Beverage companies are leaning on shrinkflation, regional flavours and functional drinks as high GST and rising packaging costs squeeze profitability amid a demand surge
India’s fizzy drinks industry is enjoying one of its most buoyant summers in years. An early and intense heatwave has sent temperatures soaring across large parts of the country, lifting consumption of carbonated beverages and pushing bottlers to ramp up production and distribution. Yet the surge in volumes is doing less for profits than headline demand figures might suggest.
Soft-drink makers are contending with a punishing 40 per cent goods and services tax (GST) burden, stubbornly high prices for PET resin and aluminium, and rising logistics costs aggravated by freight disruptions linked to tensions in West Asia. At the same time, consumers, particularly in urban markets, are showing a growing appetite for lower-sugar and functional drinks, forcing companies to spend more on portfolio diversification and marketing.
According to industry experts, the result is a season of strong topline growth but tighter operating margins. They noted that companies are increasingly relying on premium products, smaller pack sizes and rural distribution gains to protect profitability. Bottlers, meanwhile, are under pressure to balance aggressive summer stocking with volatile input costs and uneven demand visibility beyond the peak season.
“Demand is resilient because of the weather, but it is under immense fiscal strain,” said Prabhu Gandhikumar, Founder and Chief Executive Officer, TABP Snacks and Beverages. Onkar Sharma, Partner at Khaitan and Co, who tracks the beverages sector, said that the margin stress is visible even among the industry’s largest players.
Notably, Varun Beverages (VBL), PepsiCo’s largest franchise bottler outside the United States, reported revenue growth of 18.3 per cent and net profit growth of 20.1 per cent during the January to March 2026 quarter. However, input costs rose nearly 18 per cent during the same period, limiting the gains from higher sales volumes. “The GST change looks to be squeezing margins more than volumes for now,” said Sharma.
For mid-sized and regional players without VBL’s procurement and distribution scale, the equation is far worse. “In India, beverage companies are under serious pressure. The GST on carbonated and caffeinated drinks now sits at 40 per cent, putting soft drinks in the same tax bracket as tobacco and making India one of the highest-taxing countries in the world for this category. Unlike the UK or Thailand, India’s tax is not linked to sugar content, so even zero-sugar and low-sugar options pay the same rate, which discourages reformulation and innovation,” said Sharma.
GST Pressure And The Rs 10 Challenge
Industry experts argue that the current tax structure neither acts as an effective deterrent to consumption nor creates enough room for companies to scale affordable, healthier beverage alternatives. At the mass-market end, the pressure is existential. Nearly 71 per cent of all carbonated beverage transactions in India take place at Rs 20 or below, with approximately 65 per cent of consumers in the category belonging to lower socioeconomic groups.
Research on price elasticity in the segment shows an overall own-price elasticity of approximately -0.94, but the figure is significantly higher for low-income households at -1.04, compared to -0.83 for high-income households. In practical terms, poorer consumers cut back sharply when prices rise, and rural buyers are even more sensitive than urban ones.
For TABP’s Gandhikumar, whose company is built entirely around serving the bottom 600 million consumers, the Rs 10 price point is not a marketing decision. It is the boundary between being accessible and becoming irrelevant. “Because packaged drinks can quickly become an occasional luxury for daily wage earners if prices climb, we have resisted outright price hikes that disrupt this psychological barrier,” he said.
To maintain affordability, several companies have adopted shrinkflation strategies by reducing bottle sizes while keeping retail prices unchanged. Sharma noted that bottle sizes across parts of the industry have shifted from 800 ml to 750 ml, mirroring trends seen across other FMCG categories. “Coca-Cola and PepsiCo have raised prices where they can, but in a price-sensitive market like India, there is a real ceiling on how far that goes. Shrinkflation is widespread,” Sharma added.
“The increased tax burden has largely not been passed on fully to consumers because the Indian beverage market remains highly competitive and price-sensitive,” said Ishan Varshnei, Chief Executive Officer of Borecha, LB Brewers. “In some cases, brands have opted for minor pack-size adjustments or selective price revisions instead of large direct price hikes.”
The Indian Beverage Association (IBA) has formally written to the Finance Ministry seeking a GST reduction to 18 per cent, warning that at the current rate, demand could fall by as much as 10 per cent. The sector has committed to investing Rs 85,000 crore by 2030, creating 3 million jobs and installing 2 million coolers at grocery stores nationwide, investments the IBA says are now at risk.
Packaging Inflation And Regional Industry Stress
Beyond taxation, beverage companies are also grappling with sharp increases in packaging and logistics costs triggered by the West Asia conflict and rising petroleum prices.
“The combination of a 40 per cent tax structure and inflated, petroleum-driven packaging costs is completely crushing local and regional beverage producers. While a national player selling a premium product can absorb an inflation spike within their marketing margins, local manufacturers operating on micro-margins to serve the masses cannot,” Gandhikumar said.
The source of the packaging shock is the West Asia crisis, which has driven up global petroleum prices and, with them, the cost of every petroleum-derived component in the beverage supply chain, PET bottles and preforms, bottle caps, labels and outer shrink wrap. Manoj Mishra, Partner and Tax Controversy Management Leader, Grant Thornton Bharat, said the crisis has moved well beyond a geopolitical concern.
“The West Asia crisis has now evolved from a geopolitical concern into a direct cost and operational challenge for the non-alcoholic beverage industry. The impact is being felt across the manufacturing ecosystem through elevated freight rates, energy costs and rising prices of key inputs such as PET resin, aluminium, glass and packaging materials,” Mishra said.
He added that for beverage companies where packaging and logistics constitute a significant share of overall costs, even moderate input price increases meaningfully pressure margins, particularly in a high-volume, price-sensitive market. Some imported functional ingredients have seen cost increases of 20 to 30 per cent due to freight and sourcing disruptions.
“Ninety per cent of a beverage product is water, making freight a massive cost driver on top of expensive PET packaging. To counter these combined pressures, TABP utilises a decentralised manufacturing model, operating multiple third-party and owned bottling lines spread across regions. By turning localised plants into regional hubs, we minimise freight costs to keep products affordable,” Gandhikumar said.
Varshnei noted that imported functional ingredients, speciality sweeteners, aluminium cans and packaging materials have all become significantly more expensive over the past year due to freight disruptions and sourcing challenges. Some imported ingredients have reportedly witnessed cost increases of nearly 20 to 30 per cent.
Consumers Become More Value-Conscious
While companies have largely protected retail prices so far, industry stakeholders say consumer behaviour is gradually changing. “We are observing distinct behavioural adaptations,” Gandhikumar said. “Consumers are actively rejecting larger, higher-priced premium packs and strictly sticking to Rs 10 or Rs 20 pocket-sized SKUs to manage daily out-of-pocket spending.”
He added that consumers in semi-urban and rural markets are increasingly shifting toward regional and local beverage alternatives such as lemon-salt drinks, jeera beverages and ethnic refreshment products that remain affordable. “Most companies are absorbing the impact internally, which has significantly reduced already thin margins across the industry,” said Ishan Varshnei, Chief Executive Officer, Borecha by LB Brewers.
In rural and semi-urban markets, consumers are increasingly shifting toward Rs 10 and Rs 20 SKUs, while some are moving to unpackaged local alternatives such as nimbu-paani, sugarcane juice and jeera-based beverages that carry no GST burden. Mishra from Grant Thornton noted that summer months typically contribute 35 to 40 per cent of annual beverage sales for several players, making this season disproportionately important.
“Rather than a sharp decline in demand, the market is witnessing a gradual behavioural shift where consumers are becoming more value-conscious, opting for smaller packs, local alternatives and perceived healthier beverage options,” Mishra said. Varshnei warned the shift could accelerate if brands are eventually forced to increase prices.
“If cost pressures continue, the industry could start witnessing consumers moving towards smaller pack sizes, reducing purchase frequency or opting for lower-priced alternatives,” he said. The functional and health beverage segment faces a particular bind. Kombucha, probiotic, prebiotic and low-sugar drinks already carry higher base costs from premium ingredients and specialised manufacturing, yet attract the same 40 per cent GST as a standard cola.
“This becomes even more challenging for healthy and functional beverage brands where higher-quality ingredients and specialised manufacturing already make pricing premium. These categories have limited room for further price increases without affecting consumer adoption,” Varshnei said.
Desi Flavours And Functional Drinks Gain Ground
Alongside affordability-driven shifts, beverage companies are also expanding portfolios around regional flavours and functional beverages to align with changing consumer preferences. “Traditional Indian beverages are witnessing strong growth, as many consumers show a preference for familiar, ‘desi’ flavours over Western colas,” said Nikhil Doda, Co-founder and Chief Operating Officer of Lahori Zeera.
Doda said the company has expanded bottling capacity from five million bottles per day to 10 million bottles per day to improve market serviceability and shelf availability during peak demand. Regional beverage brands and indigenous flavours are also gaining market share. According to a report by Crisil Ratings, the share of such products rose to an estimated 6–7 per cent last fiscal from around 2 per cent in FY24.
Large beverage companies are also diversifying beyond traditional carbonated products. The Coca-Cola Company said it is expanding its presence across sports hydration and traditional ready-to-drink formats while strengthening affordability-led distribution. “Innovation continues to shape the portfolio, with introductions such as Powerade in sports hydration and the ready-to-drink RimZim Rose Sharbat format aimed at younger consumers,” said Sundeep Bajoria, Vice President, Coca-Cola India and Southwest Asia, to BW Businessworld previously.
Industry executives argue that India’s flat taxation framework is limiting the growth of healthier and innovation-led beverage categories. Varshnei said kombucha, probiotic, prebiotic and low-sugar drinks already carry premium ingredient and manufacturing costs, yet continue to attract the same 40 per cent GST as conventional carbonated soft drinks.
“This becomes even more challenging for healthy and functional beverage brands where higher-quality ingredients and specialised manufacturing already make pricing premium,” Varshnei said. These categories have limited room for further price increases without affecting consumer adoption.”
He added that a more balanced tax structure would allow beverage companies greater flexibility to invest in research, healthier formulations and functional beverage innovation. “Higher taxation reduces the ability of emerging beverage brands to invest aggressively in new product development, healthier formulations, functional beverage innovation and consumer trials,” Varshnei said.
Not all categories are suffering equally. The same GST 2.0 framework that penalises carbonated drinks has handed a structural advantage to adjacent categories. Packaged drinking water, non-carbonated fruit juice-based drinks and plant-based milk beverages now attract only 5 per cent GST — a 35 percentage-point differential already reshaping shelf economics.
India’s packaged drinking water market, valued at Rs 32,040 crore in 2025, is projected to nearly double to Rs 57,850 crore by 2032. The ready-to-drink beverages market overall reached USD 8.3 billion in 2025 and is forecast to reach USD 14.1 billion by 2034. Pulkit Arora, Director and Culinary Expert at CYK Hospitalities, argued that for large national and multinational players, the net tax impact of the revised framework is close to zero, and the more important structural shift is the acceleration of natural and healthier categories.
“Companies with a good balance between carbonated beverages and natural drinks will be in a better position to benefit from changing consumer behaviour and taxation policy,” Arora said. The industry is increasingly advocating for a sugar-content-based taxation system similar to frameworks adopted in the United Kingdom and Thailand, where lower-sugar beverages attract lower tax rates.
“The key question for India is whether it will move to a sugar-content-based tiered tax, like the UK or Thailand — which would push companies to reformulate and produce healthier drinks — or continue with a flat high rate that simply makes all soft drinks expensive without encouraging any real change in what goes inside the bottle,” Sharma from Khaitan & Co said. The Ministry of Finance’s notification issued on 1 May 2026 retained the 40 per cent GST structure on caffeinated carbonated beverages, offering no immediate relief to manufacturers.
“A rationalised tax tier would have given beverage manufacturers the financial buffer needed to absorb the global petroleum-led packaging shock without compromising on product volume or business viability. Instead of managing margin defence and fighting for basic survival, the industry could have fully capitalised on the soaring summer demand,” Gandhikumar said.
India’s soft-drinks industry, then, finds itself trapped between scorching demand and structural strain. A heatwave may be filling bottles faster than ever, but high taxation, volatile commodity costs and shifting consumer tastes are steadily redrawing the economics of the business. For beverage makers, the challenge is no longer merely selling more cola in summer; it is adapting to an Indian market where affordability, health consciousness and fiscal policy are beginning to matter as much as thirst.
