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A game changer or party pooper?

It will be tempting to see whether the Diageo deal will give United Spirits the much-needed high. Dipankar Bhattacharyya writes.

india Updated: Nov 14, 2012 23:15 IST
Dipankar Bhattacharyya

Now that Vijay Mallya has handed the cellar keys to Johnnie Walker, will the good times get better next Diwali? Mallya stocked his vault well, but anytime you wanted to knock back James Bond’s non-stirred poison, you’d be paying for it in equated monthly instalments. That tends to dampen spirits. A people that put down more scotch than is brewed north of Newcastle upon Tyne deserve better.

Mallya’s sale of United Spirits to Diageo is reminiscent of Ramesh Chauhan’s sale of his cold drinks business to Coca-Cola. While some of Chauhan’s brands are still around, the cola warriors have by now permanently established their mark on Indian taste buds. It would be tempting to see a similar fate for Mallya’s labels as “foreign-made foreign liquor” starts flowing more freely from Amritsar to Agartala.

Both Mallya and Chauhan were champions of local industry, keeping the big boys at bay. Once they cave in, the argument runs, the deprived Indian consumer gets his paws on his favourite international beverage brands. The top two liquor companies in India now are also the world’s heavyweights, Diageo and Pernod Ricard. When they get at each other’s throats in the Indian market, they will use brands that work best across the world.

But selling sweetened water is not quite the same thing as purveying single malts. The liquor business for one has to get around the state’s nanny instincts. The Europeans have been badgering us to lower duties on liquor, which it obviously does a good job of distilling. The Government of India has obliged, bringing down taxes yet not by enough to level the field between Indian and foreign makes.

That’s just one level of protection local liquor makers enjoy. The second and more formidable defence lies in the taxes states impose on sales of alcohol. An ancient arrangement allows states to tax production of only narcotics and alcohol, while the Centre gets to tax everything else. And states tax liquor with a vengeance. Some state governments make more money through liquor than by registering property sales. They collect an astounding 12% of their tax receipts from liquor.

Revenue has been a persuasive argument against an outright ban on the sale of alcohol. India’s official response to alcoholism has tended to be predominantly fiscal. After having flirted with — and sporadically imposed — prohibition, states have settled on prohibitive taxes as a tool to discourage drinking. In the main, this strategy has worked: Indians drink less alcohol than tipplers in 149 countries. But the consumption of liquor per head has tripled over the last 40 years and Indian society has to factor in the rising trend line.

Where stronger social and religious arguments prevail, as in Mahatma Gandhi’s Gujarat and Jammu and Kashmir, regular hooch deaths show that prohibition does not deliver. The governments in these states are making their citizens, particularly those who cannot afford the higher black market rates, more vulnerable to lethal home-made brews.

India is moving haltingly to becoming a common market. But liquor is going to stay out of the sphere of the uniform goods and service tax that will bring down barriers to trade between states. The Centre, on its part, has no reason to nudge states into lowering taxes on a demerit good like liquor, with strong links between alcoholism and poverty.

Diageo is entering a market nurtured by Mallya and will buy into an impressive United Spirits distribution chain that supplied half the liquor Indians drank last year. But it may not be able to prise open the government’s grip on the business. The market will remain fragmented along state lines and persuading states to lower duties is a tall order. Even with Mallya by its side.