India continued to witness robust trends in the tourism sector in 2007. During the year, an estimated 4.4 m tourists visited the country, registering a growth of 14% YoY.

Though the demand supply mismatch continued to exist, exorbitant room tariffs took a toll on occupancy rates in five-star hotels. With room rates ruling at around Rs 13,000-17,000 per night, occupancy levels in most metro markets except Mumbai witnessed a dip.

As a result of the high room rates in branded hotels, unregulated, unorganised hotels and guesthouse segments have reared their heads. However, on account of the strong economic growth and rising propensity to spend, the Indian hospitality sector aspires to become the forerunner of India's economic growth albeit with a fair amount of support required from the government.

Industry Wish List

FICCI's wishlist

• The hotel industry to be treated at par with other infrastructure sectors such as roads, ports and telecommunications and be granted full tax benefits.
• The tax benefit given to the two-star, three-star and four-star category (constructed and start functioning within the period 1st April 2007 to 31st March 2010 in the National Capital Territory of Delhi and districts of Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad) should also be extended to newly constructed hotels of five-star category.
• Further, the tax stimulus of a 100% tax holiday benefit for ten years instead of five years should also be given as it involves huge investments and high risk in terms of uncertainty of revenues after the Commonwealth Games.
• The industry is also seeking rollback of the depreciation rate for hotel buildings to 20%, which was reduced to 10% in 2003. It said that a hotel's building were the main plant and machinery for the hotel and because of the nature of the business, they had to be renovated, refurbished and refurnished on a continuous basis and should be treated differently from other buildings.
• Hotels should be exempted from paying service tax on services received from Foreign Tour Operators, as it is one of the prime foreign exchange earners.
• Also, proper infrastructure development is needed. Private sector participation needed to upgrade infrastructure in several identified tourist circuits.

Budget over the years

Budget 2005-06

• Corporate tax reduced to 30% from the present level of 35%, with an increase in surcharge to 10%.
• Industry not granted "Infrastructure" status, as demanded by players.
• Significant thrust on Infrastructure building and road development. An outlay for National Highway development increased from Rs 65 billion in 2004-05 to Rs 93 billion in 2005-06.
• Government proposed to establish an SPV to finance infrastructure projects in specified sectors like roads, ports, airports and tourism, which could draw upon the country's foreign exchange resources for financing necessary imports. The cumulative borrowing limit for 2005-06 was set at Rs 100 billion.
• The National Urban Renewal Mission was designed to upgrade urban infrastructure. It covered seven mega cities, with a population of over a million, and some other towns. An outlay of Rs 55bn has been made in 2005-06, including a grant component of Rs 16.5bn for the Mission.
• Projects such as the Mumbai Metro Rail Project, the Mumbai Trans Harbour Link, the Mumbai Western Expressway Sealink and the Bangalore Metro Rail Project to funded through this mission. Steps to be taken to make Mumbai a regional financial center.

Budget 2006-07

• Plan allocation has been increased from Rs 7.8 billion to Rs.8.3 billion for the tourism sector.
• The FM had announced the development of 15 tourist destinations and circuits.
• Also, 50 villages with core competency in handicrafts, handlooms and culture, close to existing destinations and circuits will be identified and developed.
• Service tax rate increased from 10% to 12%.
• Peak customs duty reduction

Budget 2007-08

• Provision for building tourist infrastructure has been proposed to increase from Rs 4.2 billion in 2006-07 to Rs 5.2 billion in 2007-08.
• 20,000 more hotel rooms are required for the Commonwealth Games. To cater to the demand for rooms 5 year holiday from income tax for 2 star, 3 star and 4 star hotels as well as for convention centres with a seating capacity of not less than 3,000 has been proposed.
• They should be completed and begin operations in the National Capital Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar during the period April 1, 2007 to March 31, 2010 to avail the tax holiday.
• Venture capital funds that invest in hotel-cum-convention centres of a certain description and size will enjoy a pass through status.
• Higher investments have been made to develop roads and infrastructure facilities.

Key positives

India as a tourist destination -- With 20% compounded growth in foreign tourist arrivals over the last four years, India continues to be a hot tourist destination. Though India accounts for a fraction of global tourist flows currently, the country is expected to increase its market share over the long-term.

The recognition of tourism as an industry in the recent past has paved the way for increased competition. This, we believe, is likely to shape industry fortunes for the better.

Infrastructure development -- The road development project along with other aspects like airport modernisation and port development is likely to result in increased economic activity.

With air tariffs also falling steeply owing to increased competition, the tourism sector is expected to witness increased inflow of foreign tourists, higher inbound tourist flow and development of new tourist destinations within the country.

New segments -- Sensing the enormous potential, new segments have emerged in the country. Budget hotels, service apartments, mid-market segments have started gaining importance.

Further, people are also visiting the country for medical tourism, wild life, spa and other non-work purposes.

Key negatives

Getting expensive: The room rates on account of demand supply mismatch continued to touch new highs. This resulted in a drop in occupancy rates. Also, India compared to its Asian peers looked expensive as a tourist destination.

As a result of the high room rates in branded hotels, unregulated, unorganised hotels and guesthouses segments have emerged, thus increasing competition.

Regional hubs developing -- As mentioned above, though India has the potential, in the tourism sector, competition is more global. The rapid growth of China, select South East Asian countries and the pace of development in the Middle East could affect India in terms of its ability to attract tourists into the country.

Susceptible to geo-political events -- Since tourism is a global phenomenon, any adverse developments on the geo-political front are likely to impact global tourist flows. India is no exception to the same, as was evident during events like September 11, Iraq war and SARS.

Powered by Equitymaster.com, an independent equity research initiative. Equitymaster is currently celebrating its 10th Anniversary. To know more about the special offers on its equity research subscription services, please click here.