Investing in India’s Emerging Wine Industry

By Dezan Shira & Associates
Editor: Grace Tate 

India’s expanding wine industry is in the midst of a vital transition. Last year, the country’s wine production hit a record 17 million liters, with export sales rising 40 percent year-on-year to reach US$4.4 million in the first 7 months. With a rapidly growing export sector, expanding domestic consumer market and increasing industry support in major wine-producing States, the Indian wine industry has potential to be a global market competitor.

This year, the Indian Government, in conjunction with the newly formed Indian Grape Processing Board (IGPB), is aiming to finalize the harmonization of Indian wine standards with the International Organization of Vine and Wine (OIV) guidelines. Set to be a catalyst for state reform, the new standards are good news for producers, investors and traders alike, who have eagerly anticipated the industry’s rise for the past decade.

A Decade of Success

Since the early 2000’s, India has been hyped as an important emerging market for wine. The country has the optimum climate for grape cultivation and its main wine-producing states, Maharashtra and Karnataka, are leading producers of world class high-quality grapes.

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In 2001, implementation of the ‘Maharashtra Grape Processing Policy’ stimulated a boom in the State’s wine production from 712 kiloliters in 2002 to over 20 million liters in 2008-09. In 2008, the ‘Karnataka Wine Policy’ simplified the process for, and reduced the cost of, obtaining a winery license to significantly expand the market.

In addition, to further promote investment and production, the States established a number of integrated wine parks which provide basic infrastructure facilities and offer incentives for new units such as: a 100 percent exemption from excise duty for 10 years, relief in sales tax levels and subsidies for production duties. As a result, many new wineries have since commenced production. However, industry competition remains low, with 80 percent of the market occupied by three major players.

In recent years, several additional measures have been taken to facilitate production, improve quality, increase awareness and encourage investment. State governments have begun to promote viticulture as an economic development tool and a tourism revitalization tactic, highlighting foreign investment as the key to honing industry potential. In addition, the IGPB has assisted producer participation in several international Wine Fairs and the National Research Centre for Grapes has undertaken numerous projects to develop improved production technology and management techniques.

Existing challenges

Further industry growth is hampered by a complex system of excise taxes, licensing processes and distribution procedures, which serve to dramatically increase retail prices on imports and limit interstate trade. In addition, the market is constrained by inadequate storage options and an enduring consumer preference for hard liquor.

Furthermore, India’s grape processing facilities are inadequate and feature poor price realization on produce. The international demand for adherence to quality parameters, coupled with a severe lack of infrastructure to support the high investment crop, has seen many producers suffer severe economic loss due to an overexpansion in supply. As a result, many domestic wine companies are struggling to recover, with over 50 percent of Maharashtra’s wineries closing, lying dormant or reverting to the production of table grapes.

Rising Export Sector & Progressive Retail Market

In 2013, India exported almost 1.8 million liters of wine, rising 41.82 percent year-on-year to reach US$6.88 million. Last year, the wine total production estimate for the states of Maharashtra and Karnataka was 14.2 million liters (1.58 million cases). Furthermore, production in Karnataka was predicted to increase to 5 million liters (555,000 cases), a rise of 1.3 million liters (145,000 cases) year-on-year. In addition, supermarket sales are increasing as high-end chains have begun to allocate spaces for fine wine. However, sales are largely of domestic wines, as imported wines suffer from high retail prices due to import tariffs and consumer unfamiliarity.

Broadening Consumer Palate

Indian wine drinkers are largely upper income earners with high levels of disposable income. Thus, wine is primarily an urban drink with the States of Maharashtra and Karnataka, the Delhi metro area and Goa accounting for approximately 75 percent of consumption.

Despite the touted emerging market, growth in domestic wine consumption has been gradual. India is the world’s largest whisky market, with over 200 million consumers of hard liquor. Indian consumers invariably prefer sweeter drinks with higher levels of alcohol. Encouraging the transition to wine will therefore be no easy feat.

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However, over the next five years, 100 million consumers will reach the legal drinking age of 25 and, by 2017, Indian wine consumption is estimated to rise to 2.1 million cases of wine per year, increasing 73 percent from 1.21 million in 2013.

In addition, wine is becoming increasingly popular among younger generations and women. Furthermore, the recent education push has led to a growing awareness of health issues surrounding consumption of hard liquor.

Therefore, while only a very small percentage of India’s total population has the right combination of religious views, age, location, income and exposure, this amounts to 24 million people, a significant and potentially lucrative emerging market.

Prospects for Foreign Investment

Indian State Governments have exclusive competence to levy excise duties on alcohol and determine their rates. As a result, each state has differing and complex licensing, taxation and registration procedures with regard to manufacturing, labeling, registration, distribution and sale of wine. Furthermore, in many states wine is grouped with other alcoholic beverages such as spirits with regard to taxation and prohibition. Consequently, foreign investment in the industry is marred by difficulty in navigating the fragmented market.

However, India is on track to reduce barriers to investment in wine-producing States in the coming years. Promotion of foreign direct investment (FDI) in India’s wine industry is on the rise, and international cooperation can provide vital market solutions in the form of capital, technology, and expertise.

India’s viticulture industry currently allows 100 percent FDI through the automatic route. Access to reasonably priced quality wines is considered by some to be the key to speeding the development of a wine culture in India. Consequently, some local wineries are working to produce inexpensive sweet wines to cater to the palate of the Indian consumer and expand the market to those with moderate incomes.

While significant challenges remain, investors can expect the industry to become increasingly inviting in the short to medium term and should prioritize the Indian consumer in any attempt to enter the market.

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