Are soft drinks staring into an Indian abyss? - Comment

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This month, Ray Rowlands focuses his attention on the recent announcement that carbonated soft drinks are to be classified as luxury items in India, and considers the disastrous effect the move could have on the country's soda market.

Authorities in India have reclassified the tax bracket for carbonated soft drinks

Authorities in India have reclassified the tax bracket for carbonated soft drinks

India is one of the largest and fastest expanding economies in the world. Indeed, the country outpaced China in 2015 with GDP growth expected to hit a high of 7.6% in 2016, according to the Delhi Central Statistics Office. That's a 0.2% gain on the previous year. And, with 1.3bn inhabitants, the country is one of the most-populated on the planet. That's a lot of people, with a lot of aspirations and a lot of thirst.

For multi-national soft drinks companies like The Coca-Cola Co and PepsiCo, India also provides a life-line as their key home market continues to suffer from declining soda sales. Although still only a fraction of the size of the US soda market, latent Indian demand is potentially huge, especially as spending power continues to expand. But, even today, the CSD category in the country is of great importance to both US giants. Their flagship international brands - teamed with local acquisitions like Thums Up cola, bought by Coca-Cola in 1993 - dominate the category.

The country's soda market is now facing a serious threat to its survival as the health risks associated with sugary drinks come further into the spotlight. Not unlike the recently-announced sugar tax in the UK, aimed at reducing child obesity, the Indian Government is also introducing stringent measures against sales of sugar-sweetened drinks, including tougher advertising rules.

This is part of a game plan designed to curb the growth of obesity and, more pointedly, diabetes; an epidemic that is spiralling out of control across India. According to a report in The Times Of India newspaper, some 69m people in the country have the disease, which is closely linked with high sugar-intake (as is obesity). At the same time, figures from the Diabetes Foundation and Centre of Nutrition and Metabolic Research show that India's annual per-capita consumption of all sugar-sweetened beverages has increased from around 2 litres in 1998 to 11 litres in 2014. Drinksinfo estimates that soda consumption alone accounts for around five of these litres: Hence, CSDs have become a key target in the crackdown on sugar consumption.

Earlier this month, the Indian government introduced a new four-tier Goods & Services Tax (GST) structure, designed to reduce inefficiencies caused by the current tax system. Due to be implemented early next year, four tax rates were approved by both the Central and state governments – 5%, 12%, 18% and 28% - depending on the product involved, with some items, such as basic foodstuffs, being zero-rated.

The Government also took the opportunity to reassess the tax position of soft drinks. 

Prior to these changes, it was announced in February that the central India excise tax on "aerated soft drinks" - the country's term for CSDs - was to be raised from 18% to 21%, though subject to a 40% abatement (or tax incentive). This is in addition to state variable VAT which averages out at around 14%. It was with heavy dissatisfaction, therefore, that the Indian Beverage Association (IBA) greeted the Government's decision this month to now classify these drinks as luxury items, thereby carrying the same levy as luxury cars. It has been further reported that an additional cess (or tax) would also be levied on top of the 28% tax rate.

The IBA, whose members include both Coca-Cola India and PepsiCo India, argue that with retail prices as low as INR50 (US$0.74) per litre (though varying significantly by brand, pack and location), sodas cannot and should not be considered to be luxury goods. A second argument against the high tax level is that, whilst carbonated, sodas serve a consumer hydration need.

In practice, this revised tax structure could have a devastating impact on the Indian CSD market. Whilst still affordable, such drinks are consumed by all layers of society, and not just city dwellers but by rural communities as well.

When the new tax comes into effect, price rises are inevitable. Sodas could then truly become luxury items to be consumed just by the middle- and elite-classes. If soda demand contracts, so too could employment levels. It was only late last year that Coca-Cola India warned that it might have to close some of its 50-or-so factories and bottling plants, due to the threat of an increased tax burden. The multi-billion dollar investments, which both Coca-Cola and PepsiCo had previously lined up for between 2012 and 2020, could also be cut back.

One ray of hope lies in low-calorie sodas. Their standing under the new tax regime is not clear cut but surely their consumption is to be encouraged, so long as sugar is an absent ingredient. Unfortunately, to date, sugar free sodas have failed to impress in India. Drinksinfo Ltd estimate that products like Diet Coke and Diet Pepsi share less than a 1% slice of the country's soda market. However, both Coca-Cola and PepsiCo have recently pledged to cut sugar levels in India in the name of healthier living.

Perhaps this new duty structure is the very catalyst needed to turn such long-term plans into immediate action.

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