The sober reality of making liquor in India
8 min read . Updated: 04 Mar 2015, 07:48 AM IST
Premium(Ramesh Pathania)
Taxation, policy decisions make India one of the most complex markets in the world to make and sell alcohol
Mumbai: If Abanti Sankaranarayanan is exasperated, she does a pretty good job of not showing it. As managing director of Diageo Plc. in India, it is not like Abanti, 45, hasn’t said this enough; in meetings with government officials in various states, myriad excise officials and also with the central government and internally to employees—being in the business of making and selling alcohol in India is tough.
But then when she says this, with a straight face, as straight and matter of fact as the expression can be, the penny drops: “Every day, Diageo as a group has 748 touch points with the government."
Every day. 748 touch points.
Make in India
And nobody understands this better than V. Raghunath, general manager at United Spirits Ltd’s distilleries at Kumbalgodu in Bengaluru. A stout, unmistakably jolly man, he has what can be called a living nightmare of a job
“It is like a James Bond movie," he says. “Every single truck that goes out of a distillery or bottling plant to a warehouse of state beverage corporation, you will spot an excise inspector sitting in the truck."
What’s in the truck? Alcohol.
Why is the excise inspector in the truck? To ensure that the law of the land prevails.
Nobody steals. Nobody tampers. Every case is accounted for. Raghunath, who has worked for the last 25 years across six states in the country, can’t help but find humour in the situation.
“It is like a handing over a tonne of gold or a month-old baby to another party," he says. “There is an excise guard in the truck until it reaches the border. Another excise guard gets into the truck as the truck starts moving to other state."
It is a simple affair. State A’s excise officer gets out, hands over the documents to the excise inspector of state B and then takes the next available line bus or auto rickshaw back home. Clearly, a job well done.
To understand the complexity of the operation, here’s a fun fact. The Kumbalgodu plant on Mysore Road produces 600,000 cases of alcohol every month. That’s 20,000 cases a day. 40 trucks a day.
That’s not all. Transportation is just one small part. The big one is documentation. And maintaining files for approvals. “There are 100-200 steps to obtain allotment of spirits from a distillery to our plant for blending and bottling," says Raghunath. And to be able to do that, Raghunath has to plan months in advance. “A concerned employee will spend at least one hour out of his eight hours just to follow up with excise commissioner offices to obtain necessary approvals," he adds. So much so that the distillery office enters transactions in pencil first to avoid mistakes.
At the Kumbalgodu plant, we request Raghunath to give us a tutorial on some of the paper work and the procedures. A concerned officer walked in with five fat files.
Let’s begin. Typically, a distillery secures necessary approvals to get spirits from a factory in 12-15 days if it is within the state and 30 days if the factory is in another state.
So a distillery gets sanction from its regional offices to procure the prescribed amount of spirits from a factory, which in turn will give a consent letter to the party to sell. The consent letter will then go to the local excise office. This letter will have to contain details including opening stock, closing stock and various other points. The local office will then issue a recommendation letter to the distillery. But not directly.
It goes to the next level in the office. That of either the deputy or joint commissioner’s office of excise to get necessary endorsements. The letter goes through post. And this letter will have prescribed trips from the clerk to deputy superintendent to deputy commissioner and back again. The officer concerned explains that there are at least 24 to-and-fro file movements. And only when it is approved will it go to the local excise office by post.
“If there is a ‘query’, then life turns ugly," says Raghunath. Which means another round of back and forth. All through snail mail. Finally, this letter will go to the state beverage corporation, which will issue an OFS, or order for supply. An OFS will order supply of spirits to the bottling plant from a designated factory. And then it is the excise guard’s turn to take over. And track everything. All over again.
Twenty nine countries
For most industries, permissions and clearances are needed when setting up a plant, whether greenfield or expansion. In alcohol, it is for business as usual.
“Any analyst will tell you that for alcohol, India is one of the most complex markets in the world," says Abanti. “I’m not commenting on whether such a high level of regulation is right or wrong. I’m stating the facts as they are and therefore it is not easy to do business. We operate not in one country but 29 different states." Needless to say, alcohol is a state subject, where every state has its own policies, procedures and excise tax structures with very little harmony between them.
Let’s try and understand a simple business decision—prices. Of let’s say, Johnnie Walker Black Label. Price in Delhi is x, in Haryana it is 0.8x; Maharashtra is y and in Daman, it is 0.6y. Because of taxes.
Now, what often happens is that the state where the prices are higher will say this price doesn’t work for it. Because they don’t want the price to be any higher in their state, because in the neighbouring state it is lower. All thanks to a different tax structure. “That alcohol can flow through porous borders between Delhi and Haryana is a genuine concern," says Abanti. “But the price of that is paid by manufacturers."
Let’s take another simple business decision—labelling on bottles. And this really gets the goat of all manufacturers. Twenty-nine states put together can’t come to an agreement on a single labelling standard. Which means that Diageo, to take just one case in point, must customize labels.
“So in 2013, we had Punjab saying we want a holographic label," says Abanti. Sure. But Diageo also wanted its Drink Responsibly branding on the label. Of course, Punjab said no. “Now one particular state said ‘no, don’t have it’, for whatever reason. So this brings complexity," she adds.
And that’s not all. There’s a much larger tug of war when it comes to policy decisions. Case in point—the inclusion of alcohol to adhere to the standards of the Food Safety and Standards Authority of India (FSSAI). Industry spokespersons argue that to begin with there were no standards and the move was ad hoc. Sonjoy Mohanty, secretary general at International Spirits and Wines Association of India (ISWAI), says that alcohol was never a part of food regulations.
“The attitude was ‘I want A, B, C, D on the label; if you don’t do it, your imports won’t get cleared’," says Mohanty. And that’s what happened. In September last year, Diageo and Pernord Ricard suspended shipments to India temporarily.
“It is a very peculiar situation," says Mohanty. “Because FSSAI is a central government authority. And alcohol has to follow what state excise says. So suddenly you’ve created confusion and no one wants to give an inch." Needless to say, manufacturers lobbied heavily to get FSSAI on board with international labelling standards. But it didn’t go anywhere. “If you caught us to put down the collective hours we put, it is mind-boggling," says Abanti. “But there was no outcome. So you are trying to fix a broken house and only if you could get 29 people in one room. There is a certain ad hocism without consulting or engaging with the industry. Like now this or nothing else."
Missing the GST bus
It is no secret that the industry desperately wanted alcohol to be a part of the proposed goods and services tax (GST). And countless man hours went into its lobbying; ISWAI, for instance, had 93 meetings across the board with the states and the centre. But to no avail. “The government is all agog and in a hurry to bring GST in," says Mohanty. “Not for a single moment have they paused to see the pitfall of excluding the alcohol industry." Let’s understand this better.
Being a part of GST would ensure that the entire manual permission ecosystem would move to electronic. By industry estimates, the number of 748 touch points would have gone down to almost 30. And at the retail end, it would have made life easier for restaurants and retail outlets selling alcohol. For instance, currently the restaurants and hotels that serve alcohol generally attract three different taxes: state sales tax or value-added tax (VAT) on alcoholic beverages, state sales tax or VAT on food and non-alcoholic beverages, and the service tax levied by the centre on 40% of the invoice amount, which is deemed to be a charge for the services provided to the customer. “Now that we are not part of GST, think of the complexity at the retail end where an outlet is selling both GST and non-GST items," says Mohanty. “To put it simply, sandwiches and alcohol."
It is another matter altogether that most states didn’t want in because they feared that they would lose the ability to control, regulate and tax the alcohol industry. And then, they didn’t want an electronic audit trail. According to the World Health Organization, almost 50% alcohol sold in India is non-commercial (350 million cases) which varies from state to state, but GST was a great chance to address it. “Now we have lost that chance forever," says Mohanty. “It is just sad that nobody wants to talk or openly discuss the alcohol industry because it is seen negatively. But this issue is more relevant for ‘Make in India’ today than ever."
