The different regulations and existence of central state tax (CST) payable on goods moving from one state to another are the biggest limit on growth, it said.
According to a report, restrictive regulations including progressive taxation and pricing controls are shortening profit growth in alcoholic beverages market, while keeping high barriers for new entrants in the country.
The ongoing high barriers for new entrants would favor European beverage makers already established in India, said Global research major Moody's in a report.
Moody's Investor Service said, "We believe India's alcoholic beverage market has strong long-term growth potential for European producers. This is supported by a number of factors, including our expectation that India's economic growth will continue to outperform that of its peers in 2015-16".
In India, alcohol production, distribution and sales are regulated by each state. The different regulations and existence of central state tax (CST) payable on goods moving from one state to another are the biggest limit on growth, it said. Furthermore, states set rules on alcohol consumption, set the drinking age and also control distribution and pricing.
Moody further added in existing manufacturers will have strong protection until regulation change, "We do not expect the regulatory environment to materially improve during the next two to three years and this will impede any broad improvement in operating profit margins for alcoholic beverage companies".
Along with other restrictive regulations, liquor prices are dogged by individual state governments once a year and so alcoholic beverage companies operating in India cannot adjust prices based on fluctuations in the cost of raw materials, inflation or competitive pressures.
Moreover, the sector also faces progressive taxation, which further limits price increases. Changes in excise duty in larger states can significantly influence annual volume production. Higher duties can sharply reduce consumption because alcohol is still relatively expensive for many consumers.
Moody's Investor Service expects, in 2015-18 beer volume growth of 8.8 per cent a year; albeit from a low base and spirits segment volume growth to moderate to around 3.7 per cent a year, more in line with the global average.