Famous American economist Milton Friedman once commented that one of the greatest mistakes is to judge policies and programmes by their intentions rather than their results. Commerce and industry minister Piyush Goyal has come up with a proposal ahead of the Union Budget to reduce the quota of liquor that can be purchased from airport duty free shops.
From the earlier quota of two bottles a traveller can purchase while coming to India, the new proposal plans to cut it to one bottle per traveller. This has been suggested at a time when the Association of Private Airport Operators (APAO) has requested the government increase the quota to four bottles per passenger. Goyal has further argued that “…India cannot afford to be liberal when it comes to liquor and cigarettes sales”. This statement smacks of the government’s patronising nature when it comes to deciding what should be consumed and by whom.
The logic behind this quota reduction is based on two arguments. The first is that liquor forms part of approximately 200 items that the government considers as ‘unnecessary imports’ or non-essentials. Reducing the import of these items will hence narrow the trade deficit. The second is the usual argument that liquor and cigarette are ‘sin goods’ that should be banned.
Calculations show that a cut in duty free liquor imports will save a meagre 0.01 per cent of India’s total import bill. With a sufficiently large foreign exchange reserves of approximately $461 billion, the possibility of immediate trade deficits affecting the economy is also out of question.
On the other hand, the fact that liquor and cigarettes account for approximately 75-80 per cent of the sales in duty free shops indicates the possibility of huge revenue loss from reduced sales. Estimates also indicate that the revenue loss in duty free sales will have to be compensated with a hike in aeronautical charges including landing and parking charges. This in turn is likely to be transferred to the customers with higher passenger fare, which is undoubtedly bad economics.
Governments have always acted naive when it comes to dealing with alcohol. In India, Article 47 of the Constitution has time and again been used as a justification to impose partial or complete ban on intoxicating substances. However, the contributions from the sale of such substances have been significant to state coffers. The liquor market in India is an imperfect market with different federal states having discretionary policies and measures to control or promote the business. In addition, the tax laws governing the market are also significantly different. This imperfect competitive structure of the industry has often led to distortions that have proved costly for the consumers. Consumers either end up paying a higher price or often resort to cheaper and adulterated brands.
The State is aware that liquor can be brewed by anyone and this is one of the prime reasons why the manufacture and sale of liquor has been controlled by it. However, government control of the industry and the restrictive policies have limited the choices available to the average consumer. It should be noted that foreign liquor brands operate in a competitive environment ensuring quality and attracting consumers. Less availability of such brands limit the choices of the low-income groups. Cross-shopping is possible and affordable for higher-income group travellers who can access the same products at a higher price from illegal markets or while travelling outside India. On the other hand, low-income travellers will have to switch to other cheaper products available in the local market.
If the government feels that it cannot be liberal when it comes to liquor, it needs to justify further the proposal to restrict imports. For instance, more clarity is required on what will be the health cost of an additional unit of liquor bottle procured from duty free stores. How big or small will it be compared to a lot of other health hazards faced by citizens? Moreover, history shows that reducing availability has not reduced the consumption of liquor. If so, the words of the minister needs to be weighed for its actual intentions.
Economists, such as Ludwig von Misses, have warned us of the consequences of politicians becoming judges of individual welfare. According to him, what starts as a well-intentioned judgement to protect individuals from the harmful effects of their own choices would finally lead to judging everything that individuals consume. The policy of ‘sin tax’ adopted across the world shows us that nothing is off limits to government intervention. However, the good intentions of the government can sometimes turn out to be bad economics and bad politics.
This article was published in Money Control on January 29, 2020 click to read
Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.