Riding high

COVER STORY: TRAVEL & TOURISM

As interest in India soars, the travel and tourism industry sees an unprecedented boom, though challenges still abound.

If ever there was a better time to travel to India, then this is it. No doubts about it, India's tourism and hospitality sector is riding a high wave. Consider the following:

The year 2006 saw foreign visitor arrivals reaching a record 4.5 million

Foreign exchange earnings from tourism for 2006 were $5931 million, up 17.9 per cent over 2005

Global players like Dawnay Day, Whitbread, Jumeirah, Golden Tulip, Istithmar and Mandarin Oriental are poised to set up shop in India

Local and foreign hospitality companies are likely to invest close to $1 billion in the next two years

Bangalore is to add 6,000 hotel rooms and apartments by 2012

The Royal Indian Raj International Corporation and Choice Hotels India will build 100-125 budget hotels in the country

The Starwood Group is to roll out 15 Aloft Hotels in India in three to five years

The Readers Travel Awards 2006 conducted by Conde Nast Traveller placed India at fourth place among the world's must-see countries, up from ninth place in 2003.

India has quietly crept up onto the world's radar. It was the theme country at the ITB Berlin 2007, which had 10,000 exhibitors from 180 countries and regions. It was even the country of focus at last year's Frankfurt Book Fair. The Indian economy has been on a roller coaster ride. The rub-off effect on the travel and tourism sector, which contributes 5.9 per cent of GDP and employs 41.8 million people, was inevitable.

Growth of over 8 per cent is propelling business and leisure travel to India to new heights. India is expected to be the third fastest growing nation in terms of tourism over the next decade, according to a World Travel and Tourism Council (WTTC) study, with expected annual growth of about 8 per cent up to 2016.

Says Amita Sarkar, who tracks the sector at the Federation of Indian Chamber of Commerce and Industry (FICCI): "Both Central and State governments realise that there are economies that thrive only on tourism"" like Malaysia, Mauritius, Bhutan, Nepal, Sri Lanka and Thailand"" and India can be one of them."

Foreign tourist arrivals grew to 4.5 million in 2006, up 13 per cent over 2005, and reflecting an annual average growth rate of nine per cent since 2000. Over the last few months, tier-II cities like Jaipur, Gurgaon and Pune (leave alone Hyderabad and Bangalore) have seen growth in both occupancy and room rates. While occupancy in these markets is around 75-80 per cent, room rates are up by 15-20 per cent.

Last year was also the fourth successive year showing a double-digit increase in foreign tourist arrivals. Moreover, arrivals recorded double-digit growth in all 12 months of the year"" even during the lean summer and monsoon months. Domestic tourism is also on the rise. With incomes increasing, Indians' have transformed their concept of a holiday. In 2006 more than eight million Indians travelled abroad, compared to seven million in 2005.

One more contributor to the upbeat tourism scenario, in no small part, has been the booming aviation sector. The new breed of budget airlines has opened up the skies, revolutionising the way Indians travel. The five major airports"" Mumbai, Kolkata, Delhi, Chennai and Thiruvananthapuram"" recorded a 42.9 per cent growth in passenger traffic in April-June 2006 (over April-June 2005) compared to 19.8 per cent growth in the same quarter of 2005 over 2004.

More for less

India has a shortage of 115,000 hotel rooms, which has pushed up average room rates by 18-22 per cent annually. That's why established hotel chains- Indian as well as foreign- are scaling up their operations in the country. According to Knight Frank Research, since 2004 there has been a slight shift in room demand from the premium segment to the budget segment, due to the increase in room rates.

The sector has been attracting a bevy of new entrants. The latest in line, after the Nusli Wadia group, to enter the supply-deficient hospitality sector is the Mukesh Ambani-controlled Reliance Industries, which intends to set up all categories of hotels- luxury, business and budget- across the country.

Even foreign majors such as Golden Tulip and the Starwood Group are looking at this segment. The Starwood Group, which operates leading hotels such as Le Meridien, Sheraton and Westin, plans to roll out a chain of 15 Aloft Hotels, its budget segment, in India in three to five years. Initially, the group plans to open Aloft Hotels in Mumbai, Delhi, Pune, Bangalore and Hyderabad.

The New Delhi-based real estate giant DLF Ltd has forged a joint venture with Hilton International to build 75 hotels and service apartments. Groups such as Royal Indian Raj International Corporation has announced a tie-up with Choice Hotels India to build 100-125 budget hotels in Delhi, Mumbai, Hyderabad, Bangalore, Goa and Pune by 2010.

ITC's Fortune chain is also getting its feet wet with India's first rural hotels initiative, branded Fortune Lodge. ITC plans to build at least 30 such lodges. Visakhapatnam-based SRI Hotels and Restaurants Private Limited, a newly-incorporated hospitality group, is planning to set up more budget hotels in the state under the 'Orange' brand. The first of these 'Orange' budget hotels is coming up at Saraswathi Junction in Visakhapatnam.

"" Nupur Amarnath

According to data compiled by the Ministry of Statistics and Programme Implementation, the domestic terminals of the five airports handled 97.89 lakh passengers in April-June 2006, compared to 68.49 lakh passengers in April-June 2005. In sharp contrast, the international terminals of the five airports handled 44.12 lakh passengers in April-June 2006, posting only 13.2 per cent growth over the 38.96 lakh passengers handled during the corresponding period of the previous year.

Domestically, air travel has also been an attractive option because of low air fares as a result of competition between the budget airlines. During April-June 2005, there was only Air Deccan to cater to the middle class. Now we have SpiceJet and Indigo coming into this domain, with every airline trying to outdo the others in offering the best deals. More airline operators are coming up to handle the increasing number of foreign travellers. Over the next 10 years, the number of foreign tourists coming to India is expected to touch 40 million. Simultaneously, the modernisation of Mumbai and Delhi airports is expected to further boost tourism.

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, sending tariffs soaring and causing a strain on capacity and manpower. Anticipating this demand, around 10,856 hotel rooms in Delhi, 9,318 rooms in Mumbai, 6,000 rooms in Bangalore and 7,408 rooms in Hyderabad are expected to be added by 2011.

India has also made a mark on the world's psyche after the hugely successful Incredible India campaign. This promotional campaign by the Ministry of Tourism, showcasing India abroad, was launched in 2002. The target was to see five million foreign visitors in the country and the target is set to be achieved this year (2007). A sum of $16.2 million was spent in 2006 on the campaign to promote tourism in the domestic and overseas markets.

Another factor contributing to the hotel boom is the Commonwealth Games to be held in New Delhi in 2010. The authorities in Delhi have identified 35 sites to develop hotels. The government is planning to spend over $55.5 million in giving a facelift to Ashok Hotel, Samrat Hotel and Hotel Janpath in New Delhi (For more details see box).

Even as tourism is on the rise at the pan-Indian level, some states are biting off a larger share of the pie than the rest. Rajasthan, Goa and Kerala are taking the lead. "New states like Chattisgarh and Uttaranchal have been quick to realise the importance of tourism early on," says Sarkar. In fact, Chattisgarh gives as much importance to tourism as to industry and minerals.

Including even Andhra Pradesh and Jammu & Kashmir in this group, Subhash Goyal, chairman of Stic Travel Group and president of the Indian Association of Tour Operators (IATO) adds: "These states have set good examples for others in respect of their marketing strategies, improving facilities for tourists in terms of infrastructure and good transport and roads." Some states have also capitalised on the Incredible India campaign by aggressively marketing themselves. Examples are Kerala's 'God's own country' and Goa's '365 days of holiday' campaign.

According to a FICCI report, 'Investment Opportunities in Hotel Infrastructure in India', the National Capital Region, Hyderabad, Bangalore and Mumbai, being major hubs of the IT / BPO industry, have seen the highest increase in hotel growth and occupancy rates. With more such hubs and SEZs in the pipeline, the growth in the demand for hotel rooms is expected to spread to major Tier 2 cities like Jaipur and Chandigarh.

Bangalore and Hyderabad have come up as strong business tourism destinations. Bangalore is expected to see a number of new hotels, serviced apartments and mixed-use developments, with about 6,000 rooms likely to be added in various categories by 2012. This is likely to treble the total number of premium hotel rooms and service apartments available in India's IT Capital. The city is set to add over 3,000 rooms in the next five years in the premium category over the existing 2,500 rooms and another 3,000 in the service apartment segment, adding to the 300 recognised service apartments.

Game for more

The plans being formulated to give Delhi a facelift in time for the Commonwealth Games in 2010 are poised to fuel a hotel boom in the National Capital Region (NCR). The government estimates that Delhi needs 50,000 rooms by 2010 to meet the increase in demand because of the Games, whereas proposed investments will add only about 10,000 rooms to the Capital's existing total of some 9,000. The shortfall is an investment opportunity.

The HVS International survey 2006 says that the NCR will take the lead in the number of rooms to be added, and that it also has the largest active development in progress, at 74 per cent. Most of the development is in Gurgaon and neighbouring Noida and amounts to 47 new hotels, serviced apartments and mixed-use developments, with 10, 856 rooms likely by 2010.

The UP Government is planning to add 5,000 rooms in the NCR region, which includes Ghaziabad, Noida and Greater Noida. The Delhi government has identified 35 sites for hotels, while the Indian Railways have bought 100 plots for hotel construction in Delhi.

The Tourism Ministry has floated a 'Bed and Breakfast Scheme' where a house owner can offer up to five rooms, or 10 beds, with air-conditioning and attached western washrooms, to meet the spiralling demand. A law granting exemption from commercial tax on houses letting out their rooms to tourists during the Games is also on the anvil.

This growth is likely to be supported by significantly improved road and transport infrastructure (including a six-lane section of National Highway 8 connecting Delhi and Gurgaon) and privatisation of Delhi airport. The government is even mulling granting infrastructure status to all budget hotels and convention centres set up in Delhi and NCR between December 2006 and the Commonwealth Games. 'Infrastructure' status will enable these units to leverage a 10-year tax holiday as in case of other infrastructure projects such as roads, ports and power, and add to their financial strength.

"" Nupur Amarnath

According to Knight Frank, an international property consultancy, Bangalore is currently facing an acute shortage of hotel rooms. The development of the new international airport has attracted a number of hotel chains to the city, such as Radisson, Hilton in a joint venture with DLF, JW Marriott, Accor with Emaar-MGF and Wyndham with Royal Orchid Hotel, in anticipation of an increase in international business travel to the city once the new airport starts functioning.

Bangalore accounts for 51 per cent of foreign business travellers visiting India annually, and international corporate travellers occupy almost 90 per cent of the hotel rooms. Over the last couple of years, the city's booming IT/ITeS sector has been responsible for nearly 45-50 per cent of the overall demand for rooms in the city.

However, the contribution of the MICE (meetings, incentive, conferences and exhibition) segment is not very significant. It accounts for around 10 per cent of the total revenue. MICE is a segment that Hyderabad is keen to address. This is why Hyderabad has built the first-of-its-kind convention centre in South Asia, with 75,000 square feet of conferencing facilities.

According to the FICCI report, even Agra is being looked at as a MICE hotspot, to change its image from that of a heritage city to that of a business centre, though the meetings segment in this city had already grown to 21.5 per cent in 2004-05 compared to 5.3 per cent in 2002-03. The lower average room rates in Agra, as compared to Delhi, make it a preferred destination for meetings for business events.

With the tourism sector revealing immense potential, global hospitality majors are exploring plans to enter India. These include Dawnay Day, Whitbread, Jumeirah, Golden Tulip, Istithmar and Mandarin Oriental. While hotel companies like Golden Tulip are looking to launch budget hotels, others such as UK's financial and real estate firm Dawnay Day and Whitbread's Premier Travel Inn are launching cookie-cutter business models.

The Jumeirah and the Mandarin Oriental are high-end luxury hotel brands looking to set up base in the country. Dubai's leading alternative investment house, Istithmar, is also looking to invest in luxury hotels. Hospitality majors from India and abroad are likely to pump in close to $1 billion in the next two years into the sector.

The government has proposed a conditional 10-year tax holiday for all tourism projects in the country. Companies will enjoy full tax exemption up to 50 per cent of profits, but will qualify for tax benefits for the remaining amount only if they re-invest it in tourism projects.

The Centre and States in a PPP (Public-Private-Partnership) model will try to increase hotel capacity with the addition of 100,000 new beds planned for the current year. Current efforts to diversify tourist attractions by offering new products such as adventure tourism, wellness tourism, medical tourism and golf tourism are expected to have a positive effect on both foreign tourist arrivals and domestic tourism.

However, long-term growth will depend on the crossing of many hurdles. The hotels and tourism sector is enjoying the benefit of a demand-supply mismatch. It is not happy with what the Budget has brought it. The hotel sector wanted infrastructure status, a hike in the depreciation rate, sops for investment in room capacity and no service tax on services received abroad. But only sops for room capacity have been taken care of.

Over 20,000 more hotel rooms are needed for the Commonwealth Games to be held in Delhi in 2010. The government therefore proposed a five-year holiday from income tax for two, three and four-star hotels, as well as for convention centres with a seating capacity of not less than 3,000. The budget allocation for the development of tourism infrastructure was increased from Rs 423 crore to Rs 520 crore, but the industry feels this increase is inadequate.

The Budget largely ignored the development of airports or ports, which most industry players find disappointing. However, the tax holiday is a major boost for hotel chains like the Taj Group's subsidiary Roots Corporation, ITC Hotels, Sarovar Hotels and Royal Orchid Hotels, which are planning budget hotels.

Complains Goyal of IATO: "We have been pleading for full exemption from service tax, or at least 90 per cent abatement, but to no effect." IATO members had asked for a relaxation in Fringe Benefit Tax on such expenses as travel and telephone, which was also ignored. "Tour operators are being burdened by extra taxation, which cuts down on commission, while hotels have managed the most benefits," he says.

In addition, foreign investors baulk at the idea of investing because of the uncertainty surrounding levels of taxation, such as sales tax, expenditure tax, luxury tax and service tax, which vary from state to state. The FICCI report proposes that taxation norms should be made uniform in all states and brought down to the levels prevailing in the South-East Asian countries. Even value-added tax (VAT) has further added to the burden of taxation.

Besides the obvious

India is gradually becoming popular as a health tourist destination. A study by McKinsey and the Confederation of Indian Industry (CII) says that at its current pace of growth, healthcare tourism alone can rake in over $1.7 billion in additional revenues by 2012. Medical tourism is now a $299 million industry, with some 100,000 patients coming each year.

The country needs to exploit the cost advantage it can offer to a health tourist, the study said. Understanding the need for this, corporate hospitals like Apollo, Fortis and Wockhardt are already eyeing alliances with foreign airlines to reach out to prospective markets.

Besides medical tourism, India is also developing sectors like adventure tourism, heritage tourism, wellness tourism, pilgrimage tourism, golf tourism, eco-tourism, wildlife tourism and Meetings, Incentive, Conferences and Exhibition (MICE) tourism. The scope for theme travel- exploring the Buddhist belt or the tea belt- is also vast in India.

The government has also realized the true potential of cruise tourism, which is estimated to have a market size of 184,710 cruise tourists by 2010-11, growing to a whopping 1.2 million cruise tourists by 2030-31. But if that is to happen India needs to upgrade facilities at not less than seven ports- Kochi, New Mangalore, Marmagao, Mumbai, Kolkata, Andaman and Nicobar Islands and Tuticorin.

MICE is another segment that is fast gaining ground, especially with the growth of business travel. Mumbai, Delhi, Chennai, Kolkata, Bangalore, Hyderabad, Kochi, Pune, Gurgaon and Ahmedabad have come up as important centres for MICE, especially since new special economic zones (SEZs) are coming up close to these centres.

"" Nupur Amarnath

As far as hotels are concerned, says Goyal, "unless land is made available on long-term lease or at concessional rates, the budget measures for tax holidays will not have much impact." According to the FICCI report, limited availability of land in suitable locations, accompanied by consequent high reserve prices, remains the single biggest roadblock to systematic development. Some state governments like those of Andhra Pradesh and Rajasthan have proposed to create land banks, but many others have yet to announce concrete measures on these lines.

There is a consensus within the government on the need to give the tourism sector a boost. However, the supporting infrastructure leaves much to be desired. Says Sarkar of FICCI: "The aviation explosion is a great positive for tourism, but there is a dire need for improving airport infrastructure and capacity. There is so much potential to be tapped. All it needs is a concerted effort."