Shifting demand patterns must guide state excise policy design

News: Policymakers need to design their tax policies after studying the market trends and available data carefully.

How a change in the consumer sector can impact the market?

The Indian consumer is becoming from price-sensitive to quality conscious, due to growing urbanization, rising incomes, and availability of innovative products and technology. The younger to middle age demography is focusing on nutrition, brand value and is willing to experiment with products. For example, in the case of food and beverages, Indian customers are comfortable with international cuisines.

This has made India an attractive market for global manufacturers and retailers. Both central and state governments want to attract this foreign investment in manufacturing and maximize revenue collection. However, their policies are not in sync with the changing demand. An example of alcoholic beverages explains this issue.

What is the status of the alcohol beverage sector in India?

India is one of the fastest-growing markets for alcoholic beverages globally. Demand for Premium products including bottled imported spirits is increasing. This growth rate is driven by changes in consumer behavior.

According to the study, “Developing principles for Regulation of Alcoholic Beverages sector in India“, the attitude in India has changed towards the consumption of alcohol. Even drinking among women is now acceptable in many social interactions.

The studies show that the share of upper-middle-income consumers is driving premium product consumption, as the group is quality and brand conscious.

Why the data of consumer pattern change is useful for policymaking?

This data helps the state excise department to plan its revenue projections based on consumer demand.

Globally, various governments use data to guide consumers towards ‘quality liquor consumption’. For example, the Scottish government changed its duty structure to impose maximum taxes on low-priced products of liquor. These guided consumers towards premium liquor products.

A study ‘Tax design in the alcohol Market’ found that heavy drinkers tend to purchase the stronger types of alcohol. They suggested an alcohol tax system that increases the relative price of strong and cheap products to discourage their consumption.

What is the status of data-based tax design in India?

In India, judicious use of consumer data to design tax rates is rare. This has led to ad-hoc and non-aligned excise policies models and duties.

However, many states have taken measures in this direction. For Example, West Bengal has proposed a downward realignment of duties on Indian Made Foreign Liquor (IMFL) to allow consumers access to better quality produce. The state also came up with a policy for non-alcoholic beer to promote the production of beer with an alcoholic strength not exceeding 0.5% v/v, which has no adverse impact on health

Thus, a current year revenue-centric ad-hoc model to design excise policy should be avoided. States need to frame policies with a focus on consumer demand, welfare, and health. Longitudinal data on consumer shopping and consumption can be used for this purpose.

Source: This post is based on the article “Shifting demand patterns must guide state excise policy design” published in the Live mint on 14th January 2022.