Daaru in times of the lockdown

Simran, a student at the Gokhale Institute asks a series of question about the topic du jour:

I had a query in regard to the news that have been doing rounds  – “Why did government order opening of wine shops?”

She asks other, related questions further on in her email, and I’ll get to them, but let’s go with this first.

Now, I am not privy to the decision-making process of either the state or the central governments, but there are two immediate responses that come to mind about the why: one, there is certainly demand for it!

And two, revenues *should* go up with the sale of alcohol. The reason I say should is because there have been arguments made about how the tax that the state government collects is when the distributor sells to the retailer, rather than when the consumer buys from the retailer. I am unable to find a report online of this nature, but I have certainly heard that argument being made. And that as a consequence, opening up liquor shops won’t have that much of an impact on government coffers, because tax has already been collected.

Very briefly, this argument doesn’t hold for at least two reasons. First, because although it is true that part of the tax that is paid is in the nature of an excise duty (that is, taxable when it leaves the manufacturer’s location), there are a whole host of other duties, taxes and cesses that are charged in addition. For instance, did you know that if you raise a glass in Uttar Pradesh, you are doing your bit to take care of abandoned cattle? Other states also impose other taxes – demand, as we are seeing right now, is fairly inelastic, so of course you should expect governments to tax as much as possible.

Second, and to my mind more importantly, never confuse stocks with flows! Forgive the pun, but once alcohol sales start flowing, the chain of taxation will kick into gear at all points. As per this report, all states and union territories put together expected to earn INR 1,75,000 crores (or thereabouts) from the sale of alcohol last year. The flow (and forgive the pun again) is important!

So, simply put, it is about the money.

Simran further goes on to ask:

The Delhi government announced a 70% ‘special coronavirus tax’ on alcohol.

Charging such a huge tax from a daily wage earner does sound cruel. Government claims that the tax will dissuade the poor from drinking but past reports claim that habitual drinker will never quit and this will just shrink the quantity of food he and his family consumes.

I was wanting to delve deeper into this topic –
Alcohol and its effect on poverty or is it
Poverty and its effect on consumption of Alcohol.

A series of tricky questions indeed! Let’s get to them one by one:

  1. I can think of at least two reasons behind the Delhi government’s decision. First, the high price might deter at least some folks from queuing up, and second, revenues will go up. Unfortunately, these reasons are contradictory! If crowds go down because of the high prices, surely revenue cannot go up at the same time? The answer, as any econ student will tell you, lies in computing the elasticity of demand for alcohol. See this video, for instance, on the topic.
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    Will the habitual drinker quit with such high prices under these circumstances?
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    Honest answer: who knows? You can spend the rest of your lives drawing diagrams and scribbling questions, but at the individual level, we simply don’t know. There are too many variables for us to get a reasonable answer (changes in income, length of the lockdown, the level of desperation for alcohol, the urge to stockpile in face of an uncertain future, for starters). The habitual drinker will certainly think twice, but beyond that nothing useful can, or should, be said. That is my opinion. It is not quite the same topic, but read this article, written by Banerjee and Duflo (and read both of their books!)
  2. I have only glanced through the two links I am sharing here, but hope to read them in more detail later. The first is an exercise in calculating the price elasticity of demand for households in India, and the second is a collation of a lot of studies done on the topic, but it deserves its own separate point…
  3. … not least because writing this blog post helped me learn about the existence of the Institute for Alcohol Studies! (Dear folks at the IAS, let me know if you are in need of test subjects). They have a page on the impact of price on alcohol, and worries about conflict of interest aside, the report that alcohol is relatively price inelastic.
  4. Both studies report much the same thing, although of course a whole host of other factors also come into play (level of education, extent of addiction being just two obvious ones). But long story short, for a one percent increase in price, you should expect demand to go down by less than one percent.
  5. But that still doesn’t answer Simran’s question: does poverty cause one to consume alcohol, or does the consumption of alcohol cause poverty? My honest answer is that we simply can never know for sure, and it is probably both, but hey, nothing should get between a tricky, potentially unanswerable question and econometrics! Knock yourself out!

 

Thank you for the questions, Simran! I enjoyed answering them 🙂

 

India: Links for 21st October, 2019

In honour of the delayed departure of the monsoons from India, five articles about what the monsoon is, and what it means for us here in India.

 

  1. “The unique geographical features of the Indian subcontinent, along with associated atmospheric, oceanic, and geophysical factors, influence the behavior of the monsoon. Because of its effect on agriculture, on flora and fauna, and on the climates of nations such as Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka — among other economic, social, and environmental effects — the monsoon is one of the most anticipated, tracked, and studied weather phenomena in the region. It has a significant effect on the overall well-being of residents and has even been dubbed the “real finance minister of India”.
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    Wikipedia is always a good place to start.
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  2. “Simulations of future climate generally suggest an increase in monsoon rainfall on a seasonal mean, area-average basis. This is due to the twin drivers of an increasing land-sea thermal contrast, but more importantly, warming over the Indian Ocean which allows more moisture to be carried to India. Typically increases in total rainfall over India may be in the region of 5-10%, although some climate models suggest more and some less. Climate simulations also show different patterns of rainfall change, so it is difficult to predict how rainfall might change within India. ”
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    The Royal Meteorological Society’s take on what is likely to happen in India in the years to come when it comes to the monsoon, and why.
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  3. “This Wednesday witnessed a rare meteorological coincidence. The southwest, or summer, monsoon, finally withdrew from the country, having overstayed and delayed its retreat by a record time. The same day, the northeast, or winter, monsoon made its onset, on time. The two events rarely happen simultaneously, though the three month-winter monsoon season is supposed to begin almost immediately after the end of the June-September summer monsoon season.”
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    The Indian Express on a relatively rare occurrence in meteorological terms.
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  4. … and the Livemint on the same topic.
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  5. “Along with their ancient perfumery, the villagers of Kannauj have inherited a remarkable skill: They can capture the scent of rain.”
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    I’ve probably linked to this before, but it is always worth a reread: on capturing the essence of petrichor.