Scotch in India: The tip of the iceberg?

On paper, Scotch whisky seems ripe for a boom in India. But several obstacles still remain…

Barely a decade ago, the big distillers were almost universally obsessed with China, writes Tom Bruce-Gardyne for WhiskyInvestDirect.

It was the powerhouse among the BRIC economies, and brand owners found the country's double digit growth and sheer size intoxicating. Today the BRICs have crumbled, with Brazilian demand faltering, Russia hobbled by low oil prices and sanctions, and China engaged in a state-sponsored crackdown on conspicuous consumption. Which just leaves India …

Depending on your definition of 'whisky' the Indians are the biggest consumers on the planet. Their molasses-based IMFL (Indian-made foreign liquor) may be closer to rum, but they call it whisky. And judging by brand names like 'McDowell's', 'Royal Stag' and 'Bagpiper' – which, between the three of them, sold just over 50 million cases in 2014 – it would seem they aspire to the Real McCoy.

David Pattison, Edrington's commercial director for the region, is convinced that: "Scotch is seen as the most aspirational and prestigious spirit" in India. It is now the third biggest export market for Scotch by volume, and ninth by value. Yet the presence of Scotch is nothing like as obvious as in other big markets. Some 90% is shipped in bulk, most of which is dribbled into Indian whiskies, a few drops at a time. What is sold as Scotch - either bottled in India like Teacher's, or in Scotland like Johnnie Walker – accounts for a mere 1% of total spirits in India, according to the Scotch Whisky Association.

The reason is obvious – most Indians cannot begin to afford it. A bottle of Teacher's, for example, costs around Rs 1200 (£14) in New Delhi – roughly twice the city's average daily wage. The Indian government does its best to keep Scotch out of reach. Imported spirits are hit with a 152% tariff, which is then followed up with a barrage of local state taxes. Endless EU trade negotiations have failed to lower this protectionist wall, and after Brexit the UK will have to join the back of the queue and start again.

Yet somehow the expense of this heavily-taxed luxury only seems to inflame desire among India's middle classes. Their numbers may be a lot less than once estimated; perhaps 70-80 million in a country of 1.3 billion. But however you define 'middle class', there's no doubt it is growing fast. At 189m cases sold (IWSR – 2015), whisky accounts for just over 60% of spirits in India. Annual growth has slowed recently, from 13% in 2010 to 4% last year. But Scotch has bucked the slowdown, growing at a fairly consistent 10% a year for the past decade.

No wonder Diageo was so keen to gain control of United Spirits (USL), India's biggest distiller, in 2014. Yet it inherited 'a complete mess financially' according to one analyst, and a chairman, Vijay Mallya, who refused to go. This February Mallya, the erstwhile 'King of Good Times' finally departed with a US $75m sweetheart deal from Diageo in his back pocket.

USL is a bottom-heavy juggernaut selling around 120m cases. As a result;  "India makes up roughly 40% of Diageo's volumes, but contributes just 1% to operating profit" claims the boss of USL, Anand Kripalu. Turning it round will take years, and for now Pernod Ricard leads the 'prestige & above' Indian whisky category with a 48% share. Both firms have some real distribution muscle and a portfolio of brands waiting for lift-off. If middle class incomes keep rising and taxes come down, the Scotch whisky boom could be spectacular.

Then again, this being India... don't bet on it.