Will she or won’t she?
This is an evergreen question which aptly applies to the Indian government as well. Until the FTA is ready to be signed, the government would not disclose its cards, comments by individuals in the government notwithstanding. Even their spokesmen change their stand often. A case in point is another burning issue-the FDI in retail which has been going on for 4 years. The government has been vacillating in its decision to allow the foreign retail chains like Wal-Mart and Carrefour though even the concerned ministries have often announced supported the idea. After giving an orange light before going green, the cabinet committee abruptly applied showed the red light a month ago and yet the chapter was opened up again about 10 days again, according to media reports.
The concessions are expected to be offered under the proposed free trade agreement (FTA) that is being negotiatedwith EU, according to the report.
So far, the government had not moved away from its tough stand of reducing duties because of protests from the domestic industry, which feared a flood of imports if duties were cut on these product segments. But officials reportedly admit now that India is emerging as a major production centre for small cars but not for the top-end which the auto producers still find cheaper to import because of low volumes.
In case of wines and spirits, the move is expected to be targeted more at wine. "We do not have the grapes or the skills to produce chardonnay wines and the import of top-end of these products is not going to affect either our farmers or the wine industry," an official has reportedly said. Strange comment, that! Even a novice knows that it is not the grape varietal but the quality and the price of the wine that should be the subject of comment or discussion (we strongly believe that this is an irresponsible misquote by someone not familiar with wines or the wine industry-editor)
In case of wines and spirits, the domestic industry has allegedly been opposing the tariff cut because it fears a rush of whisky and vodka and wine if import duty is reduced.
The renewed push to complete the trade talks was announced last week by both EU and Indian officials. John Clancy, the EU Trade Spokesman, said in a statement on November 17 that discussions are currently moving at full steam ahead. Intense negotiations will therefore continue over the coming months to effectively solve the remaining core issues between now and the EU-India Summit, he reportedly said.
A statement from the office of India’s Commerce and Industry Minister, Anand Sharma has also confirmed the “satisfaction with the progress of negotiations” of the EU-India trade FTA. But if the past record on the FDI policy in retail is an indication, where Mr. Sharma has changed his stand and that of the government, it may be pre-mature to hope that his ministry won’t reverse the stand again in February, 2012 when the next round of talks is slated to be held. Germany’s Head of Foreign Trade Division, Berend Diekmann has rightfully cautioned that “India and the EU are far away from each other as far as the negotiations are concerned.”
With the pact set to slash duties on over 90 percent of bilateral trade, along with an opening of mutual markets for investment and services, the EU Trade Commission estimates that, in the short run alone, India would gain €5 billion and the EU over €4 billion after the FTA is signed.
Wine needs lower import duties
The problem in cutting down the duties on liquor like whisky and vodka is of great concern to countries like US because there is insatiable demand for Scotch and even various vodkas from many of the EU countries. However, the Indian lobby is reportedly quite strongly against it even though one often hears of Dr. Vijay Mallya being interested in opening up the import of whisky to allow freer import of his White and Mackay. No whisky producer worth the single malt he drinks would like the local whisky industry die a natural death!
Issue so far as the wine is concerned is relatively simple. Government is currently losing out in two ways. First, the fine wines have a great potential in India provided the duties are made sensible-this is not being achieved since heavy taxation does not make it feasible to import such wines and the government is losing millions of rupees of potential duties it would receive if it brought down the duties to say 20-50% (delWine would like to see it pegged to the duties on the luxury goods like fashion goods, imported foods etc). Then there could be a higher slab of say 40-70% for medium priced wines which are not available in the local industry of say an import value of Rs.400-500. Then there could be higher slab of a maximum of 80-100% on the cheaper wines subject to a minimum floor price of say €2 to protect the Indian producers against the flood of cheaper wines.
What is more important is that the Indian wines are not being challenged enough to improve their quality to higher levels and compete against the imported fine wines. The example of auto industry where the domestic companies improved the quality exponentially once they knew they had no choice but to compete against their foreign counterparts should be an eye opener for our decision makers.
What is even more important is that the Indian wine consumer is not getting the true benefit of liberalisation and globalization. Wine is neither a Black Label nor a Cola-. Besides being a healthy product when drunk in moderation (read better quality wines which would be enjoyed with food), every country, every region, every terroir and every grape-even same varietal and definitely the thousands of unique indigenous varieties in countries like Italy, France, Spain, Austria and Portugal afford an immense opportunity to enjoy thousands of wines.
Devil in Disguise
Taking an optimistic approach one may hope that the duties on wines are slashed to the above levels in one go or even in steps so that the importers, retailers and ho-re-ca (hotels, restaurants and caterers) segment can plan ahead. But there is yet a major problem that the said report did not delve into.
There is the Devil in Disguise (Think Elvis, Think Excise. Think Delhi Excise!) to worry about. Last time when the EU threat to take India to WTO, the government buckled down in 2007 and reduced the total customs duty to 150%- within the bounded limits as agreed with WTO. But practically the next day, Maharashtra increased the excise duties many-fold, and Delhi followed. Maharashtra being a more progressive state realised its folly (or perhaps under pressure) and reduced the excise duty to a more realistic level but Delhi stuck to its guns and today the total duties work out to even higher than before-perhaps to finance the cost overruns incurred at Commonwealth Games last year due to the Delhi government’s inefficiency or mismanagement.
This process has stifled the Delhi imported wine market in more ways than one. While killing the retail of better wines (or shifting it to Gurgaon where there is basically no vend fee, whenever feasible) the hotels which were paying a fixed excise duty of Rs.150 a bottle had to start paying 3-10 times the amount or even more). Hotels being a cost- plus as entity just like the Delhi government, increased the price amounting to 3-4 times of their increased cost (for instance, if the excise duty increased by Rs.350 to Rs.500-the menu price increase would be around Rs. 1000-1500). Despite the center and the state being run by the same government (UPA/Congress), no reprieve has been given to the consumer and the market is getting slowly strangled.
Needless to point out, the Indian Constitution allows the States to formulate their own policy on taxation on alcohol, implicitly including wine also and unless the Central government finds a way to reign them in or compensate them internally, the whole point of FTA with lower duties will be defeated- at least for wines.
Let there be a clarification from those negotiating for EU or the central government that the taxes charged after the FTA would be in Toto- and there would be no jump in the excise the next day or one may forget about the fine wines to get cheaper next year…or the next.
Of course, any reduction in such duties will put countries like the USA, Chile and Australia in a deeper situation but that is another chapter that will open up once the FTA comes into effect-optimistically in February, 2012.