New Delhi, India

Project on Global Marketing of Services

Supervisor: Professor Tarun Das

GLOBAL MARKETING OF SERVICES

(PGDBM 2005-07)

PROJECT REPORT
ON

THE INDIAN TOURISM SECTOR

- A global perspective.

SUBMITTED
BY:

AMIT CHAKRABARTY
LAGAN KAPOOR
MAYANK JAIN
RIDIMA BHATIA
RINKI AGARWAL
OBJECTIVE

This paper attempts to identify and develop an insight into the ever
rising 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 and
weaknesses of the tourism industry vis-à-vis the Indian economy and
its developments.

Towards the end of the report, the implications of WTO-GATS on the

Indian Services Economy in general and tourism sector in particular
have been extracted and analyzed.

INTRODUCTION
Over the past few decades, services have emerged as the single most
important contributor towards the growth and gross domestic product
in both developing and developed countries.

Services are also the new fulcrum of employment, foreign exchange

and quality up gradation in the new economy and have a particularly
critical role to play in under developed and developing countries. Not
surprisingly services account for 54% of GDP, 26% of employment and
35% of FDI inflows. The cost-quality benefit that Indian services
promises has ensured that India stands as the 18th largest service
exporter, globally.

It is in this regard, that the tourism, travel and hospitality sectors

assume primary importance in the future growth and development of
Indian services trade. India’s rich cultural heritage, diverse people and
governmental support have the potential to propel India to the
forefront 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 FDI
inflows.
SITUATION ANALYSIS
It is boom time for India's Tourism sector. Driven by a surge in business traveler
arrivals and a soaring interest in India as a tourist destination, the year 2005 has
been 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, the
strong performance in tourist arrivals in 2005 can be attributed to a strong sense
of 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 in

2006 over 2001 (last 5 years)
• Growth in foreign exchange earnings is expected to be of the order of 122
per cent during this period.
• As per estimates (Ministry of Tourism), on an average, about 3.1 million
additional jobs per year have been created directly and indirectly in the
tourism sector in the last four years.

India is fast emerging as one of the most enticing destinations for the global
leisure traveler. The Readers Travel Awards 2006, conducted by Condé Nast
Traveller has recently placed India at number four among the world’s must-see
countries, up from number nine in 2003. The Incredible India campaign has also
been 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 over
20% from the previous year
• 270 million domestic tourists estimated in 2004; the domestic market grew
at 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
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 are
represented by management or franchise contracts. Aman and Accor
plan to own hotels as well.
• Several others such as Shangri-La, Four Seasons, Ritz Carlton and
Mandarin 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, was
the 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

Key Statistics - India

Travel & Tourism Revenue ($ billion) 32
Inbound Tourist Arrivals (2004)
3.3
million nos.
Inbound Tourism Revenue ($ billion) 4.0
Domestic Tourism (million nos.) 271
Domestic Tourism Revenue ($
28.0
billion)
Outbound Tourism (million nos.) 6.0
Hotel Industry – number of hotels 1,800
Hotel Industry – number of rooms 1,00,000
Source: WTTC Country Reports, FHRAI, HVS
Potential

• Favorable demographics and rapid economic growth point to a long term

secular uptrend in the domestic demand for hotels – for business and
leisure
• International inbound traffic is expected to grow rapidly with increasing
investment and trade activity
• India’s rich heritage and natural beauty are just beginning to be marketed
to international leisure travelers
• The growth momentum in domestic and international travel is expected to
receive a further boost with more budget airlines/lower air-fares, open sky
policies and expected improvements in travel infrastructure (roads,
airports, railways)
• There are opportunities in all price and value chain segments due to the
shortage of hotel stock - over 100,000 hotel rooms need to be added over
the 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, very
little 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. Could

double to 10 million by 2010-12
• Domestic tourism is expected to increase by 15% to 20% p.a. over the
next five years
• Rapid growth in average room rates is expected to continue until sufficient
new supply comes on stream

Average room rates increased by 21% in 2005 over 2004, the fastest growth rate
was in 4-star and 5-star segments
An Economic Growth Engine

As an engine for economic growth, the tourism sector cuts across the rural-urban
divide, and bridges economic boundaries. According to The World Travel &
Tourism Council’s 2006 Travel and Tourism Economic Research, the travel and
tourism sector in India is expected to generate a total demand of US$ 53,544.5
million of economic activity in 2006, accounting for nearly 5.3 per cent of GDP
and 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 in
2006 and by 8 per cent per annum, in real terms, between 2007 and 2016.

Growth in the tourism sector

GDP Employment Visitor Personal Capital Government

Exports T&T Investment Expenditure

Outlook for 7.8% 1.4% 10.9% 6.9% 8.3% 7.7%

2006 (Real
Growth)
(Outlook for 6.6% 1.0% 7.8% 6.7% 7.8% 6.1%
the next 10
years 2007-
2016)
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, has
skyrocketed. Hotels in the luxury and business traveller segment are recording
nearly 100 per cent occupancy, spiraling tariffs, and a strain on capacity and
manpower. Anticipating this demand, around 10,856 hotel rooms in Delhi, 9,318
rooms in Mumbai, 7,794 rooms in Bangalore and 7,408 rooms in Hyderabad are
expected to be added by 2011, according to estimates by HVS International.
A Policy Thrust

The objective of the existing Tourism Policy of the Government of India is to

position tourism as a major engine of economic growth and to harness its direct
and multiplier effects for employment and poverty eradication in an
environmentally sustainable manner.

The present government’s 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 be
developed as tourism hubs. The states in which these villages have been
identified 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 government’s Open Skies policy, permission for domestic airlines to

commence international flights, start-up of various low-cost carriers, and fleet
expansion by domestic players has created a huge incentive for domestic
travellers to explore far-off destinations within and outside India. The booming
aviation business is bringing an ever-increasing number of passengers to India,
and pulling Indians out of their homes and into hotels. The numbers, according to
the Ministry of Tourism, speak for themselves:
• The number of domestic and international passengers has increased
fifteen-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.
Health Tourism

India is gradually gathering popularity as a health tourist destination. A study by

McKinsey and Confederation of Indian Industry (CII) says that at its current pace
of growth, healthcare tourism alone can rake over US$ 1.7 billion additional
revenues by 2012. Medical tourism is now a US$ 299 million industry, as about
100,000 patients come each year. The country needs to exploit the cost
advantage it can offer to a health tourist, the study said. The biggest driver for
healthcare tourism is the disparity in costs.

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

India.
• A bone marrow transplant in the US costs US$ 250,000 and US$ 26,000
in 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 match
by other countries," the CII study said. Clinical outcomes in India are at par with
the world's best centers since India has internationally qualified and experienced
specialists.

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 demand
scenario. The objective is to tap various price segments across the sector with
local partners.

While hotel companies like Golden Tulip are looking to launch budget hotels,
others like UK’s financial and real estate major, Dawnay Day and Whitbread’s
Premier Travel Inn, are launching cookie-cutter business models. The Jumeirah
and the Mandarin Oriental are the hi-end luxury hotel brands looking to set base
in the country. Dubai’s leading alternative investment house, Istithmar, is looking
to invest in luxury hotels in key gateway cities around the world and emerging
markets.

Hotel companies clearly see the vast potential and are rushing in to fill the huge
gap between premium five star hotels and low-quality unbranded hotels and
guest houses, say sources. The interest level in India is huge, global hotel
companies are rushing in. Most have beefed up their brand portfolios. Going
forward, we will see multiple units of a brand in key cities. The developers are
also coming to terms with the reality of the market; they are not particular about
exclusivity and over-exposure of their chosen brand. The country is witnessing a
spurt in hotel expansion as there is a severe shortage of quality rooms, because
of increased business activity and a spurt in tourism both by the middle-class and
international tourists. The demand-supply mismatch is likely to last till mid-2007
with most of the fresh supply coming in 2008.

Other significant trends

• All India average revenue per hotel has grown significantly, from Rs 9.15
crore during 2003-04 to Rs 11.49 crore during 2004-05, and is expected to
see further improvement in the next few years owing to an increase in
occupancy and average rate.
• House Profit (Gross Operating Profit after deducting franchise and
management fees) as a percentage of revenue increased from 34.8 per
cent in 2003-04 to 40.7 per cent in 2004-05. The all India average net
income (income before depreciation, interest payments and taxes) per
hotel also increased, from Rs 2.80 crore (34.8 per cent) in 2003-04 to Rs
4.08 crore (40.7 per cent) in 2004-05, reflecting the overall health of the
industry.
• July has the lowest monthly occupancy in the year. However, occupancy
for 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 travel
agencies, tour operating agencies and tourist transport operating agencies, units
providing 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 units
and organization. Automatic route is also available upto 51% subject to the
following parameters. For foreign technology agreements, automatic approval is
granted if

• Upto 3% of the capital cost of the project is proposed to be paid for

technical 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.
Sectoral Policies for Employment Promotion

India’s 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. The
following policy initiatives are especially important from the point of view of
developing 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 hotel
construction and expedite grant of necessary permissions for setting up of
good quality hotels with reasonable price
• Existing policy on bilateral air agreements needs to be urgently reviewed
to ensure sufficient expansion in airline seat capacity to India. This
capacity should not be limited by Air India’s inability to utilize its bilateral
rights.
• Combined effects of luxury tax and expenditure tax on hotels makes
Indian hotels unduly expensive. These taxes need to be moderated
• Visa regime needs to be liberalized to allow tourists to obtain a tourist visa
on arrival at the airport, as is the practice in many important tourist
destinations

CONCLUSION
The global realization of India’s unparallel quality differentiation, price-cost
advantage and sourcing avenues for transnational corporations abroad have
given India an indomitable niche in the international tourism scene. It is
imperative to optimize the above superiorities with a cultural embellishment to
travel the development road faster and wider. At the crossroads that we stand,
the future looks bright and India can only go further.