More Specials

Budget 2006-07: Hotels Indian hotel industry has kept up the growth momentum that was started in the second half of 2004. India fast emerged as one of the popular tourist destinations in the world partly aided by the government's 'Incredible India' campaign, which helped develop interest among foreign tourists. Indian tourism touched new heights with international tourists arrival growing by about 13% in 2005. India's emergence as a BPO hub, continuing war on airfares, and growing infrastructure thrust by the government were among the contributing factors to this growth. Tourist arrival, occupancies and room rates witnessed strong growth.  Budget Measures Plan allocation has been increased from Rs 7.8 bn to Rs.8.3 bn for the tourism sector. The FM had announced the development of 15 tourist destinations and circuits. Also, 50 villages with core competency in handicrafts, handlooms and culture, close to existing destinations and circuits will be identified and developed. Service tax rate increased from 10% to 12%. Peak customs duty reduction.  Budget Impact The budget did give a feeling of increased thrust towards the tourism industry. The Government seems to be realizing the importance of the sector in earning foreign exchange and creating employment. With the development of new destinations, tourist inflow is expected to increase. As a result, the demand for the hotel rooms is expected to rise. The impact of service tax on the industry is likely to lower net margins, albeit marginally. The measures taken on the infrastructure front will indirectly improve the prospects of the Indian hospitality sector. If these measures are implemented, then it will go a long way in promoting India as a well-connected tourist destination. Lower of peak customs duty will result in some cost savings on the F&B front for hotel chains.  Sector Outlook The Indian hotel industry witnessed strong average room rates and occupancy rates in the year 2005. With no major capacity expansion in sight over the next two and half years, we expect average room rates to be firm. Domestic tourism is also a big opportunity. That said, there was nothing major for the hotel sector as a whole.  Industry Wish List The hotel industry be treated at par with other infrastructure sectors such as roads, ports and telecommunications and granted full tax benefits under Section 80-IA of the Income Tax Act. India requires about 60,000 hotel rooms, in addition to the existing stock of accommodation in the next three-four years to cater to 5 million tourists expected to visit the country annually by that time. Considering that this additional creation of room capacity would involve an investment of Rs 20,000 m, adequate incentives should be made available to the industry. For the tourism sector to grow rapidly, the sector should be brought on to the Central List. It s currently a state matter. The industry is also seeking rollback of the depreciation rate for hotel buildings to 20%, which was reduced to 10% in 2003. It said a hotel's building were the main plant and machinery for the hotel and because of the nature of the business, they had to be renovated, refurbished and refurnished on a continuous basis and should be treated differently from other buildings. Also proper infrastructure development is needed.  Budget over the years Budget 2003-04 Budget 2004-05 Budget 2005-06 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. 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. Service tax rate increased from 8% to 10%. Service tax imposed on business exhibition services, airport services and travel agents. Corporate tax reduced to 30% from the present level of 35%, with an increase in surcharge to 10%. Industry not granted "Infrastructure" status, as demanded by players. Significant thrust on Infrastructure building and road development. An outlay for National Highway development increased from Rs65bn in 2004-05 to Rs93bn in 2005-06. Government proposed to establish an SPV to finance infrastructure projects in specified sectors like roads, ports, airports and tourism, which could draw upon the country's foreign exchange resources for financing necessary imports. The cumulative borrowing limit for 2005-06 was set at Rs100bn. The National Urban Renewal Mission was designed to upgrade urban infrastructure. It covered seven mega cities, with a population of over a million, and some other towns. An outlay of Rs55bn has been made in 2005-06, including a grant component of Rs16.5bn for the Mission. Projects such as The Mumbai Metro Rail Project, the Mumbai Trans Harbour Link, the Mumbai Western Expressway Sealink and the Bangalore Metro Rail Project to funded through this mission. Steps to be taken to make Mumbai a regional financial center. [Read more on Budget 2003-04] [Read more on Budget 2004-05] [Read more on Budget 2005-06] Key Positives 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. 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.    Key Negatives 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. Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.