Following the Karnataka excise department’s recent proposal to increase the excise duty on beer, industry players anticipate a significant decline in beer demand in Karnataka, which is one of the largest liquor-consuming States.

According to the latest industry estimates, the State consumes around 3.8 million hectolitres (MHL) of beer annually, roughly 12 per cent of the overall Indian beer volume. Estimates also indicate that over the past two years, beer sales in Karnataka have more than doubled, driven by post-Covid-19 consumer trends.

The Karnataka government has implemented several changes in the additional excise duty (AED) and excise duty (ED) since last year, with the first in July 2023. It proposed a 10 per cent increase in AED from 175 per cent to 185 per cent, with a ₹10-15 rise per 650 ml bottle. In February 2024, this was further increased from 185 per cent to 195 per cent at a ₹15 increase per bottle.

The third proposed change would be in the ED per bulk litre (BL). What previously was simply ₹10 per BL will now be classified into three categories based on alcohol strength: ₹10 per BL for beers with an alcohol by volume (ABV) of below 5 per cent, ₹16 per BL for 5 per cent-6.5 per cent ABV and ₹20 per BL for an ABV of 6.5 per cent-8 per cent.

MRP hikes

“The beer category in Karnataka has already witnessed two significant tax increases over the past 12 months, resulting in MRP hikes. If the proposed draft notification is implemented, it would mark the third major increase. Moreover, the magnitude of the proposed hike is substantial and could see a shift or change in consumer behavior,” said Vinod Giri, Director General of the Brewers Association of India (BAI), an industry body established in partnership with the World Brewing Alliance (WBA). It represents companies like AB-InBev, Carlsberg, and United Breweries, accounting for around 85 per cent of the beer sales in the country.

He stated, “Such frequent rise in MRPs can diminish the market’s attractiveness of Beer to consumers, adversely affecting the beer category’s growth potential. If the effect on volumes is substantial, this could consequently impact, both current and future investments in the State.”

According to a 2024 Infomerics Ratings report, Karnataka, at 83 per cent, charges the highest tax on alcohol in India. In the fiscal year 2023-24, the State excise department collected nearly ₹5,703 crore from beer, an increase from ₹2,757 crore in 2021-22.

“Unlike many other States, Karnataka’s progressive policies have created a level playing field for beer, a beverage category widely regarded as one of moderation, allowing it to compete fairly with IML segments. The State’s significance is highlighted by the substantial investments every major beer company has made, each with manufacturing units and a diverse product portfolio in the State,” Giri said, adding Karnataka ranks as the third-largest beer market in the country, trailing behind Telangana and Uttar Pradesh.

Decline in demand

He explained that however, MRPs going up across various segments could lead to a significant decline in beer demand. The growth seen in the beer category over the past few years could also stagnate, impacting the State’s revenue generation from this segment. “There would also be a significant impact on the trade and hospitality sector. We believe beer consumers may shift towards hard liquor because of the MRP gap, challenging the objective of moderation and responsible drinking.”

Anant Iyer, Director General, Confederation of Indian Alcoholic Beverage Companies (CIABC), said, “Karnataka has attracted huge investments across the alcobev sector — upstream and downstream — as it was a free pricing market with a healthy and robust distribution (RTM) structure. Unfortunately, the new rules in the current excise policy have some changes that make for an unfavorable environment for fresh investments and adversely impact the industry in terms of the bottom line,” adding that despite the increasing cost push, manufacturers have not received any price increase for years together, unaddressed this year also.

Iyer noted that due to the drop in AED in the higher slabs, the end consumer prices of premium and above brands will drop. The deluxe/semi-premium and above categories, comprising around 13 per cent of the Karnataka spirits industry, may expand as consumers upgrade.

“Incidentally, in most States, the ratio of prestige and above segments is around 50 per cent to 60 per cent compared to the lower segments. The brands operating in the lower slabs of 1 to 5 will continue to sustain their market share.”

Giri said the BAI is engaging with the authorities to present its concerns and recommendations.

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