The Aam Aadmi Party government in Delhi caused a loss of Rs 2,026 crores to the public exchequer during the period of 2017 to 2021 by its now-scrapped Liquor Excise Policy through violations in licensing, lack of transparency, and inadequate quality control, according to a Comptroller and Auditor General (CAG) report.
The audit, tabled by the new Rekha Gupta-led administration, examined the regulation and supply of IMFL and FL liquor in Delhi over four years from 2017-18 to 2020-21 when Arvind Kejriwal’s Aam Aadmi Party was in power.
Here are the key findings of the CAG report
Licencing violations
The audit identified multiple discrepancies in how the Excise Department monitored and regulated liquor supply in the NCT of Delhi, raising concerns about its effectiveness in fulfilling its responsibilities. The total financial impact of the audit findings is estimated at approximately ₹2,026.91 crore.
The audit revealed lapses in the Department’s licensing process for wholesalers, retailers, hotels, clubs, and restaurants (HCR). It failed to enforce Rule 35 of the Delhi Excise Rules, 2010, allowing related entities to hold multiple license types, leading to common directorship among businesses.
Additionally, licenses were issued without verifying key requirements such as solvency, financial records, sales data, and criminal background checks. To prevent cartelization and brand favouritism, stricter scrutiny of cross-ownership and proxy ownership is necessary. The inconsistent enforcement of rules underscores procedural non-compliance, warranting accountability for these violations.
Lack of transparency in pricing
The audit found that discretionary pricing of liquor by L1 licensees (manufacturers and wholesalers) led to revenue losses. The Excise Department allowed them to set Ex-Distillery Prices (EDP) for higher-priced liquor, resulting in price variations across states. This discretion enabled price manipulation, reducing sales and impacting excise revenue. Without requiring cost details, there was a risk of hidden profits within inflated EDP. To ensure transparency and maximize revenue, the Department should clearly define EDP, mandate cost sheet submissions, and regulate pricing based on its effect on sales.
The audit found that the Excise Department’s regulatory efforts were ineffective in preventing liquor smuggling and revenue leakages. Its role was largely limited to recording seizures, while the Excise Intelligence Bureau (EIB) failed to act as a strong deterrent. Poor data management further hindered meaningful analysis and enforcement actions.
Country liquor accounted for 65% of total seizures, with structural issues like supply constraints, limited bottle sizes, and few brand options driving smuggling. FIR analysis revealed smuggling hotspots and a concentration of certain regional brands in illegal trade.
Inadequate quality control
The audit found significant weaknesses in the Excise Department’s enforcement, undermining both penalties for violations and deterrence. Raids were conducted arbitrarily without a Standard Operating Procedure, while poor evidence collection and weak use of ESCIMS data weakened cases. Lapses were noted throughout the enforcement process, from inaccurate inspection reports to flawed show-cause notices.
The audit found major shortcomings in the ESCIMS system, designed for barcode-based liquor tracking and payment authentication. The failure to ensure scanning at the point of sale led to post-sale stock reconciliation (MSR Gap), which was outside the contract’s scope and introduced data inaccuracies, weakened inventory tracking, and increased the risk of Non-Duty Paid Liquor using duplicate barcodes.
Additionally, the Excise Adhesive Labels project, meant to enhance security and traceability, was never implemented, compromising supply chain integrity.
To address these issues, real-time barcode tracking should replace the outdated MSR-Gap method, secure barcode labels must be introduced, and AI-driven data analytics should be deployed for better fraud detection and regulatory oversight.
Issues in the New Excise Policy (2021-22)
The 2021-22 Excise Policy aimed to prevent monopolies, ensure equitable liquor distribution, promote transparency, and curb bootlegging. However, several flaws in its formulation, design, and implementation led to significant revenue losses and regulatory failures.
Flaws in Policy Formation
Key recommendations of the Expert Committee were ignored without justification, including the shift from a state-run wholesale model to private entities and changes in license allocation rules. Major exemptions with revenue implications were granted without Cabinet or Lieutenant Governor approval, violating procedural requirements.
Design and Licensing Issues
The policy’s structure encouraged monopolization and cartel formation by limiting the number of wholesalers and imposing exclusivity arrangements between manufacturers and wholesalers. Retail licensing was also concentrated, reducing competition. Cases of related business entities holding licenses across the supply chain raised concerns about brand favouritism.
Implementation Failures
Retailers surrendering licenses prematurely caused supply disruptions, as the policy lacked provisions for advance notice. The government lost ₹890 crore by not retendering these surrendered licenses and ₹941 crore due to exemptions given to zonal licensees. Despite clear contract terms, a ₹144 crore waiver was granted to licensees citing COVID restrictions, further reducing revenue. Additionally, incorrect security deposit collections led to ₹27 crore in losses.
In total, implementation failures resulted in a revenue loss of ₹2,002 crore. Crucial anti-bootlegging measures, such as liquor testing labs, batch testing, and regulatory oversight, were never executed, undermining the policy’s core objectives.
