|
Whiskey and wine are strange bedfellows. One significant
factor stunting the growth of wine industry in India has been that Indians
are hooked to drinking whisky and other hard liquors- 135 million cases
every year. There is a saying that we drink more Scotch in India than
produced in Scotland; the spurious backyard produce and truckloads that
are 'leaked' out, are not included in these official figures.
The conversion of whisky guzzlers to wine sippers is
a miniscule portion in the 1.2 million cases of wine consumed annually.
This number is thanks to the recent 25-30% compounded growth of wine consumption
during the last 5 years due to other factors.
SWA may return to WTO
The Scotch Whisky Association (SWA) has complained to
India about discrimination against the brands of its members. The Scottish
industry had waged a 20-year battle against India's draconian tariff system
and won a verdict against the country through the WTO last year when the
central government taxes were forced lower to 150 per cent from 550 per
cent. But states went ahead and increased excise duties which it wants
to protest now.
Paul Walsh, the CEO of Diageo and chairman of the SWA,
warned last week at the annual convention that the industry will not hesitate
to return to the WTO if states do not drop discriminatory taxes. The SWA
has written to the European Union to highlight its concerns.
It is not clear how they can get WTO to intervene. The
maximum duty of 150% was agreed between India and WTO and on the face
of it is within the outer limits agreed between the two. In fact, the
then Secretary in the Ministry of Industries and Commerce, Mr. Ajay Dua
had confided in delWine that by their action taken the government had
pre-empted WTO as they understand that the central government has no control
over states.
Mallya not in Favour-apparently
Paul's remarks were criticised by Vijay Mallya, the
head of UB Group, India's largest spirits producer who accused the SWA
of being paranoid about India and gave warning that the body's "heavy
handed" approach could jeopardise Scottish distilleries' prospects
in the country.
"We in India not only welcome the Scotch whisky
industry but we wish to wholly cooperate with it, otherwise we would not
have invested in Whyte & Mackay," Mallya said.
What Mallya says makes sense. The Indian government should
be approached by the industry to keep the levels of basic customs duty
to 100% -at the level they were before the Additional Customs Duty (ACD)
was eliminated. This can be done only through political pressures and
dialogues and not through threats. "I have to say in the past the
SWA has been a bit heavy-handed in its relations with India. Confrontation
does not work in India, it just leads to stubbornness with a situation
that a no is a no for the sake of politics", he adds.
Good Cop Bad Cop?
What looks like a heated exchange of words and rhetoric
between the two, would appear to a lay outsider a good- cop, bad-cop combination
to pressurise the government to reduce the duties. Mallya had bought Whyte
and Mackay in 2006 for a princely sum of £ 595 m, half of which
was supposed to be in the form of inventory. It would be in Mallya's UB's
interest to have the duties brought down to help him liquidate some of
the stocks in the Indian market. It may not be just a co-incidence that
the duties were reduced only after he had made this purchase.
Mallya's financial and political clout is even more than
his business acumen. He has many politicians including India's Berlusconi
on his side. Sharat Pawar, the powerful minister from the center, whose
family is the biggest grape growers of Maharashtra is his ally in the
wine venture of his UB and is supportive of his policies. His Kingfisher
Airlines is the only non-government airline that shares the departure
terminals of the government owned airline- the Indian which is now being
merged with Air India.
Premature withdrawal by EU
Incidentally, the SWA appears to overlook the fact that
when the government reduced duties, EU suspended its complaint with WTO
immediately and later withdrew it. SWA should have remained firm and pressurised
EU not to withdraw the case. US continued with the case but lost it a
couple of months ago.
Interestingly, neither EU nor the US brought up the
states' excise increase angle to WTO, perhaps on strong legal advice.
The Indian constitution gives the right to fix taxes on alcohol to the
state governments with a suggestion that they should curb alcohol consumption.
Strong Whisky Unity
That the whisky producers have a lot of clout can be
gauged from the fact that in Maharashtra when the excise was increased
to 150%, both wine and whisky producers got together and protested against
the unjust directive. However, the whisky 'big boys' as they are referred
to, were able to make an offer the government could not refuse. Up went
the excise duties on wines from 150% to 200% and down came the same to
75% on Scotch in November.
Reasons are not hard to spot. Imported wine market and
the importers are a fragmented lot. There is no association of wine importers;
neither are they in a mental frame of mind to form one at this juncture.
They often work at cross purpose keeping the short-term profit objectives
and increased market share in mind.
Most of wine importers have been importers of spirits
and beers as well and they would rather shift their own portfolio to more
attractive products than work towards the wine market growth, with no
visible support from the foreign wine industry. There are some importers
who are also wine producers, like Sula and Chateau d'Ori. Often there
is a conflict of interest between the wine producers and importers.
Whisky industry is mature, cash-rich and powerful. At
the recently held Johnny Walker Cup, a golf tournament organised by Diageo
a sum of Rs.100 million ($25million) was reportedly spent to further popularise
the famous 'Labels'.
At this point, no respite is in sight despite everybody
being optimistic and wishful. The only hope is to work with the government
diplomatically and work towards the import duty reduction to 100% and
the Maharashtra government for reducing the duties to just levels- even
if it means using legal means to do so.
Subhash Arora
April 22, 2008
|