The lovely tale of Liquor
during Lockdown and before
At every stage, addiction is driven by one of the most powerful, mysterious, and
vital forces of human existence. What drives addiction is longing —
a longing not just of brain, belly, or loins but finally of the heart.
Cornelius Platinga
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The use of alcohol in India for drinking purposes dates back to somewhere between 3000 and 2000 BC. An alcoholic beverage called Sura which was distilled from the rice was popular at that time in India for common men to unwind at the end of a stressful day. . Yet the first mention of Alcohol appears in Rig Veda (1700BC). It mentions intoxicants like soma and prahamana. Although the soma plant might not exist today, it was famous for delivering a euphoric high. It was also recorded in the Samhita, the medical compendium of Sushruta that he who drinks soma will not age and will be impervious to fire, poison, or weapon attack. The sweet juice of Soma was also said to help establish a connection with the gods. Such was the popularity of alcohol. Initially used for medicinal purposes, with time it evolved and became the beverage that brought life to social gatherings, and eventually consuming alcohol has become a habit for many.
With such a rich history of not just humans but also of the gods,
what is a worldwide pandemic to stop anybody from drinking?
. . .
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According to a report released by the World Health Organisation (WHO) in 2018, an average Indian drinks approximately 5.7 liters of alcohol every year. In a population of casual and excessive drinkers, with the shutters of liquor stores down, it must have been extremely difficult for “certain” people to survive lockdown. In the first two phases of lockdown, the desperation had quadrupled prices of alcohol in the Grey Market of India. Also, According to Google Trends, online searches for “how to make alcohol at home” peaked in India during the fourth week of March, which was the same when the lockdown was announced. As a consequence, a few people died drinking home-brewed liquor. People committed suicide due to alcohol withdrawal syndrome. Owing to the worsening situation and to reboot the economy, some states decided to open licensed liquor stores in the third phase of the COVID-19 Pandemic lockdown in India. This decision was the worst best decision the state governments could take. The kilometer-long queues in front of liquor stores were evidence that a pandemic can turn your life upside down yet your relationship with alcohol cannot move an inch.
The love in the hearts of those who are addicted was explicit. We might have seen addiction, we might have witnessed desperation but what happened in the month of May was madness, not just in terms of the way people pounced but also in the way the government earned. According to a report by Hindustan Times, on the first day of the third phase of Lockdown, the Indian state of Uttar Pradesh recorded a sale of over Rs 100 Crore from liquor. On the second day of the reopening of Liquor stores, Karnataka reported sales of 197 crores in a single day which was the largest ever. Eventually, the prices of Liquor were hiked to 100% to discourage people from drinking.
. . .
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There was a special corona fee that was imposed in Delhi by Chief Minister Arvind Kejriwal. A 70% corona fee was imposed in Delhi, yet the sales did not drop. The entire situation was a disaster for the law enforcement officers, social distancing was easily abandoned and a basic code of conduct was happily violated. Despite the chaos created, the states continued to collect revenues. Home delivery of alcohol was allowed in Maharashtra and e-tokens were sold in Delhi.
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Demand for liquor is inelastic which means that
the sale of alcohol is not much responsive to change in prices.
In general, since alcohol policy is a state subject in India, revenue from Liquor is a cash cow for state governments. In 2018 and 2019, four states collectively collected about 20,000 crores in taxes from the sale of liquor. As much as the state earns from the sale of Liquor it is undoubtedly, a threat to the Economy. Consumption of alcohol has dire health consequences. When a person consumes an alcoholic beverage, there is a rise in BAC because of which there is a gradual and progressive loss of driving ability because of an increase in reaction time, overconfidence, degraded muscle coordination, impaired concentration, and decreased auditory and visual acuity. This is known as drunken driving. (V. M. Anantha Eashwar, 2020) Drunken driving is the third biggest cause of road accidents and over speeding in India. Road accidents are not it; alcoholism causes sleep problems, heart, and liver issues. Also, it is not about an individual’s life, it ruins the lives of all people concerned.
Addiction also causes economic loss. In 2000, Vivek Benegal and his team assessed 113 patients admitted to a special de-addiction service for alcohol dependence. They found that
the average individual earned a mean of ₹1,661 but
spent ₹1,938 per month on alcohol, incurring high debt.
They also found that 95% did not work for about 14 days in a month. They concluded that it led to a loss of ₹13,823 per person per year in terms of foregone productivity. A more recent study, Health Impact and Economic Burden of Alcohol Consumption in India, led by Gaurav Jyani, concluded that alcohol-attributable deaths would lead to a loss of 258 million life-years between 2011 and 2050. The study placed the economic burden on the health system at $48.11 billion, and the societal burden (including health costs, productivity loss, and so on) at $1,867 billion. “This amounts to an average loss of 1.45% of the gross domestic product (GDP) per year to the Indian economy,” the study said. (Mint, 2020)
Setho ka Gaon
With each passing day, the ‘curtain of separation’ weighs down on the women of Afghanistan, paving the way for tyranny to thrive.
Arth
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The Great Recession: Bursting the (Housing) Bubble
The Global financial crisis refers to a period of extreme pressure and stress in banking systems and financial markets around the world between 2007-2009. The foundation of the crisis was built on the housing market bubble that began to form in 2007.
In 2006, housing prices started to fall, a phenomenon initially applauded by realtors. They thought the real estate market was on its way to becoming more sustainable. The residential housing market was booming and in order to capitalise on this boom, lenders began to approve as many home loans as they could. This led to the rapid increase in subprime mortgages - a type of loan sanctioned to borrowers with low credit ratings or dubious income streams. Some even called these the NINJA loans which stands for “no income no jobs and no assets”. Economists cite the collapse of the subprime mortgage market and its consequences as the main reason behind the recession.
CAUSES OF THE RECESSION
As borrowers who earlier did not qualify for conventional mortgages now got access to subprime mortgages, the market was flooded with homebuyers leading to a hike in demand for houses which eventually led to the formation of the 2000s housing bubble. Subprime mortgages were characterised by their affordable repayment plans in the initial years and higher payments in the following years, setting the stage for unreliable borrowers to be unable to make repayments as the interest rates rose in consecutive years. Another way that lenders made money off of the real estate industry was by bundling loans together and selling them to investment banks which then sold these to investors around the world as mortgage-backed securities (MBS). Investors purchasing MBS were of the belief that they had laid their hands on an extremely low-risk asset, assuming that most, if not all loans would be repaid. The investors ranged from many US banks as well as banks in Europe. Over time MBS products became very complex but continued to be sold as “extremely safe” to the common public.
Investment banks then began to sell mortgage-backed securities on the secondary market as collateralized debt obligations (CDOs) - a complex financial product backed by a pool of loans and other assets, divided into varying levels of risk suited for different investors. Many believed that the culmination of various mortgages in a CDO reduced the overall risk but in actuality, tranches of a CDO consisting of low-quality mortgages brought down the entire portfolio returns. Banks and even hedge funds began trading CDOs in an unregulated fashion.
Source: Inside Mortgage Finance
In the run-up to the global financial crisis, several banks and investors borrowed significant amounts of money in order to purchase MBS products. Some even borrowed money overnight in order to purchase an asset that is not fast selling, under the garb of a seemingly secure financial market. All of this meant that in the future when house prices took a huge fall, banks incurred extremely large losses due to the amount of money they had borrowed.
Fraud became commonplace in this period with borrowers overstating their income and individuals being granted loans much larger than they could ever repay. It is important to note that a large part of the blame sat on the shoulders of the credit rating agencies, mainly Moody’s, the Fitch Group and S&P. They granted MBS schemes an AAA rating, one that is reserved for the safest of investment schemes, despite the clear presence of a risky mortgage. It is believed that despite being “independent” institutions, the credit rating agencies were caught up in a conflict of interest since they were paid to review security schemes by the same banks issuing them. Even central banks around the world were unaware of the extent to which bad loans had been issued and how mortgage losses were spreading like wildfire in their economic markets.
WHAT HAPPENED NEXT?
All through the early 2000s, the interest rates had stayed low but they slowly began to rise post-2004 and by 2006, the interest rate was 5.25%. By mid-2006, house prices peaked and at the same time, the supply of newly built houses was rapidly increasing. Sure enough, the supply outpaced the demand and house prices spiralled and the defaults on subprime mortgages increased with the number of borrowers unable to make their loan repayments shooting up.
Source: Federal Reserve System
By 2007, the entire financial system was reeling with shock and big lenders and investors incurred massive losses even after repossessing the houses of which loan repayments weren't made - this was because they had to sell the houses at a price way below the loan balance. In April 2007, New Century Financial, one of the largest providers of subprime mortgages declared bankruptcy. Due to CDOs, the collapse of the subprime mortgage industry was felt far beyond the real estate sector. Big CDO investors saw the value of their investments nosedive and because the trade of CDOs was not listed on any exchange, those who held CDOs had no way of getting rid of them and had to write off their value. Since foreign banks had also participated in the US housing market and had also purchased MBS, the after-effects of the US crisis spilt over to financial systems around the globe.
By 2008, the US was faced with a proper credit crisis and banks started charging extremely high interest rates to lend to other institutions. Lehman Brothers, a financial firm in the US owed 600 billion dollars in debt of which 400 billion dollars was supposed to be covered by credit default swaps (CDS), a financial instrument to insure against defaults on CDOs. CDS was now null and void and Lehman announced bankruptcy in September 2008. This coupled with the collapse of several other financial firms sent banks into a panicked frenzy with most banks (in and out of the US) stopping lending almost completely, investors began pulling money out of investments worldwide as they did not know which institution had exposed itself to the subprime sector and whether it would fail next. The global economy found itself short of funds, financial markets were dysfunctional and public confidence was shattered leading to both businesses and households being unwilling to invest. Companies started massive layoffs and unemployment skyrocketed. The global economy was declining and industrial production and international trade both fell at a faster rate than they did during the Great Depression.
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POLICY MEASURES
Policy responses only gained momentum after the collapse of Lehman Brothers and the subsequent downfall of the global economy. Central Banks began to lower interest rates and lend money to institutions with good assets as well as began to support financial markets and stimulate economic activity. Governments too decided to increase their spending to push demand higher and increase employment. Certain governments even purchased a stake in financial firms and banks nearing bankruptcy in order to dilute the panic in the economy. Global regulations were revised to make sure that banks operate with lower leverage and assess the risk of loans more thoroughly.
CONCLUSION
The great recession was one of the worst economic breakdowns in US history. While the subprime mortgage crisis was the trigger behind the crisis, it was the culmination of several financial failures, the biggest of which was the complex jumbles of MBS, CDOs and CDS that caused the housing industry bubble to burst, followed by major firms declaring bankruptcy and panic wreaking havoc in financial systems around the world, causing a worldwide frenzy. This is how the collapse of one US industry led to a global financial crisis.
Vindhya Venkatesh
Senior Editor, Editorial Board
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