Meaningless reduction

Protectionism against imported competition, even if not defensible, is at least understandable if the effort is to protect local industry. When no such objective is served, it can only be described as cussed behaviour. That harsh term is the only one that fits the manner in which the government has responded to pressure for dropping tariffs on imported wine and liquor. Producer countries in Europe had dragged India to the World Trade Organisation, in protest at import tariffs that have been as high as 550 per cent (in the case of wine; 230 per cent for liquor), and India was certain to get a rap on the knuckles. Anticipating this, New Delhi has now lowered the peak duty on these products to the WTO-approved level of 150 per cent for wine (and 100 per cent for liquor).

This is technically in compliance with what the WTO requires, and the government therefore can be said to be playing by the accepted rules. But this makes little difference in the market, for two reasons. First, at even the reduced tariff rates, imported liquors and most wines are priced much higher than local substitutes. The price points are so different that the market is effectively segmented into more or less watertight compartments, and domestic producers therefore will feel none of the heat of competition. Besides which, there is the fact that imported liquors account for less than 1 per cent of total consumption of what is still called 'Indian-made foreign liquor'; even if sales volumes were to double, it would make little difference in the over-all context. Certainly, the domestic distilleries and breweries will not be worried; nor will they feel additional pressure to upgrade quality.

But there are two points which make the government's response hard to understand. First is the well-known fact that the overwhelming bulk of imported liquor is smuggled into the country through a variety of routes, including leakage from duty-free shops and from foreign diplomats posted in the country. Such grey market supplies account for about 60 per cent of total imported supply (a further 30 per cent is through the legitimate duty-free route), and the government gets no revenue from this. Nor will the 100/150 per cent tariff level help legitimate importers to compete against the grey market, for the price differential is too great. A rational duty structure would seek to hit the sources of illegal supply, in order to broaden the government's revenue collection base from today's 10 per cent. Failure to introduce such a duty structure is illogical and counter-productive.

The second point that defies understanding is the central government's suggestion to the states that they should impose additional local taxes (as excise on liquor is a state subject). This can be explained only if there is some real threat of competition that local producers face, as a result of the new tariff levels. This is far from being the case""any halfway decent wine, after 150 per cent import duty, will cost upwards of Rs 1,500 per bottle, which is way beyond what domestic producers charge for even their best varieties, which are in fact quite good now. So the advisory to impose additional duties amounts to little more thumbing one's nose at the countries that dragged India to the WTO. The only people who will be celebrating are the bootleggers, whose business is safe.