States could play Spoilsport in Execution of Indo Australia CECA

One has surely heard the tale about the Arab and his Camel who was made to sleep in the cold outside the tent pitched by the Arab. One day it was too cold outside so the camel asked the Arab, ‘Sire, it is too cold outside, may I stick my head in?’ The Arab took pity on him and allowed the camel to squeeze his head in. After some more time, the camel stuck his middle body and asked his master the same question. The Arab reluctantly allowed him to get his torso in. After a while, the camel told the Arab it was too cold outside and he wanted to bring his whole body. The Arab was upset and told him off but the camel came in, pushing the Arab out.

While all the dignitaries including the High Commissioner of India in Australia, H.E. Manpreet Vohra and H. E. Ms. Sarah Storey, Chargé d’Affaires, Australian High Commission, India were diplomatic in their Presentation, thanking the Indian government, many Speakers (especially the Australian) expressed the view that it was too little and too insignificant and the scope should be increased, the price threshold should be reduced from the existing $5.

No one seemed to really appreciate the fact that it was the first time since 2007 when the Indian government had agreed to reduce customs duties in 15 years when it was under legal threat from WTO and has been firm on keeping the duties highest as allowed by the WTO Agreement.

Obviously, India has been a miniscule small market with China importing a lion’s share of Australian wines and only because of the high customs duties imposed on China and the imports tumbling by 97%, has Australia even bothered to look at India- Pernod Ricard notwithstanding. There were so many instances where Australian producers refused to cooperate with the Indian importers for FSSAI compliances and stopped doing business. But now with the duty reduction in the offing, many have decided to jump in the bandwagon and though $5 is the threshold seems to be a bit high, they are willing to at least start the business.  

The 2% market

The 2% figure of the current market share of the Australian market, does seem to be too miniscule to get excited about. But if Covid has done one thing good for the industry, it is the middle class consumers who tried drinking more expensive wines from the stores (between Rs. 4000-5000) and they loved these wines. This corresponds to a $10-12 FOB value. Australia is known to produce a significantly higher chunk in this range and with the reduced customs duty, this share can easily go up 5-10 times, offering very good wines to the consumer.

States playing Devil in Disguise

The one factor that one has been fearing is the State excise duties post-lower Customs duties. delWine has always referred to the States as a Devil in Disguise, practically enjoying monopoly, thanks to our Constitution which granted each State autonomy to set its own policy. Though the goal was to introduce total Prohibition (they somehow did not foresee the failed Prohibition in the US in 1920-33 having any impact in the independent India}. The greedy States found Alco beverages, a cash cow that delivered gold coins whenever they shook the tail. They have been repeatedly increasing excise duties whenever more taxes were needed and this has been a matter of concern.

delWine has been broaching the issue of excise duties for several years. As far back as 10 years ago in 2012, delWine had surmised in the 19 January, 2012 issue, the issue no. 486 and wrote that ‘the issue of Excise duties will still remain contentious. If the state governments including the Delhi government which thrives in increasing excise duties on wine etc rather than controlling its costs and govern better, decide to increase the excise duties like they did when the ACD (Additional Customs Duty) were abolished in July 2007, the efforts of the overseas wine producers to sell more wine will be again neutralized.’

Our source had then meekly explained that this was an internal matter of States and they could not interfere, nor influence in the internal policies of States. However, they would certainly take up such aberrations if a discrimination was proven against the imported wines. Though this factor has become slightly less contentious with open borders and each State trying to increase sales by charging lower excise duties to make wines more competitive (case in point- Delhi, Haryana and UP where the policies have become increasingly consumer friendly, resulting in higher sales and tax receipts)

Theoretically, it is not possible to influence States by the Central Government which has signed the accord. But the present government is in the best ever position to make the Chief Ministers agree not to increase the excise duties. Moreover, with the reduction being only on Australian wines (India- EU Treaty would be next though efforts have been on since 2007 but not much progress has been made so far, the recent Statements from the government notwithstanding), this factor is less likely to be of concern,

Reduce Threshold Value

There was general Consensus that the Threshold price should be reduced from the current $5 (there was not much discussion on the $15 level wines- a level that does not interest Indian producers and for all they care, the duties may be waived off.)

The ICRIER Report suggests it ought to be reduced to $25 a case (and hence the story of the Arab and the Camel above). delWine would agree with that thinking but it would surely make a big dent to the domestic industry which the government needs to nurture with its great future. Even Australia has gone through the stage 50-70 years ago when they avoided domestic wines and preferred imported wines, Today, their imports have become a trickle, thanks to the aggressive and proactive policy of the governments (for instance, the moment China imposed the punitive duties, there were massive advisories to push exports to the new markets including India because of its lucrative potential for wine consumption and wine tourism).

delWine believes that the policy has been a bit lenient for the Australian producers keeping the balance with the domestic industry but worth a try to make it successful, with minimum grudge from domestic producers.

Import of Bulk wines

Issue of bulk wines was discussed by the panellists and those present, encouraging the import of bulk wines at no customs duties. This would be absurd unless the threshold value were determined first. It does not seem to have been a part of the Agreement but the push seems to be for the Comprehensive Policy to be signed in December 2022.  

As a regular visitor to the World Bulk Wine Exhibition (WBWE) in Amsterdam, Subhash Arora has tasted hundreds of Australian bulk wines and liked them with excellent Price-quality ratio. Since Australians are masters in producing bulk wines that generally cost less than a dollar per liter, they could wipe out the domestic industry overnight.  Though as the panellists rightly pointed out that the current duty of 150% was high, they were oblivious of the fact that initially the government did allow import of bulk wines at zero/ low duties and companies like Indage, Sula and Grover took big advantage of the Policy.

The government later imposed the duty of 150% and the State government of Maharashtra also disallowed the benefits of excise duty waiver for any bulk wine, making bulk wine import rather prohibitive (it is better to import BIO bottles as many importers are already doing for private and exclusive labels.  

Lacuna to be looked into

There seems to be one obvious lacuna in the CECA which seems to be a Devil in Detail. Wines costing $4 might be more expensive than the wines costing $5 with the new policy. There may be a formula already announced but to a naked eye it appears to become confusing for the producers and importers unless there is a formula available soon-before the policy comes into effect in July –August this year. The Australian producers have already started visiting India to take the benefit of the Policy.   

Where were the Wine stakeholders?

It was surprising that there was no one from the wine industry present to bring forth their viewpoint- neither producers nor importers. Of course, Ms. Nita Kapoor, CEO, International Spirits and Wines Association of India (ISWAI) was present and presented the case for wines but her benchmark was the Spirits industry- not wine. The organisers perhaps might want to keep it in mind in future if they want to have a balanced debate, presenting both sides.

In general, it was an excellently organised programme with interesting views expressed by every participant. The Report is very useful to every wine stakeholder and is available on their website.

For details of the CECA, visit Australian Wines to get Cheaper in India with FTA signed Today

For the Indian consumer this marks a new era signalling that the government is ready to consider wine as a different category and moving in the direction of lower duties. The growth of the wine market is bound to accelerate in the years to come.

Subhash Arora

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