The threat by Scotch Whisky Association to go to WTO for further reduction of import duties on whisky imports, will apply as well to wine industry which will ride on their success- a far cry at the moment, says Subhash Arora

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