There is irony attached to the opening up of liquor shops is several states. Given that there is a very strict enforcement of curfews in almost all so-called hotspots, allowing official liquor sales looks interesting. The answer is not hard to guess as alcohol contributes to 10-15% of own tax revenue of states. As has been the case with any major disruption, the state is less sympathetic to the plight of people – migrants and those who have been laid off due to the shutdown, but gets into action when it faces the backlash of such action. Public suffering is treated as being the cost to be paid to save the country from a larger disaster. But now when it is realised that a lockdown means that the government ceases to receive revenue, it shows in such actions.
A shutdown so far has been looked at from the point of view of individuals being displaced and companies forced to shut shop. But once production has come down, which the PMI numbers show as being disastrous, it also means that the revenues stop flowing to the government. GST was to clock in Rs 1 lakh crore a month and with both April and May to be virtual minimal activity, not more than 15-20% would be realised. Companies shutting shop will mean that corporate tax collections will suffer as they will be making only losses. Foreign trade has virtually stopped which means customs collections have been impacted and with several layoffs, income tax collections would also get affected. Therefore, the Rs 24 lakh tax collection of the centre will fall short in the first two months for sure.
This is the reason why the governments have targeted petroleum products and liquor. Petrol product taxes have been raised and while the consumer price has not changed significantly, the surpluses which went to the OMCs when Brent came down by 50% has now gotten transferred to the government. This is unfortunate that consumers never benefit when crude oil price comes down as it goes to the OMCs or government. Even this may not help the government as with few vehicles on the road the demand for petrol and diesel has diminished sharply.
Liquor is considered to be a sinful product and it is ironic how the governments have opened up these shops with alacrity and slapped higher duties knowing that the demand would ensure that revenue will increase. Instead of allowing other retail non-essential outlets to open where the owners are impoverished, the decision to open liquor is a sign of desperation.
From the government’s standpoint getting revenue is important. The central government has not enhanced their fiscal deficit limits which is constrained at 3%. Neither has the centre decided to borrow from the RBI directly large amounts so that the needs of states are met. The states received almost Rs 15 lakh crore from the centre as transfers and grants in FY20. With the centre unable to collect revenue, the transfers have come down. At the same time the states have to pay salaries to their own staff, MLAs/MLCs, doctors, teachers etc. With own revenue trickling down, there is a case of states not being able to spend on relief or even routine expenditure. This is why the decision has been taken to open liquor business and tax the same at a higher rate as pent up demand is immune to price.
The shutdown needs to be rolled back as the 7 week lockdown till 17th May has not really had any clear impact in terms of halting the spread of the virus. The numbers are increasing and the comfort is that the mortality rate is just at 3.5% with associated comorbidity. While a post mortem on the decision makes no sense as it was imposed at a time when the entire world went for such measures, the realisation today is that we need to learn to live with the virus rather than close down the country. The state has definitely not proved capable of handling the shutdown as it has not been able to deliver essential goods and services to the people and several of them have lost their jobs. Such collateral damage has been high even in USA where unemployment has gone past the 10% mark. The medical staff has been stretched and have risked their lives being forced to attend to duty. As we do not quite know what we are looking for as the concept of the flattening curve is conjectural with no basis, economic activity needs to be restored with all the safeguards put in so that the nation can move to normalcy. At least we would know where we are headed.
The writer is chief economist, CARE Ratings. Views are personal.