Can imposition of punitive taxes on high calorie foods have any impact on buying behavior of consumers? The imponderable factors

Three great "sinners" among foods which are held responsible for most of the adverse health conditions in the world are sugar, fat and salt, added to the foods being churned out by the industry. Hardly a day passes without someone or the other indulging in bashing of these so called culprits and calling for policy changes that can make such foods for the citizens too expensive which hopefully would be a disincentive to frequent buying. What is lost in this debate is that escalating the consumer price has never worked as expected where ever such punitive action was taken. Therefore there are doubts whether such fiscal measures can work at all. Most dreaded of all foods are high calorie laden ones which are blamed for many health disorders like obesity, CVD and metabolic syndrome and naturally these foods provide easy targets for imposing extra taxes by the government. Since obesity has assumed epidemic proportion in countries like the US and which defies solution it is assumed that disincentivising purchase of foods rich in sugar and fat may work though no one has any clear answer as to what should be the price differential between lower calorie foods and high calorie foods. Against this background a recent study in the US throws some insight into the buying behavior of consumers when confronted with a market situation where differential pricing was prevalent. Read further to get an essence and significance of the findings to appreciate its relevance in today's world.      

"Professors Romana Khan at Northwestern University, Kanishka Misra at University of Michigan, and Vishal Singh at the New York University Stern School of Business looked at situations that mimic a "fat tax", a peculiar pricing pattern of milk in the U.S., where relative prices for milk across fat content - whole, 2%, 1% and skim - vary depending on where you live and which store you happen to patronize. At some stores, prices are equal across all fat content; at others, prices decrease with fat content, with whole milk the most expensive and skim the cheapest option. "The question that comes to mind is whether these different price structures have an impact on people's choices To put it simply, do people switch to lower fat milk for a price difference as small as 15 cents per gallon?" said Khan. "The answer to this question is of interest because it relates to the hotly debated issue of whether a 'fat' or 'sugar' tax can be an effective mechanism to curb obesity."  The study finds that in markets where milk prices are equal across fat alternatives, people tend to choose whole milk over lower calorie alternatives, particularly in low income zip codes: at equal prices across fat content, the market share of whole milk is 52% in lower income areas compared to 25% in higher income areas. What happens in markets where whole milk is priced at a premium? Although the average price difference for a gallon of milk is just 14 cents (5%), it causes a significant shift in market share away from whole milk to lower-fat options. This shift to the lower calorie options is significantly more pronounced in low-income neighborhoods. Besides income, the analysis accounts for other factors such as age profile, racial mix, and educational attainment of the local customer base. A critical factor in the analysis is that the prevailing price structure--whether prices across fat content are the same or not -- is determined by the chain's policy at the regional level and does not vary with local demographics or competition. "This provides us with a quasi-experimental setup to analyze how small price differences impact people's choices," said Misra. "Studies addressing similar questions are often conducted with small, non-representative populations, often university students. What distinguishes our work is the real-world field setting covering sales across the US and observed over a long time period -- mimicking what a potential 'fat-tax' would look like and what the long term consumer choices would be," added Misra. "Our results have significant implications for health experts and policy makers, since interventions in the form of taxes on high calories foods are highly contentious," according to Vishal Singh of New York University. "The general perception is that these taxes need to be substantial, at least 20% and often as high as 50%, to have a meaningful impact. This would be highly regressive since low-income consumers spend a greater proportion of their disposable income on food. Here, we have compelling field-based evidence that such taxes don't need to be high to be effective," noted Singh. The study finds large shifts in demand toward the lower-calorie option are achieved with a price difference of just 5-10%. Consumers respond to small price incentives; and more importantly, low income consumers who are at higher risk for obesity are particularly responsive. The authors also examine implications of a fat-tax and the inherent trade-offs for different segments of society from such interventions: while there are economic losses from taxes to some segments, the health benefits from shifting to the lower calorie option outweighs these costs. The authors' recommendation is a selective taxation mechanism designed to induce substitution within a narrowly defined product category (e.g., baked versus fried chips), rather than to discourage consumption of the category as a whole. This has the additional advantage of mitigating the regressive nature of food taxes since some options within a narrowly defined product category can be made less expensive. Importantly, these taxes should be imposed as an excise tax so that they are reflected in the shelf price at the point-of-purchase, rather than imposed as a post-purchase sales tax where they become less salient in the decision process."

Their findings that even a marginal increase in the sticker price for a higher fat content milk produced a significant shift in the purchasing pattern with people preferring to buy lower calorie milk costing less. In other words it is not necessary to increase the price very high as is being considered by food market gurus and according to the authors of the above study a difference of 10-12% can achieve a significant shift away from the high fat milk. Probably this may be true considering the experience of tobacco and spirits industries where prices were increased exorbitantly through imposition of punitive taxes with the avowed purpose of  dissuading the buyers from buying these products. Neither cigarettes nor spirits have disappeared from the market though their sales must have dipped somewhat. Obviously making high calorie foods marginally dearer can achieve the desired results while there will be less opposition from the industry to such a move. It for the policy makers to ponder over it and orchestrate appropriate policy changes to reduce consumption of high calorie foods or high salt foods in order to improve the health of the population. 

V.H.POTTY
http://vhpotty.blogspot.com
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Taxing the food-A retrograde step by governments in India

Whether in ancient kingdoms or in modern democracies, taxation is a genuine tool to garner resources for the development of the Society at large. But who ever is ruling a country must exercise caution and wisdom in choosing the basket of items to be taxed and at what rate. India to day is considered vibrant democracy with the governing fraternity being for the people and by the people. If so indiscriminate taxation regime can be nothing but suppression of the aspirations of people. This is what has been happening in the country with successive governments refusing to go by the wishes of the people not to tax their foods. If the industry is to be believed the present General Sales Tax GST) regime, being pushed through, wants to impose 20% tax on foods which is nothing but a cruel joke in a country where poor people predominate in the population. While lot has been said about "Right to Food" by the political class it is not realized that right to access food cannot be "at any cost"! The plea by the industry to reduce the food taxes to 4% is very reasonable and if the present government prides itself as a "responsive and responsible" one it must heed to this well reasoned suggestion. Here is a take on this contentious issue. 

"Preferred policy option should be imposed on food processing sector, keeping GST rate not more than 4% and farm sector should be kept outside the scope of GST, said Sharad Jaipuria, President, PHD Chamber of Commerce and Industry. The likely implementation of GST at more than 20% on food processing sector would not only impact the sector adversely but also hit the economic and social sentiments of the country, said Jaipuria. The food processing industry is still at a nascent stage of development in our country as only 2.2% of food output is processed in India as compared to 78% in Philippines, 65% in the USA and 23% in China. At this juncture, high rate of GST will slow down the growth trajectory of food processing sector in India. Further, as food comprise a major part of the Wholesale Price Index (WPI) which is nearly 14.3%, an increase in tax on food items will adversely impact WPI leading to higher inflation in the country, he said. We believe since food constitutes a large portion of the consumer basket of lower income households, any tax on food would be regressive in nature. Further, extending GST to food processing sector will also cause difficulty in view of the fact that production and distribution of food is largely unorganized in India, added Jaipuria. On global front, most of the countries tax food at a lower rate keeping in view the considerations of fairness and equity. Even in countries such as Canada, UK and Australia where food constitute a relatively small portion of the consumer basket, food is taxed at zero rate.  While in some countries, food is taxed at a standard rate which is as low as 3% in Singapore and Japan at the inception of the GST. Even in international jurisdictions, no distinction is drawn on the degree of processing of food. Hence, the benefit of lower or zero tax rates should also be extended to all food items in India regardless to degree of processing, he said."

It will be easy for the government to brush aside such suggestions branding industry as not adequately patriotic to help the government  in refurbishing its treasury but the citizens in this country will eventually punish the government if does not remove all taxes on food materials, whether processed or raw. There has been and still a procession of politicians going to foreign countries on some pretext or the other but never seems to learn good things of benefit to the citizens there. If food is not taxed in countries like Canada, Australia and the UK why should it be taxed in our country? On one hand successive governments never get tired of proclaiming from the top of their perch that agroindustries must be promoted as it provides more employment per unit investment while in successive budgets taxes are neither removed nor reduced but invariably increased What an anachronism! Can we expect from the present Finance Minister, when he presents his budget in February next to start the process of reducing the food taxes progressively, to eventually achieve zero taxation in 5 years? Pray God for good sense prevailing over him in the next 3 months! 

V.H.POTTY

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FLOUR MILLING INDUSTRY-SEEKING LOWER COST WHEAT

Any industry will always try to maximize its profits through many honest way and it is to be admitted that input material invariably forms a sizable component in the end product price. This is no exception to flour milling industry also which uses wheat as its raw material. Unlike Chakkis, modern Roller Flour Mills process the wheat into consumer products like Suji and Maida while Bran and Germ are by products. With slow disappearance of Chakkis in many parts of the country, big flour mills have entered into the Atta market with their own brands and to day branded Atta costs any where from Rs 35-40 per kg while the raw wheat sells at Rs 18-20 per kg. Naturally the industry can be expected to have comfortable margins in the manufacture of Atta, Maida and Suji. However the stand being taken by the flour milling industry that they are all incurring heavy losses is some what puzzling. Recent GOI modification of wheat pricing with uniform prices across the country seems to have gladdened the hearts of the millers probably because their profitability is bound to go up under the new policy. Here is a take on this issue.

"Roller flour mills in the northern region are gearing up to step up capacity utilisation after the Central government revisited its decision on the price of wheat under the open market sales scheme to provide a level playing field to flour mills across India. Flour mills in the north — particularly in the states of Punjab, Haryana, Uttar Pradesh and Madhya Pradesh — had been keeping their capacities idle, as wheat in the producing states was available to them at a higher price than in the consuming states, making business unviable. Under the latest guidelines, wheat prices (per quintal) in the producing states have been fixed at Rs 1,403 in Uttar Pradesh, Rs 1,417 in Madhya Pradesh, Rs 1,446 in Haryana and Rs 1,484 in Punjab. In the consuming states, the price of wheat will now be the price in the state from where it is imported, plus freight charges. Earlier, freight charges and state taxes in the consuming states were subsidised, making wheat dearer in the producing states. The president of the Madhya Pradesh Roller Flour Millers Association, Sunil Aggarwal, said, "About 50 per cent of India's flour mills are located in the producing states, as it makes business sense. The state has close to 50 flour mills with an installed capacity of 200 tonnes per mill per month. All of them were running at 30-40 per cent capacity. This will now increase substantially." Adi Narayan Gupta of the Roller Flour Millers Association of Uttar Pradesh said wheat is available in Delhi at Rs 1,328 per quintal and in Uttar Pradesh at Rs 1,403. The state has over 140 flour mills and all are battling for survival. The new price has created a favourable climate for mills in Uttar Pradesh, which can now sell in Delhi. Taxes are the highest in Punjab and Haryana. These taxes come in the form of VAT (value-added tax), mandi fee, arhtiya commission, labour charges, handling charges and rural development fund. The taxes are close to 15.5 per cent in Punjab and 13.5 per cent in Haryana. In Uttar Pradesh and Madhya Pradesh, they are slightly lower than in Haryana, but small flour millers were finding it difficult to compete with millers in other states in the wake of differentiation in wheat prices. The Food Corporation of India pays these taxes to the state on procurement of wheat over and above minimum support price of wheat, which is Rs 1,285 per quintal. The president of the Roller Flour Millers Association of Punjab, Naresh Ghai, said wheat products (wheat flour and refined wheat flour or maida) were coming from other states (Rajasthan, Delhi, Chandigarh), and this would now get discouraged. Wheat is sold to millers through the open market sales scheme. Punjab's millers did not participate in the tenders for wheat under the scheme, as the prices were unviable for them (the neighbouring states were offering wheat to their millers at lower rates). Now they will have better access to wheat at a viable price, Ghai said. Millers in Haryana are hopeful, as they expect sales to double now. Close to two dozen mills have shut down in the past few months due to the Centre's unfavourable policy, said C P Gupta, the president of Roller Flour Millers Association of Haryana. "Of 65 mills only 40 were functional and had been operating at 15-20 per cent of capacity. The amendment in the policy will help us revive operations."The country has a buffer stock of wheat, and there are no supply constraints. Consistency in government policy, millers said, was imperative for the growth of small and medium flour mills".

It is alleged, probably with some justification that wheat that is siphoned off from the leaky PDS often ends up in flour mills and that may be the reason why the mills were working at lower capacity to just process the quantities received through back channels. Other wise it is difficult to understand why these mils are still working at all incurring losses! Normal economic sense tells that lower the margin higher should be the volume of production through higher capacity utilization. Good days can be expected for the industry in the coming days under the new policy! The recent announcement by the Prime Minister about rolling out the government's newly discovered Direct Cash Transfer alternative to PDS may still upset the apple cart of this industry.

V.H.POTTY
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