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India Tourism

India: Dissecting hotel business, politics and middle class

Hazel Heyer, eTN Staff Writer  Dec 08, 2008

After the terror attacks in Mumbai in India’s finest luxury hotels that claimed the lives of over 170 people and injured some 200 civilians, an examination of the state of the country’s hotel trade before and after the bombings and gunfire took place is warranted.

Many hospitality experts expected India to overtake China in terms of GDP growth by 2010. But according to Oxus Investments Pvt. Ltd. chairman and managing director Surjit Bhalla, the challenges on the horizon for India were not only in infrastructure and training, but also in politics in the country. He said India is an East Asian economic haven in terms of savings, investment and GDP growth, but infrastructure is severely lacking.

Indian growth performance from 2003 onwards recorded a flat growth rate of 8.6 percent and an investment curve showing a growth rate of about 6 percent past 2006, reflecting some 2 to 3 points percentage short of China’s. But the potential GDP growth in capital hovers around 10.5 percent, assuming equal shares with zero productivity growth, output should grow at 6.5 percent, with a total factor productivity growth of approximately 3 percent and potential growth rate of 9.5 percent per annum.

Bhalla said real interest rates sharply dropped to less than 2.5 percent in 2006 from about 7 percent in 2001 while income growth rates were climbing steeply up to a little less than 7 percent in 2006.

However, India has reached the tipping point, it seems in 06/ 07 when India was growing at 5.6 percent growth for 22 years between 1980-2002. It was not because of its software genius but the rise of the middle class. India’s $1/day poverty line has seen a dramatic decline to almost 1-2 percent of the population by 2006. “The middle class in India is the tipping point. It is the non-absolute poor in the developed world. The absolute poverty line earns $1.08 per person (1993 base); in absolute poor developed economies, it is PPP $7.7. The middle class believes in property rights, free trade, in the rules of the game and are anti-corruption,” said Bhalla.

Bhalla added the political instability in India is pronounced that sometimes… “does it matter anymore?? Coalition governments are a regular feature of India since 1989. Congress and the BJP leaders have less than 50 percent of the joint vote. With globalization, the government cannot do damage anymore,” he said.

And there is corruption in India. However, he tends to believe that as in any emerging and part-emerging markets in the world. India’s is no longer an inefficient corruption – rather an efficient one.

Bhalla however said there is probably no end to this corruption. “People should make their corrections quickly if they do make mistakes,” he said adding politicians mess up a lot, but it is still business as usual. The effect on business is close to zero, showing decreased influence in causing damage.

Infrastructure is another core issue. There’s a massive shortage of hotel rooms and the highest room rate in Asia, India presents an attractive proposition for new hotels. All over the country, several domestic and global players are rushing to supply much-needed demand for 100,000 new rooms planned for 2010, some 11, 732 sited in Mumbai alone.

Vijay Thaker, Horwath HTL, said that in India, every real estate track needed to be in the hotel sector while rates stand at $150-$180 and occupancies are healthy at 65-70 percent over the years. Thaker added, “But rates in occupancy will drop. There is gross undersupply in 8 major cities. Mumbai and Delhi have only 14,000 rooms combined. There’s rapidly growing demand and occupancies current inventories cannot provide. Unfortunately, there is concentration in the 5-star luxury sector,” he said, blaming on the side, poor quality and consistency with mid-priced hotels, the international chains pressure to increase supply, predominance of business travels with the leisure market growing slower.

After the attacks in Mumbai, hotels will in demand in India. According to HVS managing director Manav Thadani, occupancy is high from October to March. He said, “This season will not be negatively impacted though I heard some cancellations of up to 40 percent have already come in from those who booked Mumbai previously. Last year, in this season we would run between 85-90 percent occupancy. I would imagine those numbers will come down to as low as 40-50 percent after the incidence.”

“While we lose on international travelers, I see rates being corrected with a lot of focus going on domestic tourism. India has a lot of people thinking of traveling abroad. That will change now,” he said.

When I asked if he’d choose Mumbai, Thadani said it may not be a good leisure location but (yes) a business destination. Goa may be his personal choice. “A lot of people share the same thought process, that is to travel within India and support the industry,” he said.

And safety? Thadani said, “Just because Mumbai was targeted does not mean travel to India is not safe.”

The recent attacks will not discourage people from investing in India’s hotels. But before the terrorist attacks took place, there was already a sign that India’s economy was slowing down, with the global crisis, which resulted in some projects being either delayed or dropped. “Because of the terrorist attacks, I don’t see any projects being stalled. And without saying, travel will completely change. Recall 9-11. I foresee changes in the security apparatus going up significantly in the country. Don’t be surprised if your luggage gets screened at the hotels like they are x-rayed and inspected at the airports,” said Thadani.

India: Dissecting hotel business, politics and middle class
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