Bengaluru: Large alcoholic beverage companies are worried that changes in the way liquor is distributed in some states and the probability of higher excise duties being imposed on the industry, especially ahead of elections in several states, could give them more pain in the coming year.
Sales volumes at liquor firms in India have already been hit over the past year by various policy changes—ranging from demonetisation to the Supreme Court’s ban on alcohol sale near highways, the implementation of prohibition in a few states, and even the goods and services tax (GST).
The hit from those policy changes are, for the most part, in the past now, but there could be others ahead.
“Certain states have started or are starting to change what we call their distribution structure or route-to-market for alcohol this year, and have brought in a larger role for the state. They’ve either created a (state-run) corporation or given a bigger role to the corporation over the past year. That is something we are wary of,” said Abanti Sankaranarayanan, head of strategy and corporate affairs at United Spirits Ltd (USL), India’s largest liquor firm by volume sales.
These route-to-market changes have already been implemented in states like West Bengal, Chhattisgarh and Jharkhand over the past year. Haryana is expected to follow suit.
“When we are dealing with private wholesalers we all have a credit policy. We all give them 30-40 days of credit. When the guy knows that he is not going to remain in the trade, it is very difficult to collect our money. They clamp up. And they, in turn, clamp up with their customers,” said Deepak Roy, executive vice-chairman of Allied Blenders & Distillers Pvt. Ltd (ABD), the country’s fifth-largest spirits firm by volume.
West Bengal, for instance, has been dealing with this challenge for nearly eight months now and consequently overall market growth has suffered. In states like Chhattisgarh and Jharkhand, that hit could be even more pronounced since it is not just the wholesale trade but also retail trade that has been brought under the government. When that happens it could also lead to issues of corruption as the retail stores are typically managed by low-paid staff, according to industry executives.
Several states, including Himachal Pradesh, Karnataka, Madhya Pradesh, Rajasthan and Chhattisgarh, are also headed for elections. Typically, around election time, state governments hike excise duties to earn more revenue, mostly to fund populist schemes, or decide to announce partial or full prohibition in order to appease people and garner more votes.
“The state governments are under so much pressure for money and it seems like liquor is the easiest source for them to extract it from. I am not that optimistic that things will change over the next 12 months. If it remains stable, the way it is just now, I think we should consider ourselves very fortunate,” Roy said.
Still, the fact that some previous regulatory hurdles are behind us should provide relief for alcoholic beverage firms, said analysts.
“2018-19 should be a very good year because there will be a recovery and there will be a favourable base of the last two years,” said Abneesh Roy, senior vice-president at Edelweiss Securities.
USL’s chief executive officer Anand Kripalu also said the worst is behind in terms of some specific challenges on a conference call with analysts last Friday. But Kripalu added a word of caution: “One thing about this industry is never say never. This is a challenging regulatory environment for the industry and you never know what’s the next dark cloud that is going to come.”