Almost twenty years after liberalisation, protectionism is still being used to promote the wine industry giving it the advantage of an infant industry. Restrictive policies and imposition of high import duties on foreign products are some of the measures being adopted to protect the domestic industry.
The wine industry in India grew after states like Maharashtra, Karnataka and Andhra Pradesh (grape growing regions) recognised the potential of viticulture and introduced favourable policies like allocation of land for vineyards, wine parks, excise duty exemptions and sales tax relief for domestic manufacturers to promote the domestic wine industry. Additionally, these wine producing states and states with high wine consumption like Delhi individually imposed high levels of various taxes like excise duties, additional countervailing duties and VAT on imported wines and restricted their distribution. These taxes were over and above the basic customs duty of 150 per cent imposed on imported wine. The states argued that restrictions on imported wines were imposed to proscribe liquor consumption under article 47 of the Constitution of India. However, it also indirectly protected domestic wineries, which enjoyed duty exemptions and lower VAT. Imported wine suffered both in terms of higher excise duties and non-tariff barriers.
However, there is need to assess whether such restrictive measures are actually required to promote the domestic industry. This question assumes particular importance in the context that the European Union (the largest supplier of wine to India) threatened to challenge India at the WTO for non-compliance of �national treatment� unless Indian states reduced their differential duty structures and restrictive policies. The policy of �national treatment� (Article III: 4 of GATT 1994) states that imported products �shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use�.
A recent study by ICRIER for the Italian Trade Commission on wine retailing in India throws up some interesting results that need to be kept in mind in deciding whether the Indian government should continue with the high tariff and non-tariff barriers on imported wine. First, Indian vineyards are doing well with an established domestic presence and growing exports. India is one of the top fifteen wine producing countries around the world, with the domestic wine industry clocking an annual growth rate of between 25 and 30 per cent. Second, the price sensitive Indian consumer prefers low-cost wines priced in the range of Rs.400-800 (around 3-4�). Indian wines offer a wider selection than European wines in that price range. Imported wines have a price insensitive, niche clientele, whose consumption is not affected by high prices. Third, export-import data show that India still has a negative trade balance in the sector, with substantial imports from EU countries like France and Italy. The study also revealed that apart from imported wine, India also imports wine-grade grape seeds, machinery and expertise from EU countries like France, Italy and Spain. Some of the leading wineries have also been set up as joint ventures with European viticulturists.
The study results showed that Indian wine has a specific customer base and growing export market. Therefore, protectionism is not really necessary for the growth of the industry. In fact, protectionism is actually promoting restrictive taxation between Indian wine producing states. Maharashtra and Karnataka had extended the high duty structure imposed on imported wines to domestic wines produced outside their state. This inter-state competitive taxation affected the wine market in both states.
Moreover, we are still importing expertise from European countries. So altercation with the European Union at WTO might impact trade in the sector. It also needs to be kept in mind that India has already had to roll back restrictive levies in 2007 on wine and spirits after being challenged by the United States at the WTO for non compliance of �national treatment�. Repetition of the same situation with the European Union would result in a �no win� situation for India.
A reduction in restrictive duties by state governments would create a conducive environment for state level collaborative ventures with EU countries that could ensure the transfer of expertise at a relatively low cost. With the European Union countries looking to expand their markets in the wake of the recent economic meltdown, India can enter into collaborative ventures, including making domestic vineyards production centres for European wines. Removing restrictions will also increase India�s bargaining potential at the Broad-based Trade and Investment Agreement (BTIA), which India is negotiating with the EU.
After the recent criticism by EU, the central government had appealed to errant states to comply with WTO norms. However only two states, Goa and Tamil Nadu, agreed to give �national treatment� to imported liquor. Other states like Delhi, Andhra Pradesh and Maharashtra still continue with their restrictive policies. Non-compliance by these few states may affect the future of Indo-EU trade in this sector and India will continue to face criticism at forums like the WTO. This is something that policy makers at the state level need to consider.