How will India’s agricultural waiver impact alcohol companies?

2018 witnessed a slew of assurances to waive off outstanding agricultural loan amount in various Indian states from political leaders. However, this will have an unintended victim – liquor companies.

State governments are expected to impose increased taxes on alcohol. It is one of the key sources of state and central revenues. Waiving off farm loans will require the state to make up for these fiscal losses in some other way, and alcohol companies seem to be the prime target.

Any escalation in tax will lead to a rise in alcohol price, which will trickle down to the end consumers. Waiving off farm loans is on the agenda of every political party, and with the upcoming 2019 elections, one of Prime Minister Narendra Modi’s priority is to reduce agrarian suffering.

The Indian National Congress outvoted Bharatiya Janata Party in Chattisgarh, Rajasthan and Madhya Pradesh and Congress were quick to announce the loan waiver scheme after the formation of governments in these states.

As expected, Maharashtra government hiked the tax on liquor (Indian-made only) by 20% from 1 January 2019.

Increasing liquor taxes will make at least 25% of the revenue (loss due to waivers). It is the only choice the state government has because borrowing will exacerbate their debt to GDP ratios. Earlier, there have been several situations where volumes have taken a hit due to a rise in alcohol costs.

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