 Budget 2004-05: Hotels
FY04 was a landmark year for the hotel sector. Though growth in the first half was slower, the second half witnessed a sharp upturn in occupancy rates. Operating margins also saw significant improvement. However, given the susceptibility to geo-political events, is this growth sustainable?
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Apart from the emphasis on developing the road infrastructure in the country, the FM announced a higher FDI limit in sectors like telecommunication, civil aviation and insurance. |
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Service tax rate increased from 8% to 10%. Service tax being imposed on business exhibition services, airport services and travel agents.
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As far as the tourism sector is concerned, the increase in FDI limit for civil aviation from 40% to 49% is likely to increase competition in the domestic market. Already, a number of groups have evinced interest in starting a no-frills airline. Cheaper inter-city travel is a big boost for the tourism sector (both inbound and outbound). |
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The impact of service tax on the industry is likely to be short-term. |
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The Indian hotel industry witnessed a record level of occupancy in 4QFY04 after three years of downturn. Average room rates also increased sharply. Looking at the indications from the market leader, Indian Hotels, both occupancy and ARRs are likely to remain firm in FY05, provided there is no jerks on the geo-political side. Increased tourism flow into the country, growing inbound tourism and acceleration in FDI are likely to provide a impetus to the sector. |
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Announce corporatisation plans for all existing ports and a framework for public-private partnership. Create mechanism for speedy land acquisition for highway projects. |
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Tourism to be included in the concurrent list so as to have a uniform tax structure amongst all states. Rationalization of entertainment and luxury taxes to promote tourism. |
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Implement the recommendations on Open Skies Policy by the Naresh Chandra Committee. All national airlines to form a part of the bilaterals. |
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Source: FICCI's ten point action plan for the first 100 days. |
| Budget 2001-02 |
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Budget 2002-03 |
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Budget 2003-04 |
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| There are no specific recommendations for the hotel sector in this budget. However, the budget encouraged the growth of infrastructure development, which is likely to positively impact the hospitality industry.
Reduction of dividend tax from 20% to 10%.
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Announcement of plans to divest Hotel Corporation of India (HCI) and India Tourism Development Corporation (ITDC) in the next fiscal.
Reduce basic import duty on foreign liquor from 210% to 182%. Expenditure tax to be imposed only on hotel rooms with tariffs in excess of Rs 3,000.
Plan outlay for tourism increased by 50% and 6 new tourism circuits to be identified for development to international standards.
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Expenditure tax on hotels removed (from 10% levels earlier) and continuation of service tax exemption.
Exemption of capital loans from FIIs u/s 10 - 23 G and import duty on foreign liquor has been reduced from the existing 182% to 156%
Development of airports, seaports, railways and roadways.
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| [Read more on Budget 2001-02] |
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[Read more on Budget 2002-03] |
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[Read more on Budget 2003-04] |
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| Key Positives |
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| India as a tourist destination - Though India accounts for a fraction of global tourist flows currently, the country is expected to increase its market share over the long-term. The recognition of tourism as an industry in the recent past has paved way for opening up to competition. This, we believe, is likely to shape industry fortunes for the better. |
| Infrastructure development - The road development project along with other aspects like airport modernisation and port development is likely to result in increased economic activity. With air tariffs also falling steeply owing to increased competition, the tourism sector is expected to witness increased inflow of foreign tourist, high inbound tourist flow and development of new tourist destinations within the country. |
| FDI inflow promising - Though India manages to attract to attract only a fraction of global FDI flow, the long-term potential to attract FDI remains promising. The rapid growth in the service sector in light of various competitive advantages of the country has resulted in increased trade. Outsourcing in select manufacturing sectors is also taking shape, which we believe, will provide a big fillip to the tourism sector. |
| Increased competition - In the hotel sector, a number of multinationals have entered/strengthened their presence in the country. Players like Four Seasons are also likely to enter the Indian market in the future. Besides, Indian hotel chains are also expected to expand international presence. A combination of all these factors could result in a strong emergence of the budget hotels. This could potentially lower the cost of travel and related cost. |
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| Key Negatives |
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| Slow in implementation - As has been the case before, lack of adequate recognition for the industry despite being one the biggest generator of employment (direct and indirect) has been hampering growth prospects. Infrastructure development, though happening, continues to languish. Amidst improving fundamentals, India could lose out to other countries if the pace is not accelerated. |
| Regional hubs developing - As mentioned above, though India has the potential, in the tourism sector, competition is more global. The rapid growth of China, select South East Asian countries, the pace of development in the Middle East could affect India, in terms of its ability to attract tourist into the country. |
| Susceptible to geo-political events - Since tourism is a global phenomenon, any adverse developments on the geo-political front are likely to impact global tourist flows. India is no exception to the same, as was evident during events like September 11, Iraq war and SARS. |
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