Scotch On The Rocks

Aficionados of the amber liquid may have to continue to drown their sorrows in, what else, a costlier Patiala peg. For, in a clear move to send global distilleries operating in India into throes of despair, the government has scotched the possibility of a duty cut on the imported liquor. Indians currently pay a 222 per cent duty which, if the Directorate General of Foreign Trade (dgft) has its way, may go up further.

When global Scotch whisky distillers began their India operations, they raised one ticklish issue which New Delhi was aware of but chose to ignore: that India produces more Scotch (in the slums of Mumbai) than is distilled in Scotland. In the continued battle between domestic manufacturers and the foreign distillers in the Rs 8,000-crore liquor industry, the former seems to have won yet again.

dgft director general N.K. Lakhanpal refused to divulge what would be the new tax structure for 2001, but appeared clear about the government's intentions to not pander to the mnc lobby. "Imported liquor is not high on the government's agenda. And even if we reduce the duties, it will happen after four years because of wto regulations and will remain exactly double of what the distillers are demanding," Lakhanpal told Outlook. That would still mean a 150 per cent duty.

The mnc lobby has not wanted for trying. It repeatedly raised the smuggling issue and cited China's example of lowering tariffs on imported Scotch whisky to 65 per cent as a prelude to joining wto. It also told the ministry about a government market survey which found counterfeit and smuggled Scotch at 75 per cent of the annual consumption and, as a result, the government collecting revenues on only 25 per cent of the Scotch consumed. Even the dgft was given a report which brought out the alarming increase in smuggling through duty-free and diplomatic channels.

These reports, however, carried little weight in the face of the argument made by domestic companies: they cited reports which found a drop in growth in the whisky segment worldwide, which would have a disastrous impact on both the premium and volume business if duties were lowered, besides leading to dumping of cheap products. The liquor industry almost pays for the defence budget of the country—it contributes Rs 20,000 crore in excise duties and an equivalent amount comes by way of indirect taxes: excise on cartons, labelling, bottles, etc. The domestic firms also raised the issue of the mncs not bottling their premium brands in India despite the ministry having allowed the import of bulk Scotch.

The stiff fight put up by the domestic lobby is understandable. The imfl (Indian-Made Foreign Liquor) segment has been under pressure due to the stiff competition from brands owned by global giants like United Distillers and Seagrams. But the mnc lobby is weak in terms of its marketshare—the premium segment is only 20 per cent of the Rs 1,400 crore domestic liquor market. Of this, Scotch is in the super-premium category with annual sales of only one million cases (one case has 12 750 ml bottles) compared to 63 million cases of imfl. Curiously, the government is yet to be convinced of the issue of revenue loss to the exchequer because of smuggling.

The dgft move spells a relatively long winter for global giants, who have been clamouring for a 70-odd per cent duty on Scotch to bring their products to a level playing field with Indian products. United Distillers head Deepak Roy estimates that even a cut in tariff to 70 per cent would still leave a huge gap in pricing between premium Scotch and imfl, in turn leaving enough incentive for the domestic distillers and discouraging smugglers at the same time. He says: "So where is the threat to domestic companies? Today, India should follow China's example and apply realistic tariffs." Adds Tim Jackson, director (commercial affairs), Scotch Whisky Association: "A speedier reduction of tariff to 70 per cent will only help India. The current rate results in widespread smuggling, counterfeit products, little revenue for the government and virtually no protection to the domestic industry. In fact, the only beneficiary from the present high tariff is the smuggler. Lower tariffs would create a more orderly market and attract more investments."

What Jackson forgot to mention was those who would benefit the most from a duty cut—the consumers. Says Param Uberoi, country general manager and ceo of Seagram India: "Today, people need access to international quality at reasonable rates." But, as in most other unprotected economic areas, the hiccups in promoting the Scotch whisky segment won't be going away in a hurry.