Liberalisation enhances the travel industry - Views on News from Equitymaster

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Liberalisation enhances the travel industry

Jun 2, 2000

Since the liberalisation and the opening up of the Indian economy in the early 90's the tourism industry has picked up considerably. India attracts around 2.4 m tourist visitors every year. This, however, accounts for a miniscule share of world tourist arrivals at around 625 m per annum. Considering that India has a lot to offer in terms of its rich and diverse culture its scope has been vastly untapped. The reasons being inadequate infrastructure facilities, no concerted marketing efforts, inadequate safety measures, low quality public services and expensive hotel tariffs due to high expenditure and luxury taxes.Tourism is the largest industry in the world and as per the World Travel & Tourism Council and World Economic Forum, generates 10 percent of global GDP and employment. In South Asia, the forecast is that by 2010, tourism and hospitality will contribute to around 12 percent of the region's GDP and 10.5 percent of total employment. The fact remains that tourism is important from the point of view of India's economy too as it is India's third largest earner of foreign exchange. If serious steps are taken to promote India as a prime tourist destination as is being done by other countries in Asia like Thailand, Singapore and Hong Kong, India's tourist arrivals can go up many times.

Year Tourist
arrivals (m)
Change
(%)
FY952.1212.8
FY962.298.0
FY972.383.9
FY982.37-0.4
FY992.40 1.3
FY002.51 4.6

Inbound traffic is growing at only 5 - 6 percent per annum, and of the total visitor arrivals around 35 percent are estimated to come here for business purposes, 45 percent for tourist purposes and 20 percent to meet family and friends. With liberalisation the number of inbound business travellers went up as foreign direct investment to India has picked up due to the entry of FIIs and MNCs. As a result of this, domestic business travel too has picked up. On the tourist side, however, arrivals have been growing slowly, as bottlenecks have played a negative role and discouraged tourists from coming to India. The expensive and low quality 3 - 4 star budget hotels and inadequate infrastructure are the main reasons for this decline.

The outbound traffic from India has however been growing very rapidly due to the growing middle class. Outbound travel has more than doubled in the last couple of years. The reasons for this primarily being higher salaries, awareness and impact of the western culture. RBI's liberal regulations since 1994 like the increase in the basic travel quota (BTQ) for foreign exchange going up, has given a fillip to outbound leisure and business travel. Outbound leisure business is growing at 30 percent per annum currently.

The business of money changing has undergone change with the growth in inbound and outbound traffic, as the volumes of foreign exchange bought and sold is much higher now than before the liberalisation of the economy. The market is divided into wholesale and retail. In the wholesale segment whereby banks and authorised forex dealers exchange surplus currency from hotels and full fledged money changers, the margins are lower (0.7-1 percent) and this segment is driven more by volumes. In the retail segment where forex currency is exchanged over the counter mainly for travel, margins are higher and range from 1- 2 percent while volumes are lower.

As inbound activity is higher during the months of October to March, encashing of travellers cheques and currency is higher during this period. Outbound activity is higher during April-September which leads to a higher sale of currency and travellers cheques during this period. The main players in the travellers cheque market are Thomas Cook and American Express.

The smaller agencies, due to their lower overheads are able to provide cheaper tickets and tours. Though the larger players do provide many value added services besides ticketing and tours organising, they too have had to compromise on pricing in order to increase their market share as competition is stiff. As the Indian middle class consumer is still very price sensitive, the Indian outbound market will always be competitive in pricing.

The big players in the tours market are SOTC, Thomas Cook and Travel Corporation of India. These companies have tie-ups with agencies, cruise and tour companies around the globe. In future with higher competition there will be many mergers and acquisitions in this sector. This will lead to consolidation, as the smaller agencies will cease to exist and the large brands will rule the roost.

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