Price Elasticity of Demand for Alcoholic Beverages in India: Analysis based on the NSSO's Household Consumption Expenditure Survey of 2022-23 and 2023-24

Taxation affects the prices of commodities and influences consumer behaviour. Increasing taxes on intoxicants are expected to discourage consumption. However, the price elasticity of demand for intoxicants is often low compared to standard (normal) goods. Since the distortionary impacts of taxation on intoxicants are low (in terms of deadweight losses) compared to standard goods, higher taxes are applied to intoxicants. The effect of taxes on intoxicants in terms of price changes also depends on the shifting of the tax burden to consumers. Taxation as a tool to alter prices and, consequently, consumer behaviour becomes less effective when informal supplies of intoxicants (e.g., spurious, untaxed, contraband, smuggled, locally made alternatives) exist in the market. Assessing the price elasticity of demand for alcoholic beverages is the first step in understanding the effectiveness of alcohol taxation policies in India. In this paper, we estimate the own price, cross-price, and income elasticities of demand for foreign liquor (also known as Indian-made foreign liquor) and beer. We examine substitutions across beverage types and consider informal and unregulated supply channels. This study also differentiates between the price sensitivity of poorer households and more affluent ones. Using nationally representative household data for 2022-23 and 2023-24, we find that the own-price elasticity of demand for beer and foreign liquor ranges from -0.27 to -0.17, indicating moderate responsiveness to price changes. Elasticity estimates based on total MPCE range from 0.42 to 0.80, suggesting that increased household expenditure correlates with higher consumption. Substitution effects with country liquor were significant in 2022-23 but diminished in 2023-24. These findings provide timely evidence to inform alcohol taxation policies in India and highlight the need for targeted strategies that consider income groups, price sensitivity, and changing substitution patterns. The implications are substantial, raising questions about the effectiveness of current alcohol taxation measures and encouraging discussion on potential improvements.