Some Warm-Up Questions?

• How many teach business classes?– International Business.

• Why is learning about India relevant to you?• What do you know about India?

– Perceptions?– Traveled? Asia?

• What do you know today that you did not know on Tuesday?

• What Do you really want to know about India?

Curious About India?• What is the Population of India?• What Does the Dot on the forehead mean?• What do they think about Americans?• Why Don’t Indian’s eat beef?...or do they?• What is curry?• Are most marriages arranged? How do you marry

someone before you even know them?• What is the national language? Does everyone speak

English?– Legacy of Britain

• What’s Cricket? • What is the Caste System?• About Indian Names

Resources for India Business and Tourism Information

http://globaledge.msu.edu/countryInsights/

country.asp?countryID=181&regionID=3

www.incredibleindia.org

WE LIVE AND CONDUCT BUSINESS IN A DIVERSE

WORLD

International Lodging Development and Management

India Summer Program

July 17 - August 16, 2007

India-Thailand- Dubai

Program Leader: A.J.Singh

353-9211

Singharj@msu.edu

Where are We Going?

RAJASTHAN

How Do We Get There?

Dubai

New Delhi

UdaipurUdaipur

Bangkok

Learning Objectives

To gain an appreciation of the global nature of international business.

Operational differences associated with managing hotels internationally and challenges associated

with developing business ventures overseas

Learning the complexities associated with managing in a culture and society different from

their own

Program Structure

• 30 Day Program• Option of choosing from 9 credits (international

specialization)

– HB 460 International Lodging and Management– HB 382: International Hotel Real Estate

Development– HB 490: Independent Study(Research an

international Hospitality topic)

• Field Trips• Cultural Enrichment Sessions• Exposure To Management of Hotels in India

Simulation Game for Study Abroad Pre-departure

• http://gel.msu.edu/voyagebeijing.html

Performance of India’s Hotel Industry in The Era of Economic Reforms

A Critical Assessment of The Investment and Business Climate

A.J. Singh (Ph.D.)

The School of Hospitality Business

Michigan State University

7th Biennial International Business InstituteJune 2nd, 2007

Center for International Business Education and Research

Michigan State University

Research: Purpose of Study

The Purpose of the Present Research Study is to Analyze the Economic Reforms in India since 1991 in their role as a Catalyst of the Transformation and Performance of the Hotel Industry in India.

Specifically the study will:– Identify and discuss the key features of the Economic

Reforms– Analyze Drivers of Demand– Analyze Drivers of Supply– Analyze the Performance of the Hotel Industry in India– Project Future Challenges and Obstacles to Growth

and Development

POLITICAL MAP AND

MACRO ECONOMIC CRISIS 1991

Current Account Deficit: 3.2%

Debt Service Payment % of Current Receipts: 35%

Foreign Exchange Reserves: Down to 21/2 months Imports ($1 billion)

Short term debt: 147% of ForEx reserves

Inflation: 17%

GDP Growth:0.4%

Economic Situation 1991: Possibility of Default on short term loans and down grading of India’s credit rating.

In short

The Country faced a Fiscal and Economic Crisis

Economic Reforms: Structural Changes Driving Growth

• Progressively more sectors opened to private investment.

• Encouraged Foreign Direct Investment with equity stake

• Reduction in Red Tape and Regulations• Industry license requirements( barriers to

entry) reduced to encourage competition.• Trade Policy liberalized.• Capital Market Reforms

WHAT’S DRIVING PERFORMANCE?

THE DEMAND STORY

Growth in India’s Service Sector-Post Economic Reform Era (1991)

It’s the Indian Economy• Population: 1.1Billion• GDP: $691 Billion (10th largest economy) (USA: $11.7 trillion)• GDP Growth: 7.7% (2004-05) and 8.4% (2005-06)• GDP Per head: $728 (1991:?)• CPI: 4.2%• GDP Origins: • Agri:21.5%• Manufacturing:16%• Services: 51% (expected to be 60% for 2005-06)• Foreign Exchange Reserves; $158billion• FDI Flows 2004: $5 Billion

(1991:$98 Million)• Stock Market Capitalization: $553 Billion (17th) 274% increase 2000-05• Exports: $89 Billion• Economy Fueled by: India Global IT services, Growth in Financial

Services, Tourism Sector, Construction and Manufacturing.• Future Growth Fueled by: Services, international trade, aviation, retail,

commercial real estate, ITes, telcom, insurance, financial services, hotels.

Impact of Economy on Demand• Growth in Middle Class

– Discretionary Income: – Propensity to Travel– More sophisticated traveler– Impacting Leisure travel

• Growth of Domestic Businesses– Increase in Individual Business Travel– Increase in Meeting and Convention travel– Increase in Incentive Travel

• Growth of International Business Presence– Increase in international business traveler

Market Potential Index

• Most Market Potential Index High (Based on ranking 24 emerging nations)– Size: Rank-2

• Urban population (million)– Growth: Rank-8

• Real GDP growth rate (%)– Intensity:Rank:18

• Private consumption as a percentage of GDP (%)– Consumption: Rank: 7

• Percentage share of middle-class in consumption/income

Primary Driver: Growing Middle Class Market

– Increasing urbanization

– Explosive growth electronic media: changes lifestyle and consumption attitudes

– More emphasis on higher education

– Transition from joint to nuclear families

– Impact of western lifestyle, customs and leisure and recreation preferences

– Easing Foreign Exchange resulting more international trips: higher expectations

– Consumerism fueled by cheaper consumer finance

Key Tourism Statistics

Additional Factors Fueling Tourism Demand

• Deregulation of Civil Aviation Industry– Growth Domestic Airlines– Privatization of Airports– Open Sky Policies

• Aggressive Marketing Campaign: “Incredible India”• CAAG growth in Domestic Tourism of 17% from 1991-

2004• CAAG growth of International Tourism 10% from 2001-

2004– Business Travelers based on Multinationals: Business

Confidence Index positive – Increase in Pan-Asia travel connectivity– Increase in Flights to India

MAJOR HOTEL COMPANIES: INDIA

WHAT’S DRIVING PERFORMANCE?

THE SUPPLY STORY

Foreign Direct Investment Trends

• Foreign Direct Investment:– 1990: $162 Million– 1992: $315 Million– 1999: $2.2 Billion– 2004: $4.5 Billion

• FDI steadily increased as investment regime progressively liberalized with less restrictions.– Fewer restricted industries– Easing of investment process– Removal of Investment Caps and Repatriation

Construction Sector Reforms• February 2005 Central Government Allows

100% Foreign Direct Investment in construction sector:– Hotels– Resort– Hospitals– Recreation– Educational Institutions– Hospitals– Regional Infrastructure

• Approval process streamlined with minimum hassles.

Relationship Between FDI and Sector Growth

•Impetus for Exports: IT and ITes sectors

•New Multi-product/product specific an specialized SEZ’s:

•Clusters such as: Infor-tech- gems-jewelry-bio technology

Financial Services Reforms

Banking Reforms:• Privatization of banking with growth in consumer credit• Growth of International banking institutions in India

Capital Market Reforms:• Capital Markets maturing• Regulatory agencies similar to SEC for investor protection• Growth in private sector mutual fund industry• Growth in Foreign Institutional investors driven by liquid and deep

stock market with promise of high returns (FII investment $45 billion 2005)

Non-banking financial intermediary Reforms:• Insurance sector privatized with major global insurance companies

entering India• Insurance Premiums for 2005 approximately $70 billion • Growth in Venture Capital and Private Equity Funds

Investment Flows India: Private Equity

Government Incentives for Tourism Industry

• Reduction of expenditure tax for upscale hotels• Government classifies hotels as “infrastructure.”

– Assist with financing– Lowers financing rates– Income tax benefits

• Government’s stated priority for tourism infrastructure:– Roads– Airports– Convention Centers

Hotel Development :Incentives Incentives (Provided by State Governments)• Exemption of Luxury Tax and Sales Tax for 5-7 Years for new

Projects• Government Programs for Interest free loans• Small capital subsidy for the development of budget hotels• Below market rate allotment of land controlled by State for

development projects.• Provision of electricity a lower than market cost.

Incentives (Provided by Central Government)• Elimination of Customs Duty for Import of raw materials, equipment,

liquor etc.• Capital subsidy program for budget hotels• Hotels are now, “Infrastructure status.” which allows them access to

term loans at lower rates of interest

Hotel Development: Barriers

• Corruption and multi-level bureaucracy

• Government Regulations, licenses and approval process onerous.– Over 65 Approvals and licenses required for

hotel project development.– This makes consultants and lawyers

profession happy but developer/investor, not so happy!

Business Environment IndiaParameter Sub Parameters used India Score OECD

Average

Starting a Business Number of Procedures 11 steps 6 steps

Hiring and Firing Workers

Difficulty of hiring index 33 26.2

Registering Property

Number of procedures 6 4

Getting credit Cost to create collateral (% of income per capita)

11.3 5.2

Protecting investors

Disclosure index 4 5.6

Enforcing contracts

Number of procedures 40 19

Closing of business Time in years 10 1.7

SUMMARY AND HIGH LIGHTS: HOTEL INDUSTRY STRUCTURE: INDIA

Introduction of New Lodging Concepts

• Boutique Hotels (New Consumer)

• Serviced Apartments (driver: outsourcing/consultant short stays)

• Timeshare (Increase in leisure travel)

• Adventure based Eco-Resorts

• Spas (Wellness)

• Medical Tourism

MEDI TOURISM: NEW GROWTH PRODUCT

EXISTING AND PROPOSED DISTRIBUTION TO HOTEL SUPPLY IN INDIA

PRIMARY DRIVERS OF GROWTH IN THE INDIAN HOTEL INDUSTRY

LODGING INDUSTRY PERFORMANCE STORY

PERFORMANCE OF HOTELS IN INDIA

1998-2005

CRITICAL FACTORS TO DRIVE FUTURE GROWTH AND PERFORMANCE

What Will Drive Performance and Growth in the Future?

• Government’s continuation of liberalization Policies to attract FDI• Making Tourism a Priority Sector• Improve Intersectoral communication and integration between

Central, State, and related departments• Major Investments in General Infrastructure and Tourism

Infrastructure:– Air transportation– Roads– Telecommunication

• Availability of land for development and associated regulations• Further reduction in barriers to start and operate businesses• Consistent Marketing Campaign• Improve Sanitation and Hygiene standards• Increase investment incentives and tax holidays• Availability of Trained Personnel