As the Indian Budget approaches, Scotch whisky exporters are looking for reform of what is seen as a grossly inequitable duty system. But in spite of determined lobbying, writes Richard Woodard, the grounds for optimism are slender.

As the end of February approaches and the days begin to lengthen, the thoughts of Scotch whisky exporters turn to one thing and one thing only: the Indian duty regime.

India's annual Budget measures are announced on 28 February and, if they're honest, those exporters are looking forward with more of a sense of hope than expectation.

Although the country's crippling duty burden on imported spirits has been reduced from 700% to 525% in recent years, last year's Budget standstill was a huge disappointment both to distillers and to the Scotch Whisky Association (SWA), which has campaigned tirelessly on the issue.

Not that that will deflect the SWA in its quest. Representatives have visited India twice in the past two months, putting the case for the kind of regime change which could open up a market of huge potential for its members.

For those unfamiliar with India's federal duty system, it consists of a Basic Customs Duty (BCD) of 150% - in line with GATT recommendations, but very high compared to Brazil and China, for example - and an Additional Duty (AD) of 25% to 150%, equating to an overall duty burden of between 212% and 525%.

In theory, AD is levied in place of State-level excise duty, but in practice, says the SWA, not only is it levied at a much higher rate on imported spirits than on domestic ones, but some states enforce State-level excise duty as well, creating a system of double taxation. The result, says the SWA, is a protectionist tax regime which is in breach of India's WTO obligations.

So what would the SWA like to see instead? A halving of BCD in this year's Budget to 75%, followed by a further reduction to 50% in 2007; and, crucially, the elimination of AD in favour of a Federal or State levy identical to the excise duty applied to domestic spirits - to coin a phrase - a level playing-field.

In purely economic or international trade terms, it's hard to pick holes in the SWA's argument. If a legally-traded bottle of premium Scotch costs Rs2,500 and a 'grey' import Rs1,600, reducing the price of the former to Rs2,000 under the new system would start to eat into the grey market, earning the government huge amounts of additional revenue.

"It will encourage consumers to purchase through legitimate channels, but at the same time will boost government revenues," argues David Williamson, public affairs manager at the SWA. The association's assertions that up to 97% of that grey market can thus be legitimised, adding Rs200m to government tax revenues, may be a little over-optimistic, but that should not diminish the central argument.

However, budgets are not just about economics and fair trade - in fact, they're not even primarily about those things: they're about politics. And politics and protectionism in favour of domestic producers have long gone hand-in-hand.

Witness the recent comments of Vijay Mallya, chairman of the UB Group, India's biggest distiller, and also an Indian MP. His argument that India's duty regime should stay in place until Indian 'whisky' is given a 'level playing-field' (that phrase again) in the EU is an audaciously opportunistic way of turning the argument on its head.

The SWA points out that, in the EU, whisky has to be made from cereals, at least 40% abv and aged for three years or more, whereas products like UB's McDowell's No. 1 are derived from molasses. Furthermore, Indian spirits have tariff-free access to the EU anyway - they just can't call themselves whisky unless they play by the rules.

Not everyone in India has reacted in quite the same way, however. Radico Khaitan, the sub-continent's second largest drinks company, is currently building a 270m-litre grain distillery in Rampur, Uttar Pradesh, with the aim of competing in the US and European markets. In a supremely ironic move, the company has also been exempted from paying export duty for three years by the Indian government, as long as it hits revenue targets.

It suggests that, deep-down, Indian companies are being more realistic about the long-term future than their government. The European Commission is concerned enough about the duty situation to have launched an investigation under the EU Trade Barrier Procedure, and will report back with its findings within a couple of months. With all due respect to the hard work of the SWA, criticism at such a high level is more likely to concentrate minds in New Delhi.

That will come too late to influence this year's Budget, however, and perhaps distillers and the SWA should not raise their hopes too high. Predicting what the Indian government will do next is a notoriously imprecise science, and patience will certainly be required on the part of those lobbying for change. But while reform is possible and even quite likely - eventually - it is very unlikely to go as far as the SWA recommendations.