Farm loan waivers to hit your liquor; you need to prepare to pay more

A spate of political promises of waivers on farm-loan repayments in Indian states has an unlikely victim: alcohol companies.

States are expected to hike taxes on liquor — one of the top three revenue sources — as they need to plug the fiscal hole arising from bearing the burden of farm-loan repayments. Any rise in tax will impact alcohol demand as firms will have to pass the additional levy to consumers, according to Edelweiss Securities.

Farm waivers are on the agenda of all political parties as Prime Minister Narendra Modi struggles to alleviate agrarian distress ahead of a national election around May. Modi’s Bharatiya Janata Party was voted out in three key states last month by the main national opposition, Congress, which immediately announced the waiver program after forming governments in Madhya Pradesh, Rajasthan and Chhattisgarh.

Raising liquor taxes — which bring in nearly 25 percent of revenue — is the most likely option as state governments are unlikely to borrow and worsen their debt to GDP ratios, Abneesh Roy and Alok Shah, analysts at Edelweiss wrote in an investor note. “In the past, there have been multiple instances where volumes have taken a beating owing to price hikes emanating from an increase in the tax rate,” they wrote.

Maharashtra increased the tax on Indian-made liquor by 20 percent from Tuesday, the Times of India reported, citing a bureaucrat it didn’t name. Seven states have announced waivers totaling Rs 1.75 trillion ($25 billion) so far, according to Edelweiss.

The brokerage remained underweight liquor stocks and retained its hold recommendation for United Spirits.