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Duty Exemption Is Discrimination Against Brand India

Must the Commerce Ministry continue to be a victim of inverted racism and favour cheap wine imports by five-star hotels taking unfair advantage of the duty exemption granted to them? Isn't it a better idea to rationalise wine import duties for everybody by removing the 100% countervailing duty?

The duty exemption debate is warming up, although the Union Commerce Ministry is expected to unveil its 2006-07 Exim Policy only on March 31. Last year, this would have been dismissed as a canard spread by a wine importer to get the five-star hotels resort to panic buying. This year, this chatter is being taken more seriously and there are good reasons for the mood swing.

The increasingly confident domestic wine industry, egged on by new entrants, who range from Seagram's India Pernod Ricard to the grape farmers of Maharashtra's Nashik and Sangli districts, are very upset about the treatment meted out to them by five-star hotels. These hotels have been enjoying the duty-free benefit for the last three years. They've used it, though, mainly to edge out domestic wine labels from the three most lucrative segments of their beverage business - banquets, pouring brands and giveaways. The beneficiaries of this price-driven inverted racism have been the cheap imported wine brands of questionable quality.

In banquets and pouring brands, five-star hotels are now operating at 8-10% beverage cost, because they get their imported wine at throwaway prices. Their customers aren't complaining simply because the hotels aren't charging as much as the bootleggers. But they don't realise that they're being shortchanged on quality.

The domestic wine producers are wondering what crime have they, or the farmers who supply them wine grapes, committed to be discriminated against in their own country. What's particularly galling is that they're being ruled out in favour of two-buck-chuck producers.

The men who govern the fate of supermarket wines that can't find a market in Europe or America, or even Japan and China, must be laughing all the way to the bank. As a wine producer put it, they must be seeing India as the answer to the overproduction problems plaguing the wine netherworld.

The five-star hotels are having a party. Taking unfair advantage of the acute shortage of rooms in the country, they're charging Ritz Carlton rates without providing Ritz Carlton service standards. And cashing in on the duty exemption, they are making money hand over fist from every bottle of wine they sell (see Kapil Grover's well-researched points elsewhere in this e-magazine).

As an aghast English corporate traveller informed his friend, who's an expat executive at a luxury hotel in New Delhi, he had paid 100 pounds for a bottle of wine that costs just 15 pounds at Sainsbury's. A corporate traveller, remember, operates on an expense account. Think about the unsuspecting tourist on an Indian vacation.

In the old days, five-star hotels could get away by blaming the Finance Ministry. Today, they maintain a discreet silence, now that their second argument - "we are clearing old stocks that we had bought paying the old duties" - no longer holds water, with three years having passed since they first got the exemption.

If drinking wine in India is still an expensive proposition, why give five-star hotels the duty advantage? Domestic producers are united in asking for the duty exemption scheme being withdrawn forthwith. Alternatively, they recommend that it be retained for wine imports whose CIF value is US$8 or more per bottle. They say this move will serve two purposes:

  • It'll make under-invoicing passé. The practice is rampant in wine imports, with importers simply cashing in on the ignorance of customs officials about wine prices, which makes one wonder why the guardians of the law don't make the effort to consult ready reckoners like, which lists the prices of just about any wine that anybody would care to know about.
  • More importantly, it will level the playing field for Indian wines, which are being edged out by purchase managers who still cannot understand something as basic as why some wines cost more than others.

The domestic wine producers - two of them, Chateau Indage and Sula Wines, in fact, are importers as well - are being extremely accommodating on the issue of import duties. In sync with the European Committee of Wine Importers (CEEV), they are asking for the rationalisation of the basic customs duty and removal of the 100% countervailing duty. The compromise has a nice ring to it - reduce import duties across the board (a benefit that no one's talking about now is its impact on the domestic retail market) and end the duty exemption in the interest of a level playing field.

With Maharashtra's state elections due later this year, and with the Italian-born Sonia Gandhi, whose writ runs in the ruling coalition in New Delhi, making her pro-farmer plank the national agenda, there's no way that the voice of the grape grower will go unheard in New Delhi's corridors of power. Maharashtra, after a recent ministerial reshuffle, has the largest number of ministers in New Delhi. It is a politically important state for the ruling Congress, especially because of the disarray in the main opposition party in Maharashtra, and its wine grape farmers have an important ally in the form of the Agriculture Minister, Sharad Pawar, a ruling coalition partner from the state.

Wine importers jump to the defence of five-star hotels whenever the embarrassing issue of duty exemption comes up. They say the hotels may not have reduced prices, but they have certainly bumped up the quality of the wines that are being offered for those prices. You can get a decent Caballo Loco, for instance, for the price hotels used to charge for a Beaujolais Noveau from Georges Duboeuf. Fine, but why must an Indian five-star hotel charge more than what a Michelin three-star restaurant commands for the same bottle of wine?

The importers also talk about the quality of their playing field. Eleven states, they say, do not allow the sale of imported alcoholic beverages, so where's the level playing field? They point to the over-capacity that is building up in the domestic wine industry as a result of the ease with which wine grape farmers are getting production licences from Maharashtra Industrial Development Corporation. One farmer in Satara, Maharashtra's second wine district after Nashik, has made 600,000 bottles of wine and doesn't know where to sell.

This example was cited to us by an importer in defence of his view that creating a level playing field won't help anyone in India, because the domestic wine industry is not in a position now to satisfy the thirst of the Indian market. They don't have the production capacities, we are told. The virgin wine producers are yet to achieve acceptable quality standards. If five-star hotels lose duty exemption, then the market will be awash in bad wine. Wine grape farmers have made wrong planting decisions (70% of the market is partial to reds, but 60% of the plantings are whites), so we'll soon have a glut on our hands. These are relevant points and the established wine producers must take note.

What's amazing, though, is that the same importers who are crying themselves hoarse for positive discrimination (that is, customs duty exemption for five-star hotels) are opposed to the idea of positive discrimination in favour of the domestic wine industry. But in the first round of arguments, the jury is out in favour of the have-nots - end duty exemption, rationalise import duties, stop the violation of World Trade Organisation norms by states that impose label registration charges and vend fees on imported wine, and open up those states that do not allow the sale of imported wine. This is a democratic arrangement. The present structure is only helping greedy hotels and unscrupulous importers.

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