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Hotels: Policy play - Views on News from Equitymaster
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  • Apr 13, 2002

    Hotels: Policy play

    2001 was among the worst years for the Indian travel & tourism business. It started with the Gujarat earthquake in January followed by the stock market meltdown in April. Then came the real blows, the 9/11 incident, Jammu & Kashmir assembly attack, December 13 attack on parliament and finally the Gujarat riots at the start of 2002. Counter insurgency measures have also vitiated relations with neighbours. Consequently, India is likely to register negative growth in international arrivals for 2001.

    October through February is the peak tourist season, both domestic & international, reflected in a seasonal upturn in hospitality revenues. However, the unfortunate events washed out much of the gains. This has led to the poor performance of hotel scrips on the bourses over the past twelve months. 2002 also has not started on a very comfortable note. Communal riots are likely to have affected travel into and within the country. Keeping aside sensitivities, for the hospitality industry, it is fortunate that the events occurred in FY02, which was anyway, a wash out.

    Business travel is among the key drivers of the hospitality sector in the country. With economic liberalization being flagged off in 1992, international arrivals in the country increased by 1 m per year over a five year period. New policy measures attracted foreign companies to establish operations in the country or at least to study the feasibility of operations. Therefore, foreign direct investments (FDI) could be an indicator of growth in international arrivals. In the five-year period, from FY97, international arrivals stagnated at 2.5 m per year. During this period, GDP growth cooled down compared to the mid nineties and FDI inflows stayed put at an estimated $2.2 bn per year.

    Poor performance in GDP growth during the concerned period could be due to shackles on the economy with persisting infrastructure bottlenecks and Government vacillating on second-generation reforms. However, in those five years, India had three general elections and five new Governments. Consequently, there definitely could not have been any continuity in economic policy or any other initiatives. We reckon political instability between FY97 to FY00 was the key reason for stalling in private investments, both domestic and foreign and possibly public investments, which could have depressed economic growth rates.

    These factors highlight the importance of stable governments in attracting investments in the economy, which seems to have a corollary effect on the travel and hospitality industry. Besides, stability, the Government should have the ideology and will to take India on the path of economic prosperity. The current NDA Government was elected in FY00 and will complete three years in office. This has given sufficient time for the Government to adopt and follow an economic ideology chalked out by the think tank. Over the past three years, India seems to have benefited from the aforementioned factors.

    The New Telecom Policy '99 (NTP) has revived the once troubled sector, which now attracts maximum FDI in the country. In FY01, we witnessed opening up of the insurance sector, which has seen entry of several foreign players. In the current fiscal, the Government has deregulated the oil & gas sector, which is being eyed keenly by international majors. Also, the Government has relaxed FDI and FII investment norms in the country. Recent reports on higher FDI flows to $3.7 bn in 2001 seem to vindicate the theory and Government policy. Consequently, the corollary is likely to be satisfied.

    Business travel is concentrated in the gateway cities of Bombay, Delhi, Bangalore, Chennai and Hyderabad. In the last three years, hotel capacity has dramatically increased in these cities, which is likely to lead to dilution of the pie. Having said that, with no fresh capacity expected to be commissioned, increased business travel is likely to positively impact business hotels over the next two - three years.
    International arrivals
    (m) 2000 % growth
    India 2.6 6.4%
    China 31.2 15.5%
    Singapore 6.3 10.5%
    Malaysia 10.2 28.9%
    Thailand 9.6 10.7%
    Philippines 2.2 -8.2%
    Indonesia 5.1 7.1%
    * World Tourism Organisation

    Stability at the centre and continuity in policy also has a salubrious effect on tourist travel, as infrastructure bottlenecks are removed. Having said that, tourist travel is more sensitive to internal & external security conditions prevailing in the country. Kargil, mobilization of forces at border and communal conflicts are likely to push the tourists to South East Asian neighbours. Recently, the tourism ministry has released advertisements in leading publications highlighting the attractions of India. Also, a contest is running for a slogan to market the country. State tourism ministries have also started beefing up their advertisement spend. This seems to indicate that the Government is recognizing the importance of the sector in generating employment and forex earnings.

    Tourism is the largest industry in the world. Consequently, it is among the leading sectors in most of the economies. Over the long term, there does not seem to be much reason why such a trend will not be witnessed in India.



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