Friday, June 16, 2017

How Liberal is Kerala’s Latest Liquor Policy?

Rahul V Kumar*

The hardline liquor prohibition policy of the previous United Democratic Front (UDF) Government in Kerala was debated more as a political issue than for its economic rationale. The outcome of this policy indicated that popular political whims could have serious unintended consequences. While there is an absence of systematic data indicating a decline in the use of alcohol, there are sufficient data indicating that drug abuse became prevalent following restrictions in the sale of liquor. This was enough evidence for the incumbent Left Democratic Front (LDF) Government to roll back the policy of prohibition. The LDF government’s new liquor policy is more a political statement that challenges the existing policy intended to phase out liquor sales in Kerala. Several bars with three and four-star status that were closed following the ban are proposed to be opened under the new policy. There are conflicting data on the exact number of bars that will start functioning in the state. The new policy has also raised the minimum age to purchase and consume liquor to 23 years. Moreover, the policy would give the toddy industry a big push by allowing the sale of toddy in bars. While the license fees to sell liquor through stores and other outlets are hiked, the new policy appears to liberalise the sector by increasing access to liquor in the state. However, the liquor industry in Kerala is still strictly controlled by the government, as it is in many other states in India.
As the new policy becomes operational, it is important to ask if it proposes any novel initiative that could transform the liquor sector of Kerala. A crucial transformation that liquor businesses in Kerala require is not mere access to liquor but access to quality liquor through quality outlets. If the new liquor policy cannot guarantee this aspect of liquor trade, then dingy bars and crowded consumer outlets will make a comeback in the state. Is there anything that the state of Kerala could do to effectively modernise these outlets? If there is then what are the constraints that prevent the State Government from taking specific steps towards this goal? Buying liquor from outlets in Kerala could be a time-consuming exercise at any time of the day. Long queues in front of these outlets are a common sight. Those who find it difficult to stand in queues have little choice but to visit bars, where taxes still pull up the price of liquor. Will the new liquor policy bring respite to the plight of these consumers? Increasing the price through taxes is supposed to be a disincentive for liquor consumers. The logic is that if liquor becomes unaffordable, people would buy less and thereby the state could demonstrate its commitment to the health of its citizens. This has not been a successful policy in Kerala.
Lack of asymmetric information alone does not cause market failure in the liquor sector of Kerala. Addiction that leads to overuse or abuse, which, in turn, begets crime, accidents and health hazards is a major worry. If prohibition has not been able to tackle these issues for a long time, it is worth experimenting what a liberal market in liquor has to offer. To formulate an effective liquor policy, we need to accept the fact that there is a large market for quality liquor in Kerala. The successive governments in Kerala have acknowledged that liquor is a major tax earner but have failed to accept that it is the market that creates this potential to tax and thereby provide revenue to various other state activities. Hence, the requisite is to support the market for liquor and frame rules that could make this market effective by avoiding failures. Even amidst aggressive taxing strategies as well as isolating the outlets in dingy corners, the market for liquor in the state has survived and seems to be thriving. This is indicative of the insatiable demand for the product. This also suggests that any attempt to control the liquor market would lead to a proportional increase in black markets.

The logical alternative then is to set certain broad rules for the liquor sector and liberalise the industry allowing access to foreign as well as local players. Alcohol consumption and sales are still a male-dominated sector in Kerala. Allowing retail chains to sell high-quality liquor products could change these gendered notions. Once we overcome such conventions, the sector could be a major source of employment for all genders. Such retails would better the choice available with the people and allow consumers to choose between vendors. Competition will then be among the vendors to ensure quality of products and services. Competition will allow the industry to set better standards not only in responsible drinking but also in ensuring that consumers have a choice between dingy outlets and well-maintained stores.

*The author is Research Consultant at Centre for Public Policy Research. Views expressed by the author is personal and does not reflect that of the organisation. 

Image source: The Wire

Wednesday, June 14, 2017

Animal Market Regulations: Some Immediate Concerns

D Dhanuraj and Rahul V Kumar*

India is predominantly an agrarian economy with a large section of its population depending on the sector for their livelihood. Cattle form a vital part of agriculture and allied activities. Various estimates suggest that India has a large bovine population with approximately 303 million cattle and water buffaloes alone. More than 60 million small and marginal farmers own a major part of these animals, which directly aid agriculture and form an essential part of the dairy and meat industry. The meat producing industry depends mostly on the unorganised sector for sourcing the products. This unorganised sector includes animal markets as well as slaughter houses. Estimates put the number of slaughter houses in the unorganised sector in India at 25000. The meat industry in India is estimated at approximately $15000 million. Various departments under the Ministry of Health and the Ministry of Commerce regulate the functioning of these markets.
It is in the context of these huge business prospects in the meat industry in India that the ‘Prevention of Cruelty to Animals (Regulation of Livestock Markets) Rules, 2017’ needs to be examined. The new regulatory framework attempts to regulate animal markets by introducing a set of rules restricting the sale of animals in these markets. Animal market in India is largely in the form of an open market with little formal controls. The rule provides a loose definition of a market to accommodate this informality. Accordingly, an animal market is defined as, “… a market place or sale-yard or any other premises or place to which animals are brought from other places and exposed for sale or auction and includes any lairage ... slaughter house ... and any place adjoining a market ... parking areas by visitors to the market ... animal fair and cattle pound where animals are offered or displayed for sale or auction.”
As such, the new regulations on animal markets could be a crucial step in formalising the markets and making efficient allocations within a formal structure. This could be considered as a novel initiative to reform the animal markets. However, we need to probe more into the functioning of such markets to understand the effect of the new rule on business transactions. An efficient market should be allowed to function freely with broad rules to ensure effective transactions between buyers and sellers. In the least, entry and exit from these markets should be convenient and prices tending towards competitive levels.
The Regulation of Livestock Markets Rules, 2017, is likely to create more hurdles towards a competitive market structure and bring in undue controls disrupting the existing animal markets. For instance, the rule constitutes the creation of a new bureaucratic framework  called the Animal Market Monitoring Committee, which will make it difficult for poor farmers to sell animals in these markets. A major hurdle is that such animals cannot be sold in the markets for the purpose of slaughter. Selling of cattle between the states is also restricted. Proof of sales (five copies to be maintained by not only the buyer and seller but also the local government officials, Chief Veterinary Officer and Animal Market Monitoring Committee) as well as documents to prove farmland ownership rights will be monitored by the authorities under the Animal Market Monitoring Committee for each sale of animals. These restrictions and documents make it extremely difficult for the small and marginal farmers to dispose of their old cattle stock to the meat producers through animal markets. This, in turn, is likely to affect not only the livelihood of these farmers but also the large meat export industry in India.

In India, multiple laws govern animal trade and various agencies monitor the trade at different levels. Since the State Governments have a major say in the matter, animal traders have to deal with the Central, State and Local Government legalisations. While each State Government has defined its own rules, governmental departments including health, Food Safety and Standards Authority of India (FSSAI), Pollution Control Board, Police etc monitor the trade. What matters the most are the rules and regulations that restrict opportunities for small and medium enterprises. It is easy to find fault with them, as they may not have the wherewithal to oblige to conform to the technical requirements that the law stipulates. In a way, these issues are similar to the challenges faced by street vendors. There is a need to study the matter carefully so that the smaller players could also make a decent living doing a decent job. These rules seem to be restricting them from trade and increasing opportunities to harass them. 

D Dhanuraj is Chairman of Centre for Public Policy Research and Rahul V Kumar is Research Consultant at Centre for Public Policy Research. Views expressed by the authors are personal and does not represent of CPPR

Thursday, November 10, 2016

Understanding the Phasing Out of Higher Denomination Fiat Currency in India

By Rahul V Kumar*

The Government of India has decided to phase out the existing higher denomination (500 and 1000 Rupees note) currency from circulation. Many have hailed this decision as an important step to eliminate black money from the system. At the broadest level, I put forward a hypothesis that the decision has many possibilities to strengthen the role of the state. A stronger state has its own consequences on individual freedom and liberty. This, in turn, has more potential to create an unstable monetary environment in the long term. Given the distant possibility of a complete wipe out of black money, there are a few immediate considerations that are worthy of analysis. Arbitrary and quick decisions from the side of the government will be carefully observed by the business community. This could lead to precautionary measures adopted by these groups in future to avoid discretionary government decisions like the present phasing out.

Arbitrary and dramatic decisions could lead to distrust in government handling of money supply in the economy. Lack of trust in fiat currency could have negative impact on the banking system and the control of credit by the government. Distrust of business in the currency system, however, could be seen as a positive step towards the rise of newer forms of decentralised currencies in the country. Online monetary exchanges and crypto currency would be used for future business transactions. But, the broader consequence of increase in demand for plastic currency and crypto currency could be to transfer illegality from paper currency to plastic currency sector, until the existing monetary institutions are allowed to undergo positive transformations. Credit and debit card frauds, which are increasingly reported, are likely to expand. An illegal economy in online transactions is likely to thrive.

Illegality in currency arose primarily because an artificial demand was created for paper currency by making it fiat money. The hypothesis of the current decision was that all the fiat currency and illegal notes of higher denomination stored in vaults and in circulation will be affected. The possible surge in demand for lower denomination currency was predicted and steps taken to deal with it. The heterogeneity of the country, the differential growth rates of different states, inequalities within these states, sectoral differences and so on make any analysis of the impact of policies in India difficult. Different people perceive the impact differently.

An important consequence of wiping out higher denomination currency is that production in the economy is likely to be affected in the near term. All activities that were supported and carried out using illegal money will immediately come to a halt. How the economy copes with this situation should be speculated. The coping strategies would result in a surge in the demand for employment. In the absence of development of suitable employment opportunities, it is likely that the government will find new avenues to intervene in determining economic opportunities. In other words, reaction in the business sector would be reflected with a strong rise in the government sector.

To prevent crime in the economy requires a broader canvas to determine the origin of the crime. Crime in fiat money originated, when fiat money was made valuable. This has origins in how the states evolved and gained control over monetary transactions. Hence, the new policy can be seen only as a strategic move by the current government, which converted a long-term problem in the monetary system into a political opportunity. It need not correct the flaws in the system.

*The Author is Research Consultant at Centre for Public Policy Research. Views are personal and does not represent that of CPPR