Reports continue to trickle in about the impending cuts in India’s import duties on wine and spirits from the EU, as part of the EU-India Free Trade Agreement (FTA) currently being negotiated. This latest report from the Economic Times mentions that the government of India (GOI) plans to reduce the duties on imported wines and spirits down to 75% from the current 150%. Apparently the EU is not happy with this plan and wants the custom duties reduced to around 30% citing the fact that high state excise duties will still keep EU wines and spirits very expensive. The article mentions that the GOI may further bring down import duties on some alcohol to 40% over a period of a few years after the implementation of the FTA.
Will halving import duties to 75% from the current 150%+ lead to a boom in consumption of imported wine in India? I doubt it. The current size of the imported wine market in India is small (300,000 cases projected for 2012). So, even as a matter of routine, the market is more or less bound to grow from this low base. The demographics (increasing drinking age population), the growing economy, increasing urbanisation, and the expansion of the hotel sector (particularly in the 4-star and 5-star categories) are all factors that will help the imported wine market grow. Lower import duties will certainly help, if the effect of lower import duties is not negated by local state excise policies (especially in wine-producing states such as Maharashtra and Karnataka).
There are several other reasons that keep the size of the Indian wine market small. The well-known reasons include the following:
- An under-developed retail sector: unless wine becomes widely available, it is hard for it to take-off as a major consumer category.
- Underdeveloped supply chain: goes hand-in-hand with retail availability (not to mention the possible impact on product integrity).
- High trade margins: hotels (many of whom are exempt from paying customs duties) and restaurants are well-known for charging astronomical and unreasonable prices for wine. Unless Indian consumers suddenly develop an appetite for paying ridiculously high prices for what is often entry level wine – this channel will not take-off either.
- Unfavourable state excise, brand-registration, licensing and tax policies. Not only does this contribute to high prices for consumers, it also lowers the profitability of importers by keeping their regulatory costs onerous.
What is usually absent from this list is any mention of the missing wine culture in India. The reality is that India simply does not have a culture of consuming wine (a product that has seemingly never been widely available at affordable prices in India). If import duties are lowered and the factors listed above are addressed, the lack of a real culture of wine consumption will still be an impediment to the growth of the wine market in India.
Based on the factors above, my estimate is that the imported wine market in India will continue to grow at about 20-25%. Based on this growth rate, the size of the imported wine market in India will still reach only around 520,000-540,000 9L cases in 2015. Substantial reduction in import tariffs may give the market a fillip – but I doubt if this will lead to a major boom in the market due to the balancing negative state excise environment (which may still get worse), and the other negative factors listed above.