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Foreign liquor firms caught in Centre, state tangle

business Updated: May 14, 2008 22:42 IST
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Foreign liquor companies looking to tap a large and growing market for their products in the country are being held back by the conflicting policies of the Central and state governments.

In June 2007, the Central government announced that all foreign direct investment or FDI in the liquor business would happen through the "automatic" route and that liquor manufacturing would no longer need a licence — a practice India had for most manufacturing businesses in the 1980s that has since been relaxed in most cases.

If this move hasn’t resulted in a rush of FDI in liquor, it is because of state laws. States levy a tax, called excise duty on all liquor manufactured and their laws make it mandatory for companies to obtain a licence before they start manufacturing liquor. Several foreign firms have discovered that it is easier to forge joint ventures or partnerships with local companies than obtain a licence on their own. The FDI policy was proposed by the Union government’s Department of Industrial Policy and Promotion and supported by the law ministry.

"The whole exercise of securing a fresh manufacturing licence is not only time-consuming but also cumbersome in some states, as there is no uniform law in the country," said Vivek Chhabra, director, group business development, Asia Pacific Breweries Ltd, a Singapore-based beer maker present in India. "In this context, automatic foreign investment clearance doesn’t make sense," he added.

Currently, foreign liquor firms have no option but to lease capacities from domestic companies, operate through so-called "work contracts", or acquire companies that have licences. "This is proving to be a dampener for foreign investment in the sector, though the government allows 100 per cent FDI in the sector through the automatic route," said Sandeep Kumar, director (corporate affairs and communications) of SABMiller India, a subsidiary of the world’s second-largest beer maker.

SABMiller Plc had a year ago announced a Rs 2,000 crore plan to enhance production capacity in India over five years.

Some states are trying to follow the Centre’s example. Maharashtra and Delhi, for instance, did try to follow the centre’s policy but haven’t made a final decision, said an analyst at a foreign brokerage who tracks the Indian liquor industry and who did not wish to be identified.

"We haven’t yet moved any changes in the existing policy, which mandates an industrial licence for setting up breweries, wineries, and distilleries," said AB Ghatol, a joint commissioner at the Maharashtra state excise department. Andhra Pradesh charges the highest fee of Rs 2.5 crore for a new manufacturing licence for liquor.

Other states such as Maharashtra and Delhi charge Rs 10-15 lakh.

"Some states, especially Tamil Nadu, have policies favouring local industries, which makes our efforts to get a new brewery licence almost impossible," said SABMiller’s Kumar. Around half a dozen foreign liquor firms, including Diageo Plc and Anheuser-Busch Co.s Inc, are directly present in the domestic market. They get their products made through units owned by local firms, or have formed joint ventures or manufacturing alliances with domestic players. However, "unless the states come forward to make similar moves, it (the policy) would remain on paper," said an official at the commerce ministry who did not wish to be identified.