Economy Special Articles Tamil Nadu

Economics of Alcohol: Spirit Funding the Economic Activities

May 7, 2020
G Saimukundhan

Alcohol is the anesthesia by which we endure the operation of life – George Bernard Shaw

The Tamil Nadu Government has permitted reopening of the TASMAC shops starting from 7th May 2020. As always, this decision, or any decision to increase the TASMAC outlets or its timings, has not gone well with any of the political outfits in the State. We also get to see lots of media channels carrying bytes from the general public on the ill effects of alcohol.

But the key question is – why would the Government still go ahead? When dealing with matters of economics or stagnant economy, it is always ideal to be in the opposition. Let us not delve too much into the “immorality” of the whole exercise, and have a tangible and objective look at the State Government’s move.

The broad summary of the Government’s revenue receipts for the year 2020-21, as per the budgetary documents is as follows – The total revenue for the Tamil Nadu State Government is projected to be Rs.219375 Crores. Out of which the tax revenues are Rs.133530 Crores (61%). Out of this TASMAC contributes to Rs.31000 Crores as Tax Collection (both State Excise Duty and TN Value Added Tax, put together). To put things in perspective – TASMAC contributes to almost 25% of Total Tax Revenue of the State, and is the single biggest contributor to the State Treasury over which the State exercises complete control.

Now consider these numbers – Almost Rs.79000 crores is from GST and Share of State Government in Central Taxes (Income Tax and Corporation Tax), over which the State has no policy control. The State cannot increase or decrease the tax rates or implement any plans for increasing these collections. The sizeable tax collection over which they have any control is the State Excise Duty (levied exclusively on alcohol for human consumption) and the Tamil Nadu Value Added Tax (levied on Petrol, Diesel etc, and alcohol for human consumption).

The projected fiscal deficit i.e. the amount the Government plans to borrow to meet its planned and unplanned expenditure is almost Rs.74,000 Crores. This number would go up if any of the following happens –

  1. State’s own tax revenue goes down
  2. State’s share in the Central Taxes goes down

And presently, both the above are happening, and the State Government has absolutely no other way to increase revenue. What exactly are the options in front of the Government to tide over this crisis?

  1. Increase Revenue – possible only for State Excise Duty and State Value Added Tax
  2. Decrease Expenses – With Salary and Pensions constituting almost Rs.100,000 Crores (this is excluding salaries of State Corporations) and interest payable on “sovereign debt” at Rs.36,000 Crores, the State cannot touch any of these. You don’t pay salary, and it is a political hara-kiri. Non payment of interest dues on time can lead to “Sovereign Default”. No government would want that, as it would affect its ability to raise any further debt. (You may read up on Greece Economic Crisis and India’s Balance of Payment Crisis of the late 80s in this regard. In a nut shell – the last thing any government wants is to be branded as a “Defaulter of Debt”)
  3. Borrow – With almost everyone looking to raise debt, including governments, corporates and small businessmen, the opportunity to raise big ticket loans also looks pretty bleak. Now consider this, with TASMAC earnings, government would be raising Rs.74,000 Crores i.e. almost 25% of its overall expenditure. Without TASMAC, it would be required to raise almost 105,000 Crores (and some more for the Covid-19 related outgoes).

With almost negligible economic activities across the country, and an expected GDP contraction or flat growth, the State will be getting lesser than budgeted GST and much lower amount as share in the Central Taxes. And unless it unleashes certain limbs of its money minting departments i.e. TASMAC in this case, the State Government will have to start looking for alms where there are no donors.

It can be fashionable to say that we don’t need the alcohol money. That would be not just virtue signalling, but economically stupid in these challenging times. And we are not even talking about negative effects of “Withdrawal Syndrome” and the resultant violence and suicidal tendencies. We cannot ignore them since we find the other violence more in line with our “value system”. For a State which has grown from the dark days of bootlegging, going towards prohibition is also going towards bootlegging.

The ideal world is not a world without alcohol, but a world with responsible adults. You only regulate them – such as regulating the number of shops, quantity that a single person can buy, and, strict punishment for drunken driving or public nuisance. You cannot ban them. You don’t ban vehicles on the street to cut-down road accidents.

Opening of TASMAC outlets may appear to be politically incorrect and immoral, in a country where any form of recreation is judged to be on the bottom of the “Value Judgement Scale”. But this is pretty much the “go-to” strategy in these challenging times. Every State follows a modified version of the GB Shaw’s quote – “Alcohol is the fuel by which we sustain the operation of life and economy.”