ITO Project

ITC HS Code 2208

Undenatured ethyl alcohol of an alcoholic strength by volume of less than 80% vol.

Varun Chadha 46 B IIFT MBA (IB) 2012-14 26/11/2012

Introduct on ! A"coho" ndu#tr$

Registering a robust growth of about 30 per cent on YoY basis, alcohol consumption in India will cross 19,000 million litres by 2015 from the current le el of !,"00 million litres, ape# industry body $%%&'($) said today* India+s alcoholic be erage mar,et comprising beer, wine and spirits will reach o er Rs 1*la,h crore mar, in 2015 from current si.e of about Rs 50,"00 crore, says an industry specific analysis of /he $ssociated 'hambers of 'ommerce and Industry of India 0$%%&'($)1* %i.able middle class population with rising spending power and a sound economy are certain significant reasons behind increase in consumption of alcohol in India, according to an $%%&'($) study on 23atest /rends in 4omestic 3i5uor )ar,et*+ India is one of the fastest growing alcohol mar,ets in the world and largest consumer of whis,ey which accounts for almost 60 per cent of the entire li5uor mar,et* &wing to India+s affinity for hard li5uor, Indian whis,ey mar,et which currently stands around Rs -0,500 crore is e#pected to cross Rs 5-,000 crore mar, within ne#t two years* Indian li5uor mar,et which is di ided into arious categories li,e 7 I)83 0Indian made foreign li5uor1, imported li5uor, domestic li5uor and country9made li5uor, is brimming with growth* &f late, Indian consumers ha e de eloped fondness for imported li5uor and the mar,et is crowded with arious foreign brands* $wareness about health benefits associated with moderate drin,ing is another significant factor behind this upsurge as now more and more Indians are adopting a healthy lifestyle, highlights the study* :rbanisation together with e er9changing social norms, increased alcohol a ailability, high intensity mar,eting and rela#ation of o erseas trade rules ha e e5ually contributed to increased alcohol consumption* India ran,s as one of largest alcoholic be erage mar,et across the globe considering that almost "0 per cent of alcohol in south9east $sia is produced in India* ;erela and <un=ab are leading li5uor consuming states in India with ;erela alone accounting for 1! per cent and <un=ab accounting for 1- per cent of all the li5uor consumed in India* India produces about 2*"5 billion litres of alcohol annually* It is the third largest mar,et for alcoholic be erages in the world* /he demand for spirits and beer is estimated to be around 3"3 million cases* 0%ource> $nnual Report, ?o ernment of India, )inistry of 8ood <rocessing Industries1* /he $lcohol Industry in India can be di ided into the following fi e categories> 9 1* Industrial $lcohol 2* <otable $lcohol 3* )i#ed 4istilleries 0Industrial and <otable $lcohol1 -* @ottling <lants 0purchasing alcohol and bottling alcoholic be erages1 5* 4istilleries producing alcohol from substrates other than molasses*

In India, ma=ority of distilleries manufacture alcohol from %ugar 'ane )olasses compared to international trend of grain based 0rice, wheat, millet, @arley, corn and oat1 alcohol* In India, since alcohol is largely produced from sugarcane molasses, the industry is cyclical in nature, as sugarcane production itself is affected e ery 39- years due to monsoon and other factors, resulting in low a ailability of molasses* $lcohol industry is the second largest source of re enue of the %tate A#che5uer 7 Rs*25, 000 cores* /he Industry turno er is BRs*5-,000 core 0%ource> Auro monitor International 20091* It is the only Industry where inputs are decontrolled 0free mar,et price1 and output is controlled 0selling price is determined by %tate A#cise in most %tates1* /he Indian spirits mar,et has grown rapidly owing to rapid economic growth, rising disposable incomes, fa ourable demographics and greater social acceptability of alcohol consumption in India* In particular, according to Auro monitor International 2009, the sales olume of spirits products is e#pected to reach 2*2 billion litres by 2013* India has traditionally been among the world+s lowest per capita consumers of foreign spirits such as whis,y, rum, brandy, od,a and gin* Indian )ade 8oreign 3i5uor 0I)831 is an industry term of art in India used to describe these foreign spirits that are now made in india* /he li5uor industry in India is constrained by a multitude of factors>

Ca%ac t$ &e#tr ct on#

/he industry is not allowed to e#pand without the prior appro al of the 'entral go ernment, as it among the few industries still under the licensing policy* In a liberali.ed scenario, when molasses ha e been decontrolled and for the brewery sector too, there is no shortage of domestically a ailable hops, restrictions on new capacities ma,e little sense* %tate go ernments ha e a part to play as well, since companies ha e to get their appro al too before commissioning a unit* (owe er, the situation has changed with the %upreme 'ourt ruling designating alcohol as a %tate sub=ect* It is e#pected that companies will no longer face problems on fresh capacity creation*

H 'h (ut$ Structure

/he manufacture of I)83 is sub=ect to go ernment licensing, while le ies on sales are a %tate sub=ect* /he %tates earn a significant portion of the re enues from li5uor* In some %tates, the duty is as high as 200C* /he duty structure aries so much with each %tate that for a company operating at the national le el, it is li,e dealing with 26 countries* %uch duties 0including special le ies on inter9%tate sales1 ha e resulted in a distributed manufacturing base and uni5ue mar,et characteristics for each %tate* )ar,et sources feel that since %tates are strapped for funds, ad erse changes in policies for the alcohol industry are unli,ely to happen*

)*&+( ,THA-*+ .&*(/CTI*- A-( C*-S/M.TI*- .ATT,&-

Dorld Athanol <roduction

Dorld Athanol 'onsumption

I-(IA0S SHA&, I- )*&+( ,THA-*+ .&*(/CTI*-

)or"d0# #econd +ar'e#t #u'ar %roducer Ind a contr 1ute# 2er$ " tt"e on ethano" 3ront4

The a1o2e 'ra%h #ho5# n#ta""ed ethano" ca%ac t$ n Ind a /otal Installed 'apacity of Athanol in India for 2011 is 5*-bn litres 9 the ma=or grain plant locations are )aharashtra, $ndhra <radesh, )adhya <radesh, <un=ab, (aryana and Ra=asthan* ,THA-*+ .&*(/CTI*- I- I-(IA

/he abo e chart shows ethanol production in India in 2011 which is 2*9 bn litres* Athanol is primarily produced using sugarcane molasses, a by9product of sugar manufacturing in India* /he main feedstoc, for producing ethanol in the country is molasses, a by9product of sugar manufacture*

$s the abo e chart depicts, there are three main uses of ethanol in India namely potable sector i*e* the alcohol industry in India 056C share1, industrial sector li,e automoti e sector and the fuel ethanol sector* ,6.,CT,( ,THA-*+ (,MA-( B7 2018

In 9anuar$ 200:; the 'o2ern<ent <andated a =-%ercent ethano" 1"end n 'a#o" ne throu'h t# a<1 t ou# ,thano" 1"end n' %ro'ra< (,B.)4 The %ro'ra<<e ha# not $et % c>ed u% on 3a "ure to #et ethano" %r c n' 3or<u"a and %rocedura" de"a$# 1$ 2ar ou# #tate 'o2ern<ent#4

.ro1"e<# 3aced n au'<ent n' ,thano" %roduct on?

$ ma=or problem in this regard is that in India, sugar production in general follows a 59" year cycle i*e* production increases o er a 39- year period, reaches a high, which in turn, results in lower sugar prices* $s a result of lower sugar price realisations of sugar mills, the sugarcane arrears to farmers increase* /his results in lower sugarcane production for the ne#t 293 years* 4ue to lower sugar production, the prices shoot up resulting in increased area under sugarcane culti ation during the ne#t season, following which there is usually a glut again* It is a systemic problem which needs to be resol ed through targeted policy regulations* $lso, there is lower producti ity of sugarcane* $dding to that ?o ernment control on industry also impacts its growth as ?o t* controls price of sugarcane, decides duties on import and e#port of raw and refined sugar and le ies sugar 5uota* @ecause of these industry hasn+t ,ept pace with the rising demand and India is still a net importer of Athanol* 0India imported 60 million litre of ethanol this year 1*

IE4I$ F% I)<&R/% IE 2011 Trade Ind cator# I<%orte d 2a"ue 2011 (/S( thou#an d) 156099 11-63" 96"5 Trade 1a"ance 2011 (/S( thou#an d) 92-536 911--31 991!3 95520 36"-925"92"1" 9"12 916591919 659905 9205 30"1 2"3 939! 9553 951! 122 9122 9252 923! Share n Ind aB# <%ort # (A) 100 "2*! !*2 3*! 2*6 2 1*" 1*5 1*1*2 1*2 0*! 0*! 0*5 0*5 0*5 0*5 0*0*3 0*3 0*2 0*2 I<%orte d Cuant t$ 2011 ( n tonne#) 33"00 252!" 2061222 !2! 501 !-" 3"9 "50 332 251 221 160 101 110 1-2 1-2 103 "3 5" 3" -3 69 65 -33 36" 1"" 12 -9 922 16 1" -0 -6 22 I<%orted 'ro5th n 2a"ue 1et5een 20082011 (A; %4a4) 22 20 2" I<%orted 'ro5th n 2a"ue 1et5een 2010-2011 (A; %4a4) -" -" !2 !6 21 15 1061! 111 1569 920 62 -0" 9!3 169 ! 331 130 95 2"33 92 33 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 150 Tar 33 (e#t <ate d) a%%" ed 1$ Ind a (A)

,@%orter#

Dorld :nited ;ingdom 8rance

'hina 5!6" :nited $rab Amirates ---! :nited %tates of $merica 3065 %weden $rea Ees Italy Gapan %ingapore )e#ico %pain Eetherlands 'anada ?ermany Republic ;orea @elgium of "3" !"5 2"1" 2-2" 2155 19"! 1955 10191" "93 "69 "39

)alaysia -29 (ong ;ong, 'hina -25 $ustralia 'hinese /aipei 2"" 259

%ource > trademap*org IE4I$ F% AH<&R/% IE 2011

Trade Ind cator# ,@%ort ed 'ro5th ,@%ort n ed 2a"ue Cuant t 1et5e $ 2011 en (n 2008ton#) 2011 (A; %4a4) 2336! 612!-!3 995 !30 593 !51 !33 291 5-5 359 1-3 156 !05 1"0 252 15 12! 160 356 2"9 1-1 136 5! 122 2! 1!3 30 120 11! 31 21 -3 1102 1! 20 1210! -! " 92! -0 !2 ,@%ort ed 'ro5th n Cuant t $ 1et5e en 20082011 (A; %4a4) " 0 23 12 91! "6 "! 23 910 911 3 10 911 9! 93 -" 91! 36 190 ,@%ort ed 'ro5th n 2a"ue 1et5e en 20102011 (A; %4a4) 35 1! !1 50 9-1 109 190 130 292 39 92 2--00 32 96 !59 2322912 95" 92-

I<%orter #

,@%orte d 2a"ue 2011 (/S( thou#a nd)

Trade 1a"ance 2011 (/S( thou#a nd)

Share n Ind aB # e@%or t# (A)

Tar 33 (e#t <at ed) 3aced 1$ Ind a (A)

Dorld :*$*A* $ngola &man Eetherlan ds /ogo Eigeria ?hana %ri 3an,a %ingapor e 'ongo Iiet Eam $rea Ees /hailand Jatar 'anada )auritius @enin @ahrain 8rance %pain Eiger @ur,ina 8aso Agypt )alaysia

1335!1 -3190 -2"-2 52!36!3-11 3316 30-3 2939 2609 2305 20!1 1"15 13-9 13-5 10!2 69" "26 "21 "12 "12 59593 565 551

92-536 36"--2"-2 52!30"1 3-11 32-! 30-3 2939 652305 20!1 9"12 129" 12"! 2"3 69" "26 "21 991!3 9205 59593 5!1 122

100 32*3 32 3*9 2*9 2*! 2*5 2*3 2*2 2*1 1*" 1*5 1*3 1 1 0*6 0*" 0*5 0*5 0*5 0*5 0*0*0*0*-

-6*3 30 9!*1*20 20 20 12!*3 0 30 55 !1*9!*0*1 15 20 113*2 1*1*20 20 2""9*1"2

390 !3 30 913

%ource > /rademap*org

Countr e# 5h ch ha2e .otent a" to 1e ,@%"ored

If we loo, at India+s A#ports, top 25 countries contribute 95*1 C of e#ports, :*$*A and $ngola garnering around !- C of share* 'learly, India needs to di ersify its e#ports as it can+t be dependent on ery few countries for e#ports* /herefore, it should focus on $frican )ar,ets where there is a huge potential* @etween 2009 and 2011, India+s e#ports to $frica ha e trebled in whis,y and 5uadrupled in wine segment* $nalysing India+s e#ports to $frica, we find that barring ten countries, all countries+ e#port olumes is abysmally low i*e* less than 50 tonnes* India+s focus should be on relati ely lesser e#plored countries li,e )auritius, Agypt, :ganda, :nited Republic of /an.ania, %udan, 'ameroon, A5uatorial ?uinea, @urundi, ?uinea, %eychelles, ?ambia, Athiopia, ?abon, and )o.ambi5ue* Ind a #hou"d a"#o 3ocu# on countr e# " >e Mada'a#car and S5aD "and 5here Ind a doe#n0t e@%ort# current"$ 1ut doe# <%ort# " Cuor 3ro< the#e countr e#4 $mong these countries, Special Focus should be on Egypt, Namibia, Kenya which ha e si.eable demand 0in terms of share in world imports1 for imported li5uor*

.roduct code 2220630 2220620 2220690 22206-0 2220650 22206!0 22206"0 %ource > trademap*org Dhis,ies %pirits obtained by distilling grape wine or grape marc :ndenatrd ethyl alc K60C alc cont by olLspirit,li5ueurLspirit be nes Rum and tafia ?in and gene a Iod,a 3i5ueurs and cordials

Ind aB# e@%ort# to A3r ca Va"ue n Va"ue n Va"ue 200E 2010 2011 155!" 31131 -913" 2-65 12" "-5 15" 99 53 163" 32"3339 1216929 9"662 326 116 0

Ho5 to Increa#e ,@%ort#?

/here are many countries where India has to pay hea y A#port 4uties li,e %ri 3an,a 012!*31, @ahrain 0113*21, )alaysia 01"21, Gordan 01"3*31 and Agypt 02""9*-1* India can as, these countries by way of foreign diplomacy to lower these duties and allow it a fairer ground to compete with local companies in these countries at competiti e prices thereby benefiting consumers* Aspecially with Agypt where such high types of duties are unsustainable* India can also le erage on its strong relationships with %ri 3an,a to lower duties* %ince India is on the erge of signing trade agreements with $%A$E, it could as, these countries 0)alaysia, /hailand1 to include li5uor e#ports in 8/$ 08ree /rade $greement1*

Incent 2e# to 1e o33ered 3or I<%ro2 n' ,@%ort#?

Dith 5C Athanol blending in fuel being made mandatory and India already being a net importer of ethanol, and with rapid increase in li5uor consumption* $ll these factors are going

to increase demand of ethanol considerably and as a result imports would be higher* In order to produce li5uor e#ports, ?o t* can reduce e#penditure on ethanol for companies by remo ing import duty of "*5 C for companies e#porting li5uor* <resently only one ma=or sugar producing state /amil Eadu has opposed the Athanol blending programme to meet state+s demand for potable alcohol and in return increase its e#cise re enue* ?o ernment needs to come up with policies for growth of sugarcane and sugar industry which can be done by increasing )%<s so as to encourage farmers to produce more sugarcane* $lso, go ernment needs to bring industry friendly policies with ta# concessions so as to encourage more participation from industry*

B 1" o'ra%h$?
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