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Highway liquor ban to reduce road accidents but cause 1 million job losses

Liquor ban on highways may result in fewer road accidents

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Highway Liquor Ban

Devangshu Datta 

liquor, alcohol
Liquor ban

The Supreme Court order banning liquor sales within 500 metres of highways may result in fewer road accidents. However, the order will have multiple adverse consequences for sure. For one thing, over one million jobs will be lost across the hospitality sector.

Liquor sales will obviously be hit. So, will real estate prices at what used to be prime locations, close to major thoroughfares. Food and snack sales close to highways will also, in all probability, be affected. Going by prior experience with similar bans, a parallel economy will soon develop. There will be a large increase in corruption and rent-seeking across the law enforcement machinery.

The direct impact of all those negatives will show up to some extent in the balance sheet of listed companies. The hospitality sector, liquor manufacturers, FMCG firms, will all take a hit. So, will real estate developers in those affected locations. Realtors have bought land, and developed commercial locations with certain return assumptions. Those assumptions will be scaled down and the value of undeveloped/unsold real estate inventory will have to be discounted down.

The real estate situation is most interesting. Commercial development and re-development of contiguous real estate is always assumed when a road project goes through. Usually the strips of land contiguous to the road see highest appreciation. Now, it could be the areas which are just over 500 metres away. Some road project models offer the project developer the right to develop land contiguous to the road. This could require tweaking.

The indirect effect of so many job losses is likely to show up in GDP growth rates, and macro-statistics at some stage. The social dimensions of that employment loss could play out over a long period. The laid off workforce will consume less; some will default on extant personal loans; a few could take to crime.

There could be a kneejerk effect on share prices in the specific sectors. The more sensible investors will review sector discounts and assume slower growth rates for a while. Eventually the affected industries will settle down into a lower trend rate of growth. Presumably that will also result in lower discounts for these industries.

The re-employment of the workforce will present a major conundrum that is unlikely to be easily solved. India's economic growth through the last decade has come without much in the way of accompanying employment. The slashing of skilled and semi-skilled jobs in this fashion could have nasty long-term fallout in terms of uneven development and skewed per capita income ratios.

Growth rates in FMCG and in the liquor industry are difficult to estimate for several reasons. Liquor has to contend with prohibitions in several states and excise laws that vary from state to state.

There is also rampant corruption in states with prohibition and widespread attempts to get around the laws. This shows up in border districts of Uttar Pradesh-Bihar and Maharashtra-Gujarat for instance. The UP border districts and the Maharashtra border districts see very high liquor sales with much of the alcohol illegally transported across the border at a high premium. A similar model could arise with liquor sales being very high in vends just beyond the 500 metre mark.

FMCG is less affected by illegality and it doesn't face barriers like prohibition. But, there's very stiff competition. There's also the fact that a couple of major players are unlisted and allegations from big listed players that at least one major unlisted player derives higher margins by skimping on quality control. This has helped the unlisted player to grab market share. Growth in the listed companies has slowed. This move could place an additional burden on the sector.

The author is a technical and equity analyst

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First Published: Thu, April 06 2017. 09:43 IST
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