The government’s attempt to ease FDI in the hotel and tourism sector bodes well for the real estate industry. The government aims to remove the minimum capital and area requirement for hotels as well as exclude them from the purview of the three-year lock-in clause that governs real estate activities. This move comes at an opportune time as India is facing a huge demand-supply mismatch in the availability of rooms. It is expected to give a fillip to the plans to increase the number of hotel rooms in the country manifold, besides enabling domestic realty majors to induct foreign partners in their projects.
According to tourism ministry estimates, there are about 1.2 million hotel rooms in the country. The requirement for 2020 is estimated to be 6.6 million. If the target of 5 million tourists has to be achieved by 2012, we require a total of 80,000 more rooms to be added. A captive investment of Rs 40 lakh per room will entail investment of about Rs 32,000 crore. The increasing number of airlines and foreign tourists is creating a huge shortage of rooms in the country. Naturally, when there is a mismatch between demand and supply, the average rates go up. Hence, this attempt will also bring about the rationalisation of prices.
India is one of the fastest growing tourist destinations in the world, second only to China. At present, India accounts for 0.5% of world tourism. Strong GDP growth, improving infrastructure, confidence in the country’s economic prospects, open sky policy and the ‘Incredible India’ campaign have improved the outlook for India. This positive outlook would increase the tourist arrivals in the country and the hotel industry is expected to be the major beneficiary. Even domestic tourism is gaining momentum. Rising disposable incomes, cheaper airfares and better connectivity would continue to increase the demand for rooms. The hotel and tourism industry recorded FDI inflows of only $950 million from January 2000 to March 2009, which exacerbates their need for FDI to build hotels.
In the light of these prospects, the government’s move to relax foreign investment entry restrictions will stoke a huge interest among foreign investors to invest in mixed-use format as they have been hesitant because of the minimum size and capital commitments.
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