Global Services Project on Indian Tourism

8/9/2019 Global Services Project on Indian Tourism

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New Delhi, IndiaNew Delhi, India

Project on Global Marketing of ServicesProject on Global Marketing of Services

Supervisor: Professor Tarun DasSupervisor: Professor Tarun Das

GLOBAL MARKETING OF SERVICES

(PGDBM 2005-07)

PROJECT REPORTON

THE INDIAN TOURISM SECTOR- A global perspective.

SUBMITTEDBY:

AMIT CHAKRABARTYLAGAN KAPOOR

MAYANK JAINRIDIMA BHATIA

RINKI AGARWAL


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OBJECTIVE

This paper attempts to identify and develop an insight into the everrising and dynamic Indian Tourism Market, especially in the wake of

increasing globalization and international competition.

The report also studies in detail the current status, strengths andweaknesses of the tourism industry vis--vis the Indian economy andits developments.

Towards the end of the report, the implications of WTO-GATS on theIndian Services Economy in general and tourism sector in particularhave been extracted and analyzed.

INTRODUCTION

Over the past few decades, services have emerged as the single mostimportant contributor towards the growth and gross domestic productin both developing and developed countries.

Services are also the new fulcrum of employment, foreign exchangeand quality up gradation in the new economy and have a particularlycritical role to play in under developed and developing countries. Notsurprisingly services account for 54% of GDP, 26% of employment and

35% of FDI inflows. The cost-quality benefit that Indian servicespromises has ensured that India stands as the 18th largest serviceexporter, globally.

It is in this regard, that the tourism, travel and hospitality sectorsassume primary importance in the future growth and development ofIndian services trade. Indias rich cultural heritage, diverse people andgovernmental support have the potential to propel India to theforefront of global services and export.

The following pages given account the increasing Indian share of the

global tourism market both in terms of revenue, travelers and FDIinflows.


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SITUATION ANALYSIS

It is boom time for India's Tourism sector. Driven by a surge in business travelerarrivals and a soaring interest in India as a tourist destination, the year 2005 hasbeen the best year till date, with foreign visitor arrivals reaching a record 3.92

million, resulting in international tourism receipts of US$ 5.7 billion.

According to global hotel and hospitality consulting firm, HVS International, thestrong performance in tourist arrivals in 2005 can be attributed to a strong senseof business and investment confidence in India inspired by:

India's strong GDP performance

Strengthening of ties with the developed world, and

Opening of sectors of the economy to private sector/ foreign investment.

The efforts made by the Ministry of Tourism & Culture in the last few years have

had a salutary effect on India's tourism industry.

Foreign tourist arrivals are expected to witness a growth of 78 per cent in2006 over 2001 (last 5 years)

Growth in foreign exchange earnings is expected to be of the order of 122per cent during this period.

As per estimates (Ministry of Tourism), on an average, about 3.1 millionadditional jobs per year have been created directly and indirectly in thetourism sector in the last four years.

India is fast emerging as one of the most enticing destinations for the globalleisure traveler. The Readers Travel Awards 2006, conducted by Cond NastTraveller has recently placed India at number four among the worlds must-seecountries, up from number nine in 2003. The Incredible India campaign has alsobeen a huge success.

Size

Tourism is a $32 billion industry in India, 5.3% of GDP

3.3 million international tourist arrivals in India in 2004, an increase of over20% from the previous year

270 million domestic tourists estimated in 2004; the domestic market grewat about 20% p.a. in the last 4-5 years

Only about 100,000 hotel rooms in 1,800 hotels across the country,registered in 2004*

Five star hotel rooms constitute 27%, four-star 7.5% and three-star 22%.

All India industry-wide occupancy of about 70% in 2004-05

Scarcity of rooms in cities like Bangalore has resulted in rates of over$300 per night


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Structure

The industry is dominated by 4-5 large Indian hotel owner-managers The Taj Group, Oberoi, ITC, Leela and Bharat Hotels

Most major international chains like Sheraton/Starwood, Inter

Continental, Hyatt, Marriott, Hilton, Le Meridien, and Carlson arerepresented by management or franchise contracts. Aman and Accorplan to own hotels as well.

Several others such as Shangri-La, Four Seasons, Ritz Carlton andMandarin are in the process of establishing their presence in India,primarily through management contracts

The branded segment represents approximately 30,000 rooms or 30%of the total hotel stock

Compounded growth in the last 5 years, in terms of rooms added, wasthe strongest in the mid market segment

The three-star hotel segment grew at about 11%; followed by the four

star segment at about 9%

Policy

100% FDI is permitted in Hotels and Tourism, through the automatic route

Source: WTTC Country Reports, FHRAI, HVS

Key Statistics - India

Travel & Tourism Revenue ($ billion) 32

Inbound Tourist Arrivals (2004)

million nos. 3.3

Inbound Tourism Revenue ($ billion) 4.0

Domestic Tourism (million nos.) 271

Domestic Tourism Revenue ($billion)

28.0

Outbound Tourism (million nos.) 6.0

Hotel Industry number of hotels 1,800

Hotel Industry number of rooms 1,00,000


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Potential

Favorable demographics and rapid economic growth point to a long termsecular uptrend in the domestic demand for hotels for business andleisure

International inbound traffic is expected to grow rapidly with increasinginvestment and trade activity

Indias rich heritage and natural beauty are just beginning to be marketedto international leisure travelers

The growth momentum in domestic and international travel is expected toreceive a further boost with more budget airlines/lower air-fares, open skypolicies and expected improvements in travel infrastructure (roads,airports, railways)

There are opportunities in all price and value chain segments due to theshortage of hotel stock - over 100,000 hotel rooms need to be added overthe next five years

Hotel-asset construction and ownership Low penetration of brands (about 30%) provides opportunities for

management contracts and franchising with local hotel owners/developers

Serviced apartments in major cities no chain operating in all cities, verylittle stock

Investment opportunity of about $8-10 billion in the next 5 years

Outlook

Foreign tourist arrivals are expected to grow to 5 million by 2007. Coulddouble to 10 million by 2010-12

Domestic tourism is expected to increase by 15% to 20% p.a. over thenext five years

Rapid growth in average room rates is expected to continue until sufficientnew supply comes on stream

Average room rates increased by 21% in 2005 over 2004, the fastest growth ratewas in 4-star and 5-star segments


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An Economic Growth Engine

As an engine for economic growth, the tourism sector cuts across the rural-urbandivide, and bridges economic boundaries. According to The World Travel &

Tourism Councils 2006 Travel and Tourism Economic Research, the travel andtourism sector in India is expected to generate a total demand of US$ 53,544.5million of economic activity in 2006, accounting for nearly 5.3 per cent of GDPand 5.4 per cent of total employment.According to the report, the sector is expected to grow at a rate of 8.4 per cent in2006 and by 8 per cent per annum, in real terms, between 2007 and 2016.

Growth in the tourism sector

GDP Employment Visitor Exports PersonalT&T CapitalInvestment GovernmentExpenditure

Outlook for2006 (RealGrowth)

7.8% 1.4% 10.9% 6.9% 8.3% 7.7%

(Outlook forthe next 10years 2007-2016)

6.6% 1.0% 7.8% 6.7% 7.8% 6.1%

Source: The World Travel & Tourism Council, www.wttc.org

A Room-Full of Opportunity

As travellers surge into India, the demand for rooms, across segments, hasskyrocketed. Hotels in the luxury and business traveller segment are recordingnearly 100 per cent occupancy, spiraling tariffs, and a strain on capacity andmanpower. Anticipating this demand, around 10,856 hotel rooms in Delhi, 9,318rooms in Mumbai, 7,794 rooms in Bangalore and 7,408 rooms in Hyderabad areexpected to be added by 2011, according to estimates by HVS International.


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A Policy Thrust

The objective of the existing Tourism Policy of the Government of India is toposition tourism as a major engine of economic growth and to harness its direct

and multiplier effects for employment and poverty eradication in anenvironmentally sustainable manner.

The present governments major policy initiatives include:

Liberalization in aviation sector

Pricing policy for aviation turbine fuel which influences internal air fares

Rationalization in tax rates in the hospitality sector

Tourist friendly visa regime

Immigration services

Procedural changes in making available land for construction of hotels Allowing setting up of Guest Houses

The Indian Ministry of Tourism has identified 31 villages across the country to bedeveloped as tourism hubs. The states in which these villages have beenidentified include Himachal Pradesh, Gujarat, Maharashtra, Bihar, Karnataka,Madhya Pradesh, Andhra Pradesh, Kerala, Tamil Nadu, Orissa, Assam, Sikkim,Rajasthan and West Bengal.

Open Skies, Open Arms

The governments Open Skies policy, permission for domestic airlines tocommence international flights, start-up of various low-cost carriers, and fleetexpansion by domestic players has created a huge incentive for domestictravellers to explore far-off destinations within and outside India. The boomingaviation business is bringing an ever-increasing number of passengers to India,and pulling Indians out of their homes and into hotels. The numbers, according tothe Ministry of Tourism, speak for themselves:

The number of domestic and international passengers has increasedfifteen-fold to 73.34 million in 2005/06 since 1970.

Domestic air passenger traffic grew by 16.8 per cent in 2005/06 compared

to 2004/05. International passenger traffic observed a growth of 16.9 per cent in the

same period.

Private airlines accounted for 77.0 per cent of the total domestic traffic.


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Health Tourism

India is gradually gathering popularity as a health tourist destination. A study byMcKinsey and Confederation of Indian Industry (CII) says that at its current pace

of growth, healthcare tourism alone can rake over US$ 1.7 billion additionalrevenues by 2012. Medical tourism is now a US$ 299 million industry, as about100,000 patients come each year. The country needs to exploit the costadvantage it can offer to a health tourist, the study said. The biggest driver forhealthcare tourism is the disparity in costs.

A heart surgery in the US costs US$ 30,000 as compared to US$ 6,000 inIndia.

A bone marrow transplant in the US costs US$ 250,000 and US$ 26,000in India.

"With yoga, meditation, ayurveda, allopathy, and other systems of medicine,India offers a unique basket of services to an individual that is difficult to matchby other countries," the CII study said. Clinical outcomes in India are at par withthe world's best centers since India has internationally qualified and experiencedspecialists.

Global hospitality majors make beeline for India

Global hospitality majors like Dawnay Day, Whitbread, Jumeirah, Golden Tulip,Istithmar and Mandarin Oriental are exploring plans of entering joint ventures or

setting up shop independently in the Indian market in an upbeat demandscenario. The objective is to tap various price segments across the sector withlocal partners.

While hotel companies like Golden Tulip are looking to launch budget hotels,others like UKs financial and real estate major, Dawnay Day and WhitbreadsPremier Travel Inn, are launching cookie-cutter business models. The Jumeirahand the Mandarin Oriental are the hi-end luxury hotel brands looking to set basein the country. Dubais leading alternative investment house, Istithmar, is lookingto invest in luxury hotels in key gateway cities around the world and emergingmarkets.

Hotel companies clearly see the vast potential and are rushing in to fill the hugegap between premium five star hotels and low-quality unbranded hotels andguest houses, say sources. The interest level in India is huge, global hotelcompanies are rushing in. Most have beefed up their brand portfolios. Goingforward, we will see multiple units of a brand in key cities. The developers arealso coming to terms with the reality of the market; they are not particular aboutexclusivity and over-exposure of their chosen brand. The country is witnessing a


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spurt in hotel expansion as there is a severe shortage of quality rooms, becauseof increased business activity and a spurt in tourism both by the middle-class andinternational tourists. The demand-supply mismatch is likely to last till mid-2007with most of the fresh supply coming in 2008.

Other significant trends

All India average revenue per hotel has grown significantly, from Rs 9.15crore during 2003-04 to Rs 11.49 crore during 2004-05, and is expected tosee further improvement in the next few years owing to an increase inoccupancy and average rate.

House Profit (Gross Operating Profit after deducting franchise andmanagement fees) as a percentage of revenue increased from 34.8 percent in 2003-04 to 40.7 per cent in 2004-05. The all India average netincome (income before depreciation, interest payments and taxes) per

hotel also increased, from Rs 2.80 crore (34.8 per cent) in 2003-04 to Rs4.08 crore (40.7 per cent) in 2004-05, reflecting the overall health of theindustry.

July has the lowest monthly occupancy in the year. However, occupancyfor all months was higher in 2004-05 compared to the last five years.

FDI guidelines for tourism sector

100% FDI is permissible in this sector. The term hotels include restaurants,beach resorts, and other tourist complexes providing accommodation and/or

catering and food facilities to tourists. Tourism related industry includes travelagencies, tour operating agencies and tourist transport operating agencies, unitsproviding facilities for cultural, adventure and wild life experience to tourists,surface, air and water transport facilities to tourists, leisure, entertainment,amusement, sports, and health units for tourists and Convention/Seminar unitsand organization. Automatic route is also available upto 51% subject to thefollowing parameters. For foreign technology agreements, automatic approval isgranted if

Upto 3% of the capital cost of the project is proposed to be paid fortechnical and consultancy services including fees for architecture, design,

supervision, etc. Upto 3% of the net turnover is payable for franchising and

marketing/publicity support fee, and

Upto 10% of gross operating profit is payable for management fee,including incentive fee.


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Sectoral Policies for Employment Promotion

Indias potential for both domestic and international tourism is greatly under-utilized. Expansion in international tourism could contribute a substantial

expansion in high quality employment opportunities in the years ahead. Thefollowing policy initiatives are especially important from the point of view ofdeveloping tourism:

Hotel room capacity in major Indian tourist centers (especially of the mid-price variety) is not adequate to support an expanded flow of tourists.Local authorities must take steps to earmark available land for hotelconstruction and expedite grant of necessary permissions for setting up ofgood quality hotels with reasonable price

Existing policy on bilateral air agreements needs to be urgently reviewedto ensure sufficient expansion in airline seat capacity to India. This

capacity should not be limited by Air Indias inability to utilize its bilateralrights.

Combined effects of luxury tax and expenditure tax on hotels makesIndian hotels unduly expensive. These taxes need to be moderated

Visa regime needs to be liberalized to allow tourists to obtain a tourist visaon arrival at the airport, as is the practice in many important touristdestinations

CONCLUSION

The global realization of Indias unparallel quality differentiation, price-costadvantage and sourcing avenues for transnational corporations abroad havegiven India an indomitable niche in the international tourism scene. It isimperative to optimize the above superiorities with a cultural embellishment totravel the development road faster and wider. At the crossroads that we stand,the future looks bright and India can only go further.

Global Services Project on Indian Tourism

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