The stated objectives of higher tax on liquor — and monopolisation of procurement and distribution of liquor in most States in India — are to discourage liquor consumption, regulate production and trade in liquor, and revenue mobilisation.
Usually multiple objectives of public policy are contradictory, and the policy would serve one at the cost of others.
Liquor consumption can be discouraged by fixing a higher minimum age for liquor consumption, and implementing stiffer rules and regulations for trade in liquor. Of course, enforcement of these regulations is always less than desirable.
States involvement in de-addiction efforts is far from satisfactory. But continuous increase in tax rates on liquor due to its inelastic demand has only encouraged State governments to use liquor tax as a safer route to larger tax revenue mobilisation.
The State's monopoly over procurement and direct distribution of liquor has only helped in de-stigmatising liquor consumption.
Thus, it appears higher liquor tax, combined with State monopoly in liquor trade, has only served the objective of higher revenue mobilisation at the cost of encouraging liquor consumption.
Incidentally, politicians also claim that higher tax revenue from liquor trade has helped in implementing larger social sector schemes.
PUBLIC REVENUE
We need to test the hypothesis, namely, the complete prohibition of liquor trade will result in irreversible loss of public revenue, consequently jeopardising social sector expenditure.
Let us take two States, one that has not accrued a paisa from liquor tax (Gujarat) and Tamil Nadu, which is proud of achieving among the highest tax-GSDP ratios, with the distinction of having the highest State Excise collection of Rs 7508.18 crore (2010-11 BE) in the country.
With 6.06 per cent of India's population and 8.2 per cent of GDP, Tamil Nadu distinguishes itself with 13.53 per cent of total State Excise collection in the country; if we add the sales tax on liquor, this proportion should be much higher.
We have taken a three-year average of 2004-07 and 2008-11 to avoid year-on-year fluctuations.
The first period coincides with the boom and the second period coincides with the recession in the Indian economy.
The aggregate tax revenue from liquor is the summation of State Excise on liquor production and sales tax on liquor distribution.
For the periods 2004-07 and 2008-10, the State's Own Revenue (SOR) for Gujarat increased from Rs 19504.33 crore to Rs 32165.34 crore, compared with Tamil Nadu's increase from Rs 26258.67 crore to Rs 41577.80.
In terms of SOR/GSDP ratio, Gujarat suffered a decline from 8.00 to 7.43; whereas, for Tamil Nadu, it was from 10.01 to 8.77.
What is striking here is that both States' SOR/GSDP ratios declined in 2008-11 due to recession, but Tamil Nadu maintained a higher ratio than Gujarat.
State Excise is a tax on production of liquor, narcotics and medicinal preparation. Excise revenue from liquor invariably forms 99.5 per cent of the total excise duty collection in any State.
Compared with Rs 45.70 crore and Rs 54.90 crore of State Excise collection in Gujarat, Tamil Nadu collected Rs 3237.36 crore and Rs 6597.50 crore in these periods. If we add the sales tax revenue from liquor, Tamil Nadu's collections from total liquor tax were Rs 6125.48 crore and Rs 12415.09 crore.
These liquor tax collections in terms of Tax-GSDP ratios are 2.33 and 2.62 respectively. Note that, when the SOR-GSDP ratios fell in 2008-11, the liquor tax-GSDP ratio increased in Tamil Nadu.
Let us compare the SOR net of liquor tax revenue for Gujarat and Tamil Nadu.
For Gujarat, it has increased from Rs 19458.63 crore to Rs 32110.44 crore; in terms of SOR (net of liquor tax)-GDP ratio, it has declined from 7.98 to 7.42. For Tamil Nadu, the SOR (net of liquor tax) increased from Rs 20133.19 crore to Rs 29161.91 and the corresponding tax — GSDP ratios are 7.67 and 6.15.
The shrinking feature here is that Gujarat's SOR-GDP is higher than that of Tamil Nadu if we exclude liquor tax revenue.
EXPENDITURE
Having said that Gujarat's own revenue mobilisation is better than that of Tamil Nadu, if we exclude tax revenue from liquor trade, we now move on to see the pattern of public expenditure in these two States.
As mentioned already, many States claim that the tax revenue from liquor trade is essential to implement social welfare schemes. It appears this premise holds good for Tamil Nadu.
Tamil Nadu's expenditure-GSDP ratios for development expenditure, social sector expenditure and capital outlay in 2005-08 were 10.1, 6.3 and 2.1, respectively; these ratios compare favourably with Gujarat's 9.3, 4.9 and 2.8.
If we take 2008-11, Tamil Nadu's ratios are higher at 11.97, 2.67 and 2.60, compared with those of Gujarat's 10.4, 5.83 and 2.5.
Thus, Tamil Nadu, which has a tax-GSDP ratio of 2.33 to 2.62 from liquor trade, is far ahead of Gujarat in public expenditure on economic development and social welfare.
The higher developmental and social sector expenditure in Tamil Nadu is reflected in the better human development indicators compared to Gujarat. The life expectancy at birth (2002-06) in Tamil Nadu was 66.2 years, compared to 64.7 years in Gujarat; so too, in other human development indicators like IMR — 31 versus 50; gross enrolment ratio (I-VIII standard) — 114.8 versus 106; literacy rate (2011) — 80.3 versus 79.3, and gender difference in literacy rate — 12.9 versus 16.5.
Thus, Tamil Nadu is much more developed than Gujarat in all socio-economic spheres.
But Gujarat's per capita NSDP (at current prices) in 2005-08 was Rs 44,714 compared to Tamil Nadu's Rs 41,002.
The higher per capita income in Gujarat, along with its lower-level social development, only reflects the deep-seated inequality in the state. There is some truth in the fact that higher public revenue mobilised through liquor tax in Tamil Nadu has facilitated larger public outlay for socio-economic development schemes in the state.
Nevertheless, the revenue space in other State taxes has to be fully exploited. Gujarat, though proud of being a dry State, cannot be complacent about the low level of its social development.
Notwithstanding the argument for mobilising higher tax revenue from liquor trade to finance social development, we need to find a way of curbing liquor consumption in the State.
Rather, in the absence of liquor consumption, the amount of money released for private consumption will be more than double the tax revenue collected, sequentially reducing the need for State funding of social welfare schemes.
(The author is Associate Professor, Dept of Econometrics, University of Madras.)