Economic growth the catalyst to India's hotel market success

(Mumbai skyline)

HVS estimates that two decades ago India had about 120 hotels with about 18,000 branded rooms. In its latest Trends & Opportunities Report, HVS now writes that the country has a record 887 hotels with a room count of 113,622. 

In a “volatile global economic environment,” India has emerged as one of the better performing economies of the world, which HVS credits to the country’s “relatively strong investor sentiment” as well as domestic absorption and falling oil prices. 

Over the last two years, the government set the tone for economic growth with emphasis on infrastructure, simplification of tax structure and facilitation of entrepreneurship at both rural and urban levels. It further focused on creating an investor-friendly climate by fostering competition and streamlining bureaucracy. Inflation then dropped from 9.5 percent in 2013/14 to 4.9 percent in 2015/16, which HVS credits to a decline in crude oil prices and the government’s “timely management of inflation” through buffer stocking and import of select commodities. The decline in inflation, fiscal deficit and current account deficit has brought “macroeconomic stability” to India.  

Tourism’s Role

The Indian Travel and Tourism Industry has been “instrumental” to the nation's economic growth, the report said, serving as a significant source of foreign exchange.

A growing middle class, improvements in infrastructure, an increase increase in international tourist arrivals and tourism-friendly visa policies (such as the extension of e-Tourist Visa to 150 countries) have all helped the industry thrive. According to the World Travel & Tourism Council's Economic Impact 2016 - India report, the total contribution of Travel and Tourism to the GDP was R8,309.4 billion (6.3 percent of the GDP) in 2015. This is projected to grow by 7.3 percent to R8,913.6 billion in 2016 and eventually reach R18,362.2 billion (7.2 percent of the GDP) by 2026. 

International tourist arrivals grew by 4.2 percent in 2015 for a compounded annual growth rate of 6.2 percent over the past five years.

Domestic demand for hotels in the country has historically been higher than inbound demand. A rise in spending capacity along with proliferation of low-cost carriers has not only resulted in growth of domestic travel, but has also had a significant impact on the domestic travel spend. In 2015, domestic travel spending generated 82.5 percent of the direct travel and tourism GDP, which is expected to rise by 6.6 percent in 2016 to R6,284.4 billion. Further, as an initiative to enhance regional connectivity and to make air travel more affordable for the growing middle class, the government capped the fare for one-hour flights at R2,500 in June 2016. 

Although the majority of demand for hotels comes from business travelers, there is a large portion of Indians traveling for leisure, both within the country and overseas. In 2015, the WTTC estimates that leisure travel spending (inbound and domestic) generated 83.2 percent of the direct travel and tourism GDP (R5,945.5 billion) in comparison to 16.8 percent from business travel spending (R1,198.9 billion). 

New Initiatives

As an initiative to further boost inbound tourism, the government is planning to extend the e-Tourist Visa facility to an additional 36 countries after witnessing incremental growth in tourist arrivals in the first quarter of 2016. On acceptance of this proposal, the facility will be available to 186 countries. As per the Ministry of Tourism, a total of 540,396 tourists arrived on an e-Tourist Visa between January and July this year as compared to 147,690 during the same period in 2015—a 266-percent increase.

Acknowledging the vast scope of Travel and Tourism in India, the Union Budget 2016-17 allocates R1,590 million to the tourism ministry to focus on infrastructure development, promotion and publicity initiatives—all of which bode well for the Indian tourism sector. 

Supply & Demand

Countrywide, new branded supply grew by 9.9 percent last year, but demand outpaced it considerably to increase by almost 16.4 percent in the same period. As such, the resultant market-wide occupancy of 63.4 percent in 2015/16 was 6 percent higher than the preceding year. When broken down by positioning, the improved occupancies can be seen across all categories.

Overall, this is the third consecutive year of occupancy growth. The chart below presents the nationwide supply and demand trend for a 15-year period. HVS noted that while the absolute increase in ADR was not spectacular, "the very fact that the weighted average rate for almost 900 branded hotels across varied positioning, geographies and stabilization statuses showed an enhancement over the preceding year, points to an overall improvement in the health of the hotel sector."