwarranted. Other than revealing public attitudes towards alcohol consumption, there is nothing surprising in the long queues, nor indeed in what appears to be an excessive amount of money spent at a liquor store.
It is neither moral degradation nor widespread alcoholism that caused those queues, but the fact that these stores were completely shut for seven whole weeks of lockdown. The average adult per capita consumption of alcohol in India is over 120ml per week. If unrecorded alcohol—which includes country, home-made and contraband spirits—is factored in, the weekly adult consumption could be as high as 250ml per week . That’s the average during normal times. At this time, there is the pent up demand of the last couple of months. In addition, consumption is likely to be higher when people are stuck at home. Furthermore, people are likely to buy some extra bottles in case they are caught in another lockdown. Since one in three adults in India drink, there are bound to be a lot of people, across age, sex and income levels, who will line up outside retail outlets. A closer look at the ₹52,000 receipt suggests that it might have been a pooled purchase, with a designated buyer tasked with queuing in the hot sun on behalf of his buddies.
Alcohol is not special in this regard. There were queues outside banks and ATMs to withdraw cash after demonetization. Queues would have formed outside grocery stores had the sale of bread, eggs and coffee been stopped for several weeks. Whatever the government might think about alcohol, a lot of people see it as an essential commodity. Realism would suggest that we accept this fact and design public policies that account for it.
We do not have an official explanation for why the Union government disallowed the sale of liquor during the lockdown. It is possible that officials took the view that a combination of crowding, inebriation and unruly behaviour will raise outbreak risks and take up scarce policing resources, and erred on what they thought was the side of caution. This is justified in theory, but retailing, consumption and behavioural patterns vary vastly across the country. For instance, from an epidemiological perspective, a liquor store in a Karnataka city is not much different from its neighbouring grocery store, and could have remained open during the lockdown without additional risks. Had they been open, those long queues and the attendant outbreak risks could have been avoided.
That is why New Delhi must not arrogate to itself such tactical decision-making that properly belongs to the states and districts. They are better placed to decide what should be open or closed. Instead of one-size-fits-all micro-management, national policy should declare principles and outcomes, and leave rule-making to the district administration.
Will massive new taxes on liquor—as the Delhi government has done—reduce consumption? Not quite. As economist Santosh Kumar has found, the price elasticity of demand for spirits such as whisky and rum is a mere -0.139, which means the 70% increase in taxes reduces the demand by less than 10%. The elasticity is much higher for beer and country liquor, but higher prices for these beverages might cause people to switch to hard liquor instead.
So higher liquor taxes raise revenues for the state government but are deeply inequitable because the poor will now have to part with a larger share of their income. They could switch to more dangerous substitutes like illicit liquor, raising health risks during the pandemic. The poor are already under severe stress as a result of the lockdown. State governments must not cave in either to moral panic or to revenue greed at this time, and refrain from intervention in the liquor business.
One way states can reduce the risk of an outbreak is by permitting home delivery of alcohol under adequate safeguards. Mandatory proof-of-age at purchase and delivery as well as quantity limits are—counter-intuitively—easier to implement for e-commerce than at stores. Compliance culture, enforcement capabilities and political economy will vary across states, so this might not work everywhere in India. But where it has a good chance, there is a case to permit it.
There are many more The Intersection columns here
Alcohol consumption is not a moral issue. Making it one complicates its governance and is often counterproductive. Effective public policy should aim to achieve moderation in consumption on the one hand, and manage its negative social effects on the other. Prohibition, bans on sales, government control of production and excessive taxation might satisfy our hypocrisy, but only make our real problems worse. The queues will dwindle and disappear in a few days. The need for pragmatic policy will remain.
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