Life can be cruel and unfair—well, that's a familiar lament on barstools the world over. And when it comes to India's $14 billion alcoholic drinks market, it's also a refrain common among foreign executives trying to sell spirits in India while coping with a sobering array of lofty import tariffs.
Johnnie Walker Red Label blended Scotch whisky, for instance, sells in India for more than $63 a bottle. In contrast, Antiquity, an Indian brand from UB Group, the largest Indian spirits conglomerate—based in Bangalore—retails for as little as $11.
The massive price gap owes everything to India's stiff tariffs on foreign-made spirits and wine products, which have depressed sales by foreign alcoholic beverage companies in one of the most effervescent markets in the world, and have triggered a high-profile trade flap. Both the European Union and the U.S. are pressing New Delhi and the World Trade Organization for some relief.
Layers of Taxes
Indian Prime Minister Manmohan Singh's government is considering the matter. On Mar. 7, Kamal Nath, India's Industry & Commerce Minister, hinted in New Delhi at possible tariff cuts on liquor imports to avoid what could emerge as a nasty dispute at the WTO.
The move came just one day after U.S. Trade Representative Susan Schwab followed up on a move by the EU last year to request WTO consultations over India's custom duties on imports of wine and distilled spirits. "With its fast-growing middle class, India could be an important export market for American wines and distilled sprits if not for these layers of duties," Schwab said in a statement.
For more than a decade, foreign companies such as Anheuser-Busch (BUD), Diageo (DEO), Pernod Ricard (PDRDF), and SABMiller (SBMRY) have tried with little success to make inroads into the India market which is dominated by UB Group. While India's base import duties of 100% for wine and 150% for distilled spirits are in sync with the WTO rules, federal and state taxes push up effective levies to around 550%.
Wiping Away the Problem
In November, 2006, the EU asked for WTO consultations to reduce tariffs. With no signs of change, early this week it threatened to seek help from the WTO's arbitration panel. Australia has also expressed displeasure.
The matter is said to be taken up by the highest political authorities in India. In a media interview in New Delhi, Commerce Secretary Gopal Pillai said: "We have proposed to get rid of the additional customs duty completely. Just wipe it off." The government may also propose legislation for equal taxes for both domestic and imported spirits and wines in all 29 states in India.
Today imports account for barely 1%, or 1.5 million cases, of the 120 million case-a-year spirits market in India. However, there is demand for foreign products. At airport duty-free shops and luxury hotels, where India's Draconian duties don't apply, U.S. exports for wine grew 350% during the first half of the decade, U.S. trade rep Schwab has pointed out.
Bad for Local Brands?
Also, domestic companies have developed so-called "Indian-made foreign liquor products" that are similar to foreign brands, but obviously don't incur tariffs, to meet demand at home for better products. That market is growing at 9% a year.
Despite the intense international pressure, some think the Indian government may not take any drastic action to reduce import duties. "They may reduce duties by 15% to 20% and phase them over a five-year span," says Deepak Roy, who runs an independent wine business at Nashik, about 185 kilometers (114 miles) outside Mumbai.
But others, like Kapil Grover, a director of Grover Vineyards, are worried about the impact should New Delhi cede to demands by the U.S. and Europe. "It will destroy the new players," he says. A bottle of his premium red wine La Reserve sells for a little over $10 in the 4 million-liter-a-year Indian wine market.
Meanwhile, foreign companies are trying to figure out ways around the import duties. Recently, London-based Diageo has been bringing Scotch into the country in bulk and then bottling the spirits in India. Its locally sold brand called Haig is now priced at an affordable $13.