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Hospitality in dark shadow - Views on News from Equitymaster
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  • Mar 6, 2009

    Hospitality in dark shadow

    India may not be an economy like Mauritius or Maldives that is heavily dependent on tourism for its growth. However, tourism and hospitality in the country do have a strong potential to contribute to future growth. The scope of better infrastructure, well maintained historical and cultural heritage and hosting international games like the Commonwealth further aided the prospective of growth of Indian hospitality sector. A demand supply mismatch and strong tourist inflows had also lent pricing power to the players until mid-2008. However, what followed was reminiscent of cautionary times ahead.

    Source: WTO
    South Asian crisis
    In 2008 worldwide international tourist arrivals was just 924 m, representing a growth of 2% YoY. Financial crisis, rise in commodity and oil prices and sharp exchange rate fluctuations led to the muted growth. To add to the worries, increasing terror attacks, especially in South Asia affected the tourism in this region, especially India.

    Source: WTO
    In the last six months, the growth of tourism in Asia dropped by 3%, after witnessing a double digit growth in 2007 and 6% growth in 1HCY08. The trend of decline in tourist arrivals is expected to continue in the current calendar year. South Asia is world's smallest tourism regions. However, it has been witnessing strong growth over the last 4 years on account of strong economic growth, increasing tourist destinations and government initiatives. Its share of world tourist has increased from 0.3% in 1980's to around 1% in recent times. However, 2008 was a tough year and things are expected to be difficult this year as well.

    Effects on India
    India is already facing pressure due to economic slowdown and the terror attacks in Mumbai on 26th November 2008. Between the period of September 2008 to January 2009 (peak season), the tourist arrivals dropped by 6% YoY. In fact, for the month of January, the occupancy rates dropped by 21% YoY, while room rates declined 14% YoY. With the recent incidents of violence (latest being the attack on Sri Lankan cricket team) witnessed in India's neighbouring countries, the scenario is unlikely to improve in the near term.

    Recent violent events in sub continent
    Nepal - Civil war between monarchist forces and the Communist Party of Nepal.
    Bangladesh - Widespread political and bureaucratic corruption and social unrest. Recently witnessed armed uprising by BDR soldiers
    Pakistan - Coming under the sway of Islamic radicalism, violent political tension and military repression
    SriLanka- Since 1983, there has been on-and-off civil war, predominantly between the government and the Liberation Tigers of Tamil Eelam (LTTE)

    Recent instances of terror attacks in India and its neighbouring countries have made it an unsafe destination. These attacks in the region may also lead to postponing or cancellation of sport events like IPL series, 2010 Commonwealth Games and Cricket World Cup 2011. This may affect the tourist arrivals that were expected to touch around 10 m in the next couple of years.

    Slowdown effects to continue
    As per the Tourism Vision 2020, international tourist arrivals to South Asia was expected to increase to 19 m by 2020, growing at a CAGR of 6.2%. However, these estimates seem to warrant revision in the changed scenario. As per travel agents, the corporate customers in Asia are expected to spend between 15 to 20% less in 2009 compared to 2008. Worldwide, travel spending by clients is expected to decline 10% to 15% YoY. India is expected to see Asia's biggest drop in corporate travel spending, falling 25% this year compared to 2008. Having said that, while we remain positive on the long term prospects of Indian hospitality sector, one will need to exercise patience and caution in the medium term.



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