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WINE PRICES IN BANGALORE HEADED INTO THE STRATOSPHERE !

You might be surprised at a wine article in my aviation blog, but wine is a subject close to my heart.

The convoluted alcoholic beverages policy in India, makes each state, akin to another country, each with their own cumbersome taxes and regulations. The recent collapse of the Doha round of trade talks was not the only failure last month. A trade war is growing between the three wine producing states in India, Maharashtra, Karnataka and Goa, and it is going to send prices of Indian wines up by 46% ~ 100%, in Karnataka. Unfortunately, unlike the world which has the World Trade Organisation, India has no mechanism for settling economic wars between states.

Bangaloreans, along with the rest of India, are increasingly taking to wine as their drink of choice. It is more healthy, low impact, goes great with food, and more fashionable. What ever the reason, the market is growing about 20% year on year. In 2007-8, about 56,225 cases of wine were sold in Karnataka, almost all of it in Bangalore. This does not include the Goan Port "Wines". As consumers' wine tastes evolve, they gravitate from the cheap and cheerful variety to the mid-range and higher quality.

Maharashtra is India's California; the leading producer of wines. About 18 "non-Karnataka", Indian wine producers, Sula, Indage, Reveilo, Nine Hills, Mandala Valley, Big Banyan, sell their wines in Karnataka. There are two wine producers in Karnataka, Grover and Naka, and about 27 foreign (Non-Indian) wine producers whose products are available in Bangalore.

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A few years ago, the Government of Maharashtra imposed a special tax of 150% on wines “imported” into the state from outside Maharashtra. It was a purely political decision done at the behest of one of India's most influential politicians in India, who has, for long, been reportedly, the major player in the wine-grape farming and wine producing industry in Maharashtra. The 150% tax made non-Maharashtra wines more expensive in the state. The wine producers of Karnataka, found it hard to compete in Mumbai, the capital of Maharashtra, but more importantly, the economic capital of India.

There have been half-hearted attempts by the Karnataka Government to resolve this issue with their Maharashtra counter-parts. The lack of genuine desire, urgency, or sensibility, on both sides, expectedly, has not yielded positive results. While, I will be the first to say, the nasty actions of Maharashtra deserve a response, the recent actions of the Karnataka Government, are equally nasty. Two wrongs do not make a right.

Effective August 1, 2008, the Karnataka government started levying a tax, just as offensive, to the one in Maharashtra, on all wines of Indian origin “imported” into Karnataka. The new levy raises the import fee on wine from outside Karnataka from Rs. 10 to Rs. 300 per bulk litre, an increase of Rs 217.50 per bottle!!!! Add to this other levies and margins that will subsequently accrue, the final retail price to consumers will rise by approx Rs 250~280 per bottle.

55% of all wine sold in Karnataka is currently priced between Rs. 350 - Rs. 550 a bottle. The increase translates to a 46% - 100% increase in final price. Lower priced, entry level, wines like UB's Zinzi will see their prices go up over 100% from Rs. 250 to Rs. 500~530 per bottle. Dr. Mallya’s fledgling Indian wine business (Zinzi) will be hit hard, in his home town of Bangalore, since all his Indian wines are produced in Maharashtra.

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The wines produced by Grover's and Naka in Karnataka, will be spared the tax. I wonder how long will they maintain their original price. Like any opportunistic business house, I am sure they will slip in a few price increases since their competition is more expensive by Rs. 250.

Another most unfortunate consequence: as the entry-level wines will rise 100% in prices, many prospective wine drinkers, who were just taking to wine, will decide wine is suddenly too rich for their blood, and give healthy wine-drinking a go-by, reverting back to high impact spirits.

Observing the antics of their fellow Governments in Maharashtra and Karnataka, the Government of Goa is now talking about similar "protection" for its wine producers and growers.

The market place, consumers and producers, determine usage. Government can implement rules of conduct (procedures) but no one, including the self-proclaimed smartest people in the world, often found working in government, can accurately predict a marketplace. The market place determines itself.

The majority of the wine producers in this country are going to take a hit – the emerging wine drinking segment will take a hit – the retailing industry will take a hit. Even the wine producers of Karnataka will be hit. To get around the new levy Maharashtra wine producers will set up wineries in Karnataka state. There is simply not enough wine-grape grown in Karnataka to meet the needs of the state. Existing farmers will be tempted away from their existing contracts with Grovers and Naka to supply the newcomers.

The only “good news” in this sorry saga ? Fearing the wrath of the WTO, the new Karnataka levy does not apply to foreign wines. With the new higher prices of the non-Karnataka wines, many of the Australian, Chilean, South African, Spanish, and Argentinian wines will now look quite attractive. This retrograde step is helping the foreign brands, while sticking a most cruel knife into the heart of the Indian wine business. How many wineries will close, and as a result farmers going bankrupt, as sales drop and mayhem prevails ?

This squabble, in many ways, reminds me of the days of the British Raj. While the Indian states are busy fighting each other, the winners are the foreign wines.

I wonder if Indian wine producers can go to the WTO and beg for protection from their own governments.

Thanks to Stanley Pinto for the inspiration and some of the data.