High inflation turning out to be a bane for India's liquor industry

Liquor manufacturers have made huge investments in manufacturing of liquor. Diageo has around 50 distilleries but is now facing an uphill task because of the rising inflationary pressure on direct raw material.

Surge in prices of Extra Neutral Alcohol (ENA), glass and boards used for mono cartons, besides no price increase in most of the States, high taxes and levies were stretching them, according to members of the International Spirits and Wines Association of India (ISWAI). They said the shrinking supplier share of consumer price and States not allowing manufacturers to pass on the cost of high prices to consumers had put serious pressure on manufacturers' margins, making it difficult to sustain their operations.

While States are keen to maximise their excise revenue from the liquor industry, due attention needs to be paid to manufacturers too. It has, thus, been difficult for manufacturers to sustain operations. States need to consider a balanced approach between supplier prices, volume growth and taxation.

In India, the liquor sector generates nearly 1.5 million direct and indirect employment, and is among the top three tax revenue earners for the government. The market is expected to grow at a CAGR of 6.8 per cent between 2020 and 2023. Inflation is now hurting all players big and small.

Inflation for the fast moving IMFL segment has been growing rapidly between 2020-21 and 2021-2022. The production cost of a carton of liquor (750ml x 12) of 9 litres has increased by Rs 57, the price of a glass bottle by Rs 12 and that of mono cartons by Rs 10. This is the cost increase in just one year, but the minimum Ex Distillery Price (EDP) is fixed for several years.

Besides, the government policies are adding fuel to the fire, resulting in significant escalation of manufacturing costs. There is a minimum support price for grains and sugarcane, which are key ingredients for manufacture of IMFL. Manufacturers can't get the input tax credit on materials and services. The alternative use of alcohol in the National Blending Policy has led to price inflation of alcohol. Alcohol does not also come under the ambit of GST, further increasing the price. Besides, States decide the final price of the product, leaving little room for profit margins. State governments also increase license fees at regular intervals and labels have to be registered in each State.

If the distilleries have the right environment for manufacturing, there could be more revenue for States, more employment generation and happy consumers. Hope the governments at the Centre and in States initiative steps to improve ease of doing for liquor manufacturers so that liquor industry has a smooth ride.