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Hotels: Neutral impact of FDI

May 10, 2001

The government has increased the foreign direct investment (FDI) limit for the hotel and tourism industry to 100% from the earlier 51%. In the past few years the FDI in this sector has been minimal due to lack of adequate infrastructure available across the country. Despite the FDI limit being 51% earlier, the Indian hotel sector has failed to attract much of FDI. Most foreign chains have been more keen to have marketing and management tie-ups with hoteliers across the country. The major chains which already have their presence in India are Mariott, Inter-Continental, Meridien, Sheraton, Kempinski, Raddison and Holiday Inn. Majority of these are management tie-ups with Indian hotel companies.

The main reason behind foreign chains not investing in companies is that many prefer to tie-up with up and running hotels in the sector, instead of starting from scratch. The scarcity of land in the two largest hotel markets of Mumbai and Delhi is one of the prime reasons which acts as a deterrent. Besides the time taken to build a hotel varies between 3-4 years on an average to set up a hotel.

Also property prices in the larger cities of India are at par with other international cities, this too acts as a negative as investment requirements are very high. Considering that it takes around five to six years for a five star metro city hotel to break even and most of the larger foreign chains want a presence in the five star segment here, this is a hindrance for FDI in this sector.

Internationally in the hotel sector, the tendency to manage and franchise hotels on behalf of owners of the property is very well known. As these foreign chains have entered India only since the past few years they are probably averse to taking investment risks in this sector and are adopting a wait and watch policy. Also if they are keen to invest in this sector in future, they would prefer taking on already running hotels.

The hike in FDI limit hence we feel will not have much of an impact on India's hotel sector in the short to medium term. It is likely that small hoteliers could sell out to these foreign hotel chains, but very unlikely that the bigger chains like Indian Hotels Company Ltd and EIH will sell off to these chains. Hence the impact of this if any on India's hotel sector is of a longer term nature.

Another strategy that these foreign chains could adopt is of entering the hotel market in secondary cities, where investment requirements are likely to be lower. The reason being that the hotel markets of Mumbai and Delhi are fairly saturated. However, first the government needs to step up infrastructure facilities in the smaller cities for FDI to start flowing in here.

The tourism sector however will attract a reasonable amount of FDI, in the areas of cruises, adventure holidays etc. This will give a boost to untapped tourism in the country and bring on the latest technology in this sector.

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