FDI in India’s Tourism Industry

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By Ankit Shrivastava, Dezan Shira & Associates


Feb. 14 – The Indian tourism industry is interwoven with the country’s monetary development. As GDP continues to mature, it increases deals in fundamental infrastructure like transportation systems, which is necessary to support the tourism industry. The hotel industry is directly connected to the tourism industry in India. Over the last decade, India has transformed into one of the most popular tourism destinations in the world, largely as a result of the government’s “Incredible India” campaign which showed India in a new light to overseas tourists. In 2005, the appearance of global tourists improved by 16 percent, leading the resurgence of Indian tourism.

As new destinations extend the tourist entry is likely to rise. Numerous procedures have been taken in infrastructure, which will shine Indian hospitality for overseas guests.

Under the automatic path, 100 percent FDI is allowed in hotels and tourism. Travel and tourism is a US$32 billion business in India with an input to 5.3 percent of Indian GDP. Many worldwide hotel groups are setting up their businesses in India and many global tour operators are establishing operations in the country.

A brief on hotel and tourism industry in India
The hotel and tourism industries have been growing rapidly in recent years, bringing in huge revenues through overseas as well as domestic tourists in many parts of India. There was a key rush to inbound tourism in India in 2006 and a double-digit increase in the coming of overseas tourists to India in the same year. Tourism is one of the third largest revenue generators of foreign exchange for India and also employs one of the highest numbers of manpower. Conde Nast Traveler, one of the most decorated travel magazines, rated India as one of the hottest destination in the world. According to the World Tourism Organization, India will be the leader in the tourism industry in South Asia with 8.9 million arrivals by 2020. India is gradually emerging as the second most rapidly increasing (8.8 percent) tourism economy in the world over 2005-14 according to the World Travel & Tourism.

FDI in tourism
With a view to stimulate domestic and international investments in this sector, the government has permitted 100 percent FDI in the automatic route –allowing full FDI into all construction development projects including construction of hotels and resorts, recreational facilities, and city and regional level infrastructure. 100 percent FDI is now allowed in all airport expansion projects subject to the condition that FDI for upgradation of existing airports requires Foreign Investment Promotion Board (FIPB) approval beyond 74 percent. A five year tax holiday has been given to organizations that set up hotels, resorts and convention centers at specific destinations, subject to fulfillment with the agreed conditions. Some international hospitality majors such as Hilton, Accor, Marriott International, Berggruen Hotels, Cabana Hotels, Premier Travel Inn (PTI) and InterContinental Hotels group have already announced major venture plans in India in recent years. It is expected that the hospitality division is expected to see an additional US$11.41 billion in inbound investments over the next two years.

Types of tourism

Medical tourism
The medical tourism industry in India has been estimated to increase to around US$20 billion over the next couple of years. Expenditure of key health care treatment is up to 30 percent low in comparison to the United States and United Kingdom. Medial tourism in India emerges as a huge money generator. India has been promoting its healthcare tourism by giving the tourists with personal healthcare services. It is projected that the total marketplace for medical tourism will reach US$2 billion by 2012, representing a CAGR of 60.69 percent.

Spiritual tourism
India is spotted with a number of spiritual destinations. A visit to them is important as one of the corridors of spiritual self-discovery. In fact, divine tours of India allow one to care for the spirituality within oneself by delving deep into the rich religious history of the country. Spiritual tours of India take one to quite a few spiritual destinations in the country which are famous for their religious and spiritual significance. Spread all over India, these spaces give tourists the delight and peace that may have eluded them for long and which may have stimulated them to visit the piously and religiously rich India.

Rural tourism
Rural India has much to present to humanity. As a historic civilization rich in arts, crafts and culture, rural India can come forward with significant tourist spots. Those in the urbanized world who have an enthusiasm for facts about customary ways of life, arts and crafts will be fascinated to visit rural India if the notion of rural tourism is marketed well. Without any promotional movement for rural tourism, thousands of overseas tourists visit rural areas in Rajasthan, Gujarat and south India every year. This is evidence of feasibility on the idea of rural tourism. The government has realized what rural India can offer to the world. The 10th plan has acknowledged tourism as one of the main sources for generating jobs and promoting sustainable livelihoods. Rural tourism can also reduce absolute dependence on agriculture. It has now revived traditional crafts, buildings, art etc. It also provides prepared marketing opportunities for rural artisans. Handicraft exports from Rajasthan totalled about INR4 million in 2009. The union tourism ministry and UNDP have launched an endogenous tourism projects for the development of rural tourism in India. The UNDP has devoted US$2.5 million for the project. UNDP will assist in areas of capacity building, participation of NGOs, local communities and artisans.

Adventure tourism
The continuous scale of adventure tourism in India is mainly because of its different geography and climate. On land and water, underwater and in the air, you can enjoy whatever form of adventure in India you want. The hilly regions present many opportunities for mountaineering, rock climbing, trekking, skiing, skating, mountain biking and safaris, while the flowing rivers from these mountains are ideal for river rafting, canoeing and kayaking. The oceans are not far behind as well. The huge and profound area of water provides many chances for adventure sports in the form of diving and snorkeling.

MICE tourism
The latest type of business tourism is the fastest growing part of the international tourism market. It caters to a variety of forms of trade meetings, international conferences and conventions, events and exhibitions and is gradually but progressively capturing the interests of every major hotel. Being a hot favorite traveler target, India is also very much into the business. It is expected that the total world market for MICE tourism was in surplus of US$280 billion. Of this, the allocation of Asia-Pacific region alone was US$60 billion and India’s share would be US$4.8 billion. The ministry of tourism has initiated the expansion of mega destinations and circuits with investments of INR2 billion for each mega destination and INR5 billion for circuits.

Ecotourism has measured the highest growing market in the tourism industry, according to the World Tourism Organization, with a yearly growth rate of 5 percent worldwide and representing 6 percent of the world GDP and 11.4 percent of all consumer spending. Primarily, ecotourism means creating as small an environmental impact as possible and serving to maintain the original nature, so encouraging the conservation of wildlife and habitats when visiting a place. This is a responsible form of tourism and tourism expansion, which encourages going back to normal products in each part of life. It is also the key to sustainable ecological development.

Outbound tourists from India have also improved in modern years, with more and more Indians undertaking overseas trips. Many global tour operators have started operations from India trying to tap the growing marketplace of foreign tours from India. This has also led to amplified foreign direct investment in India’s hotel and tourism industries. The numbers of Indian outbound tourists are likely to reach 20.5 million by 2015. Domestic tourist visits are likely to rise with a CAGR of 12.29 percent for the time spanning 2008-2015. International tourist arrivals in India are anticipated to grow with a CAGR of 7.9 percent for the period spanning 2010-2015.

Suggestions by the Reserve Bank of India
The RBI has recommended a quarterly or annual reporting on the delivery and procedure of foreign inward payment, granting permission or license for running a hotel under which construction of the hotel should be finished within a given period, and norms under which the investor or the investee company would not be allowed to sell undeveloped plots. There are many limitations on buying of assets by non-residents. If they are establishing an office in India, which is not just a liaison office, the RBI allows them to acquire fixed property. In such cases, a statement is necessary to be filed with the RBI within 90 days of acquiring the property. Overseas citizens of non-Indian origin who have acquired fixed property in India cannot relocate the property without the RBI’s consent.

Suggestions include the following:

  • Lock-in period for original investment, which means foreign investors cannot sell and walk out of the Indian company whenever they choose
  • A monitoring device to check FDI violations
  • A quarterly/annual reporting on receipt and usage of foreign inward remittance
  • Granting permission/license to run hotel under which construction of hotel should be completed within stimulated period
  • Clauses under which investor/investee company would not be allowed to sell undeveloped plots
  • Put onus of checking FDI violations on administrative ministry or states concerned

Future trends
According to the Indian Tourism ministry, the Indian tourism industry would be the third largest foreign exchange earner in the country in the next three year. Till the end of 2012, foreign tourists will grow at the fastest pace in comparison with the last decade and it is estimated that tourism in India could contribute US$1.8 billion to India’s GDP. These statistics show the seriousness of the Indian government towards tourism. Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Karnataka and Rajasthan are the leading tourism destinations in India in terms of total tourist arrivals. In the next few years, some new states should come into the picture such as Uttaranchal, Madhya Pradesh and a few others. According to the ministry, it is predicted that around US$10 billion is required for the development of Indian tourism in the next five years. When we think of long term capital requirements for all the states, it would be nearly US$56 billion in the next 20 years.

Why one should invest in Indian tourism

  • Economic liberalization has given a new force to the hospitality industry
  • The Indian hospitality industry is increasing at a rate of 15 percent yearly. The current gap between supply and demand is predicted to grow as the economy opens and grows
  • The government predicted an additional requirement of 200,000 rooms in the next five years
  • Due to stable political and social conditions in India, there will be an increase in the number of tourist arrivals. India is ranked fourth among the world’s must see countries
  • The present government in its process has taken a few projects like opening of the partial sky policy. This allows private domestic airline operators to fly on the Indian skies
  • An increasingly growing middle class group, the arrival of corporate incentive travel and the multinational companies into India has bright prospects for tourism. India’s easy visa rules, public freedoms and its many attractions as an ancient civilization makes tourism development easier than in many other countries
  • The 5 star hotel sector has increased the fastest during the last five years at a CAGR of 12 percent. In the coming years, this sector can be divided into three sub-segments Luxury, Business and Leisure. The growth in this segment shows that segment of travelers coming into India. In the last few years India has seen a large inflow of business travelers in the country courtesy to relaxation of the government’s stand on FDI for most of the sectors in the country
  • It costs an average of US$50-80 million to set up 5 star hotels with three hundred rentable rooms in India. The gestation period is generally between 3-5 years

Some suggestion to attract more FDI in tourism

  • Reconsideration the taxation policy on the hotel industry
  • Service tax should be calculated based on the value of services given by the company

There are certain points which make India a hot destination for investment in tourism department. First is the positive attitude of the government, who has allowed 100 percent FDI in this sector. Last year in the Indian union budget 2010, the Indian government has given more than INR1,000 crore to the Ministry of Tourism. Second, the tax holidays are being given to the organizations who want to invest in this sector. All this makes India’s tourism industry a great investment option.