The sober reality of making liquor in India

Taxation, policy decisions make India one of the most complex markets in the world to make and sell alcohol

P.R. Sanjai |  Ashish K. Mishra, 4/3/15 Mint

source: http://www.livemint.com/Industry/IL7nR6USe1un4vgIcnYhdJ/The-sober-reality-of-making-liquor-in-India.html

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.”​

***

VRIDHI’s View: The article was really fun to read but then at last you feel how complex the law is! The Alcohol has always been lobbied hard by the state governments and hence will remain out of the GST when it comes in effect from 1/4/2016. No wonder Alcohol is Big Business and there are few states which depend on revenues from it for funding their electoral promises. State CM’s can atleast come together through the platform of Niti Aayog and make the process of liquor business more smooth. States should realise that if the rules are made simple and straight forward, the cash books out of liquor business will only swell further. Use the platforms like Niti Aayog immediately. If Make In India has to be successful, doing business has to be made simpler. Hope atleast this govt. will make things easy.

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Govt plans 60 solar cities

FC 19/5/09

The union ministry of new and renewable energy (MNRE) is proposing to develop 60 cities in the country as solar cities to achieve at least 10 per cent reduction in the projected demand of conventional energy in the next five years by enhancing the supply of renewable energy sources and energy efficiency measures.

As per this plan, the ministry is presently in the process of appointing national level reputed consulting firms or institutions to prepare the master plan. The consulting firms will be roped in to chart plans for increasing energy efficiency and renewable energy supply in the city, establishing institutional arrangements for the implementation of the master plan and awareness creation and capacity building activities, said an official statement.

The ministry has called for expression of interests for empanelment of consultants who would be interested in consultancy assignment for preparation of the master plan for solar city programme.

The ministry plans to develop 60 such cities during the 11th plan period. The ministry will support at least one city in each state up to a maximum of five cities. To set an example for other cities, it has been decided to develop two cities as model solar cities. Nagpur in Maharashtra is set to be the first model solar city in the country.

The ministry will provide Rs 50 lakh for master plan, solar city cell and promotional activities. Major solar energy system will be installed including streetlights, garden lights, traffic lights, hoardings, and solar water heaters, among others. Energy efficient green buildings also will be promoted on large scale under solar city plan.

Financial support up to a maximum Rs 9.50 crore will be available to each of these model solar cities for implementation of the master plan. The support will be on 50 per cent cost sharing basis from respective municipal corporation/state government. Funds will be released after the city identified for development as model solar city submits its master plan.

If the total funds of Rs 19 core (MNRE support of Rs 9.50 crore and the matching grant from state government) for developing a city as model solar city are not sufficient, the city will be eligible to draw additional grant for installation of renewable energy systems from various ongoing schemes of the ministry.

Why Kenya beats India in flower business?

ToI 8/5/09
 New Delhi: Talk to any flower seller and you are likely to hear an oft-repeated phrase about the nature of the business: Bika to phool, nahin to dhool (if it sells, it’s a flower; if not, it’s just dust). That says a lot about the perishable nature of the flower trade.
 Take this piece of earthy wisdom in a larger context, and it aptly describes the fickle fortunes of the country’s nascent floriculture export sector — not long ago, the government had raised visions of India emerging as a flower power in the world, but those hopes, like unsold flowers, are turning into dust. Some years ago, government announced a target of Rs 1,000 crore for India’s floriculture exports by 2010. In the fiscal year 2006-07, our exports reached Rs 649.6 crore. But since then, they have been slipping. In 2007-08, when world economy was still galloping, India’s flower exports plummeted 49% to Rs 332 crore. In 2008-09, exporters expect to see a further 30% decline. Currently, India accounts for 0.65% of the $11 billion global flower trade.
 According to the Agricultural & Processed Food Products Export Promotion Authority (Apeda), a commerce ministry body, the revised floriculture export target for 2009-10 is Rs 375 crore — a far cry from initial target of Rs 1,000 crore.
 Now compare that with Kenya, a poorer country but which is the top supplier to Dutch flower auctions — the world’s flower centre — accounting for 37.8% of supplies there in 2008. Despite the general economic slump, it managed to earn more than 250 million euro (Rs 1,648 crore) from sales in Dutch auctions.
 So, what went wrong with India? Experts say given the country’s size and diverse geography and climate, India remains a potential giant in the field. Fresh cut flower exports started with lot of government backing in the early 1990s, but since then, infrastructure inadequacies — coupled with lack of initiative from the growers — has seen the promise wither away.
 “Volumes and quality are the two keys for success in world flower markets. We have not been able to build up volumes, and our quality isn’t consistent,” says industry expert Narendra K Dadlani. “Above all, we have failed to build infrastructure around our natural advantages.” Take the case of Cymbidiums (an orchid variety) from Sikkim and other parts of Northeast. Cymbidiums grown there are among the best in the world, but due to bad roads these flowers can’t reach the gateway airport at Bagdogra in good condition for export. “These gaps need to be filled,” says Dadlani.
 Now, look at Kenya, which like some other equitorial east African countries like Uganda and Ethiopia, have maximized their natural advantages. Like India, they have good sunshine, but they also have similar weather conditions through the year and large swathes of hilly terrain — all ideal for rose cultivation.
 Also, these countries are also closer to the European market, which cuts their frieght costs by half compared to India. Kenya has huge farms with modern technology that gives the country economy of volume as well as quality in rose cultivation.

NOT ROSY ENOUGH

Kenya vs India

Floriculture exports in 2008

Kenya: Rs 1,650 cr* India: Rs 235 cr**

Area under exportable cut flower cultivation in India less than 1/10th that of Kenya

Average size of farms Kenya: 40 ha India: Less than 4 ha

* In Dutch market alone ** Ballpark industry estimates for 2008-09

18 banks have Rs 660-cr exposure to Satyam

BL 30/1/09

 

-No need to worry much, says RBI official.

-Total funded loans

-Six banks have Rs 274.53-crore loan exposure

-Citibank tops list with Rs 196 crore

-Ten banks have investment exposure of Rs 12.49 crore

 

Hyderabad, Jan. 29 Eighteen banks, which include both Indian and multi-national entities, have varying degrees of exposure to the crisis-ridden Satyam Computer Services. The information, gathered by the Reserve Bank of India from various banks, puts the total exposure at Rs 660.48 crore as on January 8 (a day after Mr B. Ramalinga Raju, the former Chairman of Satyam Computer Services, confessed to fudging the company’s books to the tune of Rs 7,136 crore).

 

While the total funded exposure stood at Rs 287 crore, the total non-funded exposure was put at Rs 373.47 crore. (Funded exposure refers to advancement of funds as loans to a company or its subsidiaries. The non-funded exposure is issue of letters of credit or guarantees to companies.)

When contacted, a senior RBI official said: “We can say that there is nothing to worry about too much and the banks have enough capital to withstand any scenario”.

 

Safeguarding interests

Six banks (Citibank, HDFC Bank, Kotak Mahindra Bank, HSBC and ICICI Bank) have an aggregate loan exposure of Rs 274.53 crore to Satyam. Citibank tops the list with Rs 196 crore of total funded loans and advances, followed by HSBC Bank at Rs 16 crore.

 

Seven banks — Bank of America, Citibank, Bank of Baroda, HDFC Bank, ICICI Bank, BNP Paribas and HSBC Bank — have non-funded exposures totalling Rs 373.47 crore.

 

This includes contingents and commitments of Rs 118.17 crore and marked-to-market gains of 185.29 crore on derivative contracts with the company.

 

Ten banks — Bank of America, Allahabad Bank, Central Bank of India, Corporation Bank, OBC, PNB, UCO Bank, Union Bank of India, Indian Bank and Federal Bank — have aggregate investment exposures of Rs 12.49 crore.

 

“Banks are taking steps to safeguard their securities and interests in respect of their exposures to the Satyam group,” the RBI has assured the Union Government.

 

Loans to Maytas firms

Though SBI had no exposure to Satyam, it had an exposure of Rs 500 crore to the Maytas firms, promoted by Mr Raju’s kin. State Bank of Hyderabad had not extended any loans to Satyam. But it had advanced Rs 189 crore to Maytas Infra, the company promoted by Mr Raju’s reatives. “The loans were given for specific projects and they are secured loans,” Ms Renu Challu, Managing Director of SBH, told Business Line.

 

According to Mr R.S. Reddy, Chairman and Managing Director, Andhra Bank, the bank has some “indirect’ exposure” to Maytas for about Rs 45 crore. “This loan was given to a consortium where ICICI Ventures is a majority stakeholder along with some other partners. Maytas Infra has only 15 per cent stake in the project. Even this loan is well secured,” he said.

 

Deposits

Enquiries made by the RBI with the banks revealed that Satyam had deposits of Rs 78 crore as on January 8, 2009 (as against Rs 65 crore on March 31, 2008. But as per the audited (fudged) figures, the amount was Rs 4,274 crore).

Insurance reforms gain pace; FDI cap to be hiked to 49%

BL 23/12/08

 

New Delhi, Dec. 22 In the last leg of its term, the UPA Government has come up with a big-bang approach to insurance sector reforms by introducing two Bills in Parliament.

 

This would pave the way for the much-awaited hike in foreign direct investment (FDI) in an Indian insurance company to 49 per cent from 26 per cent, permit foreign re-insurers to set up branches here and do away with divestment restrictions on Indian promoters of insurance companies to enable entry of more players into the sector.

 

While a Bill to amend the insurance laws was introduced in the Rajya Sabha, the Government also introduced the Life Insurance Corporation (amendment) Bill in the Lok Sabha, with Left parties lodging stout protests against their introduction in both the Houses, amid a melee.

 

Later, the Left parties charged that the proposed move to increase the FDI cap was “a shameless move to facilitate greater control of the insurance sector by foreign insurance companies”.

 

“It was shocking that the Congress-led Government was taking this step at a time when the financial crisis in the US had exposed the pernicious practices of the insurance and financial companies of the West,” the CPI (M) said in a statement.

 

Shelf life

The Bills were introduced by the Minister of State for Finance, Mr Pawan Kumar Bansal. The Insurance Laws (Amendment) Bill 2008 will have a longer shelf life, beyond the term of the current UPA Government that ends technically by April 2009, as it had been introduced in the Rajya Sabha.

 

Defining health insurance

Besides providing for a hike in FDI cap to 49 per cent in insurance companies, the Insurance Laws (Amendment) Bill has sought to define “health insurance business” and provide for a minimum paid-up capital of Rs 50 crore for pure health insurance companies. The Bill also seeks to maintain FDI cap at 26 per cent for insurance cooperative societies.

 

On the re-insurance front, the Bill seeks to permit foreign re-insurers to open branches only for the re-insurance business in India. The proposed amendments would also facilitate the entry of Lloyd’s of London in the insurance business as a foreign company in joint venture with Indian partners, and also as a branch of foreign re-insurer.

 

Also, the existing restrictions on divestment by Indian promoters of insurance companies are proposed to be removed. Currently, Indian promoters are required to divest to 26 per cent or such other prescribed percentage in the manner and period prescribed by the Central Government.

 

Moreover, the Bill seeks to allow nationalised general insurance companies to raise money from the market with the permission of the Central Government for increasing their business in the rural and social sectors, to meet solvency margins and other purposes. The proposed amendments seek to provide obligatory underwriting of third-party risks of motor vehicles on the pattern of insurance in rural areas and social sectors.

 

Newer instruments

The Bill provides for insurance companies to raise “newer capital” through “newer instruments” on the pattern of banks. It would also pave the way for formulating regulations for payment of commission and control of management expenses.

 

Both Life Insurance Council and General Insurance Council are to be made self-regulating bodies.

 

The power of adjudication will be with Insurance Regulatory Development Authority (IRDA) and appeal against the decisions of IRDA will rest with Securities Appellate Tribunal.

 

On penalties and fines, carrying on insurance business without registration could lead to a fine of up to Rs 25 crore and imprisonment of up to 10 years. A penalty “not exceeding Rs 25 crore” could be imposed if an insurer fails to comply with the obligations for rural or social sectors or third party insurance of motor vehicles. All penalties realised would be credited to the Consolidated Fund of India.

 

Distinction will now be made between a beneficiary nominee and a collector nominee in life insurance policies. The responsibility of appointing insurance agents will rest with insurers and IRDA would regulate their eligibility, qualifications and other aspects.

 

Life insurance policies are proposed to be made “unchallengeable” on whatsoever ground after five years of issue of the policy. Also, there would be limiting of the grounds for challenge during the period within five years.