As India ushered in 2026, alcohol once again sat at the centre of celebration and contradiction. An estimated 12–15 million cases were consumed nationwide, even as Mumbai had to nearly double police deployment to record a 37% drop in drunk-driving incidents. This contrast captures the core dilemma facing Indian states: alcohol is both a major fiscal lifeline and a source of deep social harm. Managing it responsibly is among the most complex challenges of public policy.
Why alcohol governance poses a unique policy challenge
Alcohol policy operates at the intersection of public health, social order, and state finances. Unlike commodities that only affect individual consumers, alcohol consumption generates spillover costs — road accidents, violence, healthcare burdens, and productivity losses — that society at large must bear. These costs are not reflected in the market price of alcohol, making it a textbook case of negative externalities and justifying state intervention.
Why prohibition is neither practical nor desirable
Despite these harms, alcohol does not fall into the category of substances that warrant outright bans. In most societies, moderate consumption is considered a matter of personal choice. Prohibition has repeatedly shown itself to be counterproductive, breeding illicit markets and enforcement excesses. The realistic policy goal, therefore, is not elimination but informed and responsible consumption, achieved with minimal intrusion and maximum efficiency.
The limits of state capacity and the need for smart regulation
Indian states operate under severe administrative constraints. Policing alcohol consumption through constant surveillance is neither feasible nor efficient. This makes it essential to rely on self-executing regulatory tools — price signals, structural controls, and simple rules — rather than manpower-intensive enforcement. Broadly, states have two levers: non-price regulation and taxation.
Non-price controls and their role in harm reduction
Non-price regulations shape the context of consumption rather than its quantity directly. These include:
- Setting and enforcing a minimum legal drinking age
- Locational restrictions to keep outlets away from schools, colleges, and religious sites
- Community participation in licensing decisions
Such measures protect vulnerable populations but have limited impact unless complemented by a sound taxation regime.
Excise duty and the post-GST fiscal trap
In India, alcohol taxation is a state subject, and excise duty has become a fiscal mainstay, especially after the introduction of GST in 2017 reduced states’ independent tax instruments. Today:
- Excise contributes up to 30–35% of own tax revenue in some states
- In high-dependence states, it accounts for 1.5–2% of GSDP
- Most states fall between 0.5% and 1.2% of GSDP
This growing dependence has sharpened a fundamental conflict: states are expected to curb alcohol-related harm while being financially incentivised to maximise alcohol sales.
From revenue maximisation to revenue optimisation
The principled way out of this conflict lies in redefining the state’s objective. Instead of maximising revenue, states must optimise it — setting tax rates to internalise social costs rather than to plug fiscal gaps. Economic theory offers a clear framework here: Pigouvian taxation, which aligns taxes with the estimated value of negative externalities.
Why alcohol-content-based taxation works better
Global evidence shows that the most effective Pigouvian approach is to tax alcohol strictly in proportion to its ethanol content. This directly targets the source of harm. A high-alcohol spirit should attract a higher tax burden than a low-alcohol beverage, sending a clear price signal that nudges consumers towards safer choices.
India’s current system does the opposite. On average, beer is taxed 30–70% higher per unit of ethanol than whisky. This inverted structure penalises lower-strength beverages and implicitly favours higher-strength spirits, undermining public health objectives.
Regulatory fragmentation and the case for alignment
Beyond taxation, India’s alcohol regulation suffers from institutional overlap. Safety and quality standards already fall under the “”, yet states impose parallel and often conflicting production rules. Aligning state regulations fully with FSSAI standards would:
- Improve consumer safety
- Reduce compliance burdens on producers
- Enable joint and more effective enforcement
What a reformed alcohol policy framework should look like
A coherent and balanced regime would rest on five pillars:
- Excise duty based solely on alcohol content
- Full regulatory alignment with FSSAI safety standards
- Strict enforcement of minimum age and locational norms
- Removal of arbitrary controls like licence caps and production limits
- A clear shift in the state’s role from revenue maximiser to public health regulator
What to note for Prelims?
- Alcohol excise is a state subject under the Constitution
- Excise duty is outside GST
- Negative externalities justify state intervention in alcohol markets
- FSSAI regulates safety and quality of alcoholic beverages
What to note for Mains?
- Discuss the trade-off between public health and fiscal dependence in alcohol policy
- Explain Pigouvian taxation with reference to alcohol excise
- Analyse how GST reshaped state incentives around alcohol taxation
- Evaluate the case for alcohol-content-based taxation in India
By shifting from a punitive, revenue-driven approach to one grounded in economic logic and public health priorities, Indian states can better reconcile morality, markets, and money in one of their most contentious policy domains.
