FINAL REPORT ON EVALUATION OF THE SCHEME INCENTIVES TO ACCOMMODATION INFRASTRUCTURE IN INDIA

Transcription

1 FINAL REPORT ON EVALUATION OF THE SCHEME INCENTIVES TO ACCOMMODATION INFRASTRUCTURE IN INDIA Incredible India Submitted to: MINISTRY OF TOURISM- GOVT. OF INDIA NEW DELHI June 2007 Prepared by: TOURISM FINANCE CORPORATION OF INDIA LIMITED NEW DELHI

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3 ACKNOWLEDGEMENT At the outset, we would like to place on record our appreciation to Tourism Secretary (ex) - Shri A.K. Misra I.A.S., Secretary Tourism, Govt. of India for the trust reposed in TFCI and the valuable inputs provided for the study. We are equally thankful to other key officials Shri Amitabh Kant I.A.S., Shri Sanjay Kothari I.A.S., Additional Director General, Shri P.S. Bose, Additional Director General, for the time given for discussions and the insights provided. Our special thanks to Shri A.K. Gupta, Joint Director (Market Research Division) and other officials of the division for their valuable support and guidance. We would also like to place on record support provided by Shri M.N. Javed, Deputy Director and other officers of the Hotel and Restaurant division of the Ministry of Tourism, Govt. of India. Last but not the least, we would like to thank all the industry participants, industry associations, state tourism departments especially Governments of Kerala and Rajasthan for their perceptions and feed-back. * * * * * * *

4 C O N T E N T S Page No. CHAPTER ABBREVIATIONS EXECUTIVE SUMMARY 1-5 I INTRODUCTION 6-15 II TOURISM INDUSTRY- REVIEW III SUBSIDY SCHEME OF CENTRAL GOVT IV SURVEY ANALYSIS AND FINDINGS V ANALYSIS OF NON BENEFICARIES VI CAPITAL SUBSIDY IMPACT ON THE STATE OF KERALA VII CAPITAL SUBSIDY SCENARIO IN THE STATE OF RAJASTHAN VIII ISSUES & SOLUTIONS IN DEVELOPMENT OF BUDGET HOTELS IN INDIA IX CONCLUSION AND RECOMMENDATIONS ANNEXURES I - VI

5 LIST OF ABBREVIATIONS USED IN THE REPORT GOI KFC FI SFC HDFC FY GDP WTTC MOT IT CAGR FDI FII SARS ITES MICE FHRAI DOT IFCI ICICI IDBI SIDBI HUDCO DFI A.P. VAT FSI PLR NDMC Govt. of India Kerala Financial Corporation Financial Institutions State Financial Corporation Housing Development Finance Corporation Financial Year Gross Domestic Product World Travel and Tourism Council Ministry of Tourism Income Tax Compound Annual Growth Rate Foreign Direct Investment Foreign Institutional Investment Severe Acute Respiratory Syndrome IT-Enabled Services Meetings, Incentives, Conventions and Exhibitions Federation of Hotel & Restaurant Association of India Department of Tourism Industrial Finance Corporation of India Industrial Credit and Investment Corporation of India Industrial Development Bank of India Small Industries Development Bank of India Housing and Urban Development Corporation Ltd. Development Finance Institution Andhra Pradesh Value Added Tax Floor Space Index Prime Landing Rate New Delhi Municipal Corporation

6 L&DO EPCG FAR BIDI LRG JDA NCR DDA MMDA IRCTC ARR PPP Land and Development Office Export Promotion Capital Goods Floor Area Ratio Board of Infrastructure Development and Investment Large Revenue Generating Jaipur Development Authority National Capital Region Delhi Development Authority Metropolitan Manila Development Authority Indian Railway Catering and Tourism Corporation Average Room Rate Public Private Partnership

7 EXECUTIVE SUMMARY Ministry of Tourism Government of India (GOI) introduced a scheme of `Capital Investment Subsidy in the year 2002 which was available during the tenth plan period till 2007, for setting up hotels in 1,2,3* category and heritage hotels with an objective to increase the supply of hotel rooms in the budget category in the country. The objective of the study is to assess & review the impact of Capital Subsidy scheme of Ministry of Tourism (MOT), Govt of India which is available to the budget category hotels in the country and to recommend whether to continue the scheme during the 11 th five-year plan in the same form and manner or to suggest modifications/changes to make it attractive to the entrepreneurs and thereby augment the supply of the budget hotels in the country. During the study, all the hotels that have availed of the capital subsidy till January 2007 have been covered with the help of semi-structured questionnaire. Besides all the beneficiaries, about 24 non- beneficiaries from different parts of India were also interviewed with the help of semistructured questionnaire; experts from the hotel industry were also contacted along with different banks/fis that had financed those projects. The list of respondents as well as the format of questionnaire is enclosed vide Annexures IA, IB, IIA & IIB The Financial Institutions (FI) covered under the study include Kerala Finance Corporation (KFC), Federal Bank, Tourism Finance Corporation of India Limited (TFCI), State Finance Corporations, and other FIs etc. who have provided loan to various projects having availed of the subsidy. 1

8 The total numbers of hotel projects that have availed capital subsidy in different star categories are 62, out of which 18 have availed it from various State Finance Corporations (SFCs) with more than 75% having availed from KFC. Around 39 have availed it from banks and 5 have availed it from other designated FIs /Banks like HDFC. It has been observed during the survey that only one heritage hotel had availed the capital subsidy. Today, there are more than 2004 hotels comprising rooms in the country according to the data available from Federation of Hotels and Restaurants Association of India (FHRAI). Of these, about 60% cater to the mid-market (budget) segment. Out of the total hotels that have come up in the budget category in the country since 2002, 44% have availed the capital subsidy. It was observed that around 61% subsidy was availed by units from Kerala. The southern states had mainly benefited from the scheme with 80% of beneficiaries from various states of south which included Karnataka (12.27%), Tamilnadu(3.36%), Andhra Pradesh(3.67%) etc. Units in Punjab had availed around (6.28%). During the survey 69% of the respondents opined that subsidy was moderately useful, followed by 17% who found it highly useful and rest of the entrepreneurs (14%) did not consider it to be of much use. Majority of the beneficiaries were of the view that the subsidy amount was too low. 76% respondents claimed that they would certainly go in for more hotels, if the subsidy was increased from its present level. 13 % said, may be they go in for a new project. Regarding the increase in the amount of subsidy, 2

9 70% were of the view that it should be in the range of 20%-25% of the project cost. The formation of budget hotels in the country needs a multi-prong strategy from the State Govts./local authorities in terms of land pricing, moderate taxation and speedy approvals. The states could consider for budget hotels, may be10- year tax incentives, reimbursement of stamp-duty and lower transfer fee for leasehold land. In order, to keep the tariffs competitive, budget hotels should also be extended concession on entertainment and luxury tax. Further, the base tariff for luxury tax needs to be revised from the present Rs.500/ - in various states to a limit of Rs.1000/- The auction of hotel plots is linked to the real estate values of the land, which makes the project cost prohibitively high and setting-up of budget hotels becomes an economically un-viable proposition. However, considering the future positioning of some cities like Delhi, Mumbai, Bangalore (which are gateways for entry) and creation of budget accommodation for domestic and leisure segment, an alternate strategy needs to be worked out. The Ministry of Tourism, Govt of India could also consider extending the capital subsidy to metro cities, especially to Delhi being the host for 2010 common- wealth games. The average estimated cost per room for a new project of different star categories including the construction cost, furniture & fittings, accessories and other basic facilities required for taking the classification under different categories as per project guidelines approved by Ministry of Tourism but excluding the land cost is given below :- 3

10 Construction cost per room Category Cost in Rs. lakhs ( Excl. land cost) Three Two One star star star It is suggested that the subsidy should be related to the importance of the location as to being a destination with tourist value as pilgrimage centre etc, and hotel offering some unique facility with a replica of the culture of the location, backward area and areas of seasonal importance. Ministry may consider linking it to the cost of the project instead of the loan availed and size of the project in terms of number of rooms rather than the same for all projects in the same category. The capital subsidy may be enhanced to 20% of the capital cost subject to maximum of Rs. 50 lakhs, Rs. 100 lakhs, & Rs. 150 lakhs payable based on the number of Rs. 1 lakh, Rs. 2 lakh & Rs. 3 lakh per room for 1-star,2-star & 3-star category respectively. The need for resources is felt more during the implementation of the project Hence Ministry could consider the release of Capital subsidy during implementation of the project pro-rata to the capital expenditure on the project based on the certificate by Chartered Accountant and govt.- approved architect. It may be in 3 installments 25%, 50%, & 25% of the amount. Though initial response for the capital subsidy during was limited, during 2005 and 2006 many applications for subsidy were being received by the Ministry. The response from the Northern and Eastern states is still very minimal as compared to southern states. As the scheme is gaining ground and awareness about the scheme has started percolating the govt may consider continuing the scheme during the 11th Five year plan period also with some changes to make the same more attractive. 4

11 The Ministry of Tourism, Govt of India could take up with the FI and banks for popularizing the scheme in their brochures websites etc. The industry association such as FHRAI, HRAI, Confederation of Indian Industry (CII), Federation of Indian Chambers of Commerce and Industry (FICCI), etc. can also be requested to highlight the capital subsidy scheme to their members through their websites, journals etc. The need for the budget hotel rooms has assumed more importance as the country targets 10 million foreign tourists and around 50 million domestic tourists by ********* 5

12 CHAPTER -I INTRODUCTION BACKDROP The importance of Tourism (including the Hospitality industry), in the Indian economy, cannot be over-emphasized. Tourism in India is third largest foreign exchange earner (US$ 5731 mn in FY 2005) and contributes to 6% of GDP. The Ministry of Tourism estimates that by the end of 2012 the foreign exchange earnings will cross US$ 12 billion. Another parameter, in which India ranks very high, is the employment provided by the industry. The sector contributed 41.8 million jobs in 2004 (8.78% of total employment). The year 2005 has been good for inbound tourism, with foreign tourist arrivals reaching 3.9 million. Domestic tourism has soared to 369 million during the period, having grown by 40% over the last 5 years. India as a destination has made its way to the Top 10 chart of Conde Nast Traveller and Lonely Planet. This is attributed to the strong sense of business and investment confidence in India. Demand growth rate is being fuelled by the impact of emerging middleclass. TOURISM India truly deserves to be a tourism haven, blessed, as it is, with amazingly diverse natural bounty and tourism-related products catering to the tastes, preferences and budgets of tourists of varied backgrounds. A positive development has been the increasing realization amongst decisionmakers in India that tourism is not a elitist activity and tourism can be a major engine for economic growth. It is realized that tourism is the largest employment- 6

13 generating industry. Globally, it generates 200 million direct jobs and accounts for almost 10 percent of the GDP. Tourism forms an integral part of the Indian tradition and culture. It was about two decades back that tourism began to be recognized as an industry as a result of which tourism found a place in the nation s five-year plans and a National Tourism Action Plan in 1992 was announced. The table below shows the tourist arrivals during the past five years: Jan Feb Mar April May June July August Sept Oct Nov Dec Total Source : Market Research Division, MOT India has done exceptionally well in 2004, with an arrival growth of more than 25 percent over the previous year. The growth in 2005 has also been very encouraging. To deal with this growth momentum, India does need to invest significantly in improving infrastructure, particularly roads and highways. New hotels, especially budget hotels, also need to be constructed. According to a World Tourism & Travel Council report titled, The travel and tourism industry in India is projected to attract a capital investment of $21 billion by 2014, up from about $10.2 billion (Rs. 48,530 crore) estimated in In fact, the same study has stated that the personal travel and tourism in the country, which accounted for Rs. 92,728 crore in 2004 is expected to go up nearly 290 percent to Rs. 3, 61,294 crore by

14 The total number of inbound tourists in India is about 4 million and the total number of outbound tourists is about 6 million and both the numbers are growing rapidly. Tourism is on the rise and shall continue to be so because disposable incomes are on a high all over the world. Tourism revenue for a country is the sum total of tourism expenses incurred by all the tourists put together. Tourism expenditure can be classified under three headings direct, indirect, and induced. Direct arises from direct expenditure by tourists generating income for businesses and households. Indirect comes mainly from taxation utilized from items affecting tourists; and induced arises from income from taxation spent indirectly for something. Tourism for many nations is an important source of foreign exchange and thus provides a basis for export-led economic growth of the country. Tourism-related activities do not require huge investments, though the benefit goes much beyond the investment especially in developing small enterprises, small businesses and self-employment. These activities can range from providing tour and guidance services to setting-up of hotels, restaurants, souvenir shops and local handicrafts outlets. While the picture is all bright and vibrant, there are certain issues that need to be addressed for achieving the aim of tourism to play a significant role in the national economy. The major issue is inadequate infrastructure especially the condition of roads and highways both within major cities, as well as roads & highway linking cities and tourist centres. Although some work has been undertaken, the overall situation remains disappointing. Another critical bottleneck is the shortage of accommodation. While in many cities, there are no rooms available during the peak season, some cities have a perennial shortage of rooms. At present, there are just about 1,00,000 hotel rooms available in the country whereas the actual demand is much higher. A 8

15 large number of rooms need to be created by building new hotels. These should be mid-level budget hotels of 2-3 star categories. The land use and other policies need to be amended to facilitate augmentation of hotel rooms. Airports need to be upgraded and overall sanitation at railway stations & bus depots needs to be clearly improved. MOT envisages that by 2010, India can achieve the target of 10 million foreign tourist arrivals and the number of domestic tourists to cross 50 million. The sluggish investment scenario in the hotel and tourism segment implies that most of the investors are not willing to come forward because of the inherent problems therein like: 1. Lack of hotel sites, expensive land available through auctions 2. Construction of hotel is capital-intensive and it has a long gestation period 3. There are few Government incentives presently available to the hotel industry because of the withdrawal of the I.T. Section 80 HHD and 80 I A. 4. There are over 60 approvals / sanctions required to construct and operate a hotel (regulatory process). 5. Inadequate returns on the investment as compared to other sectors of the economy. Tourist facilitation also holds significance. The immigration desk, transport services outside the airport, technological aids to guide tourists etc. are only some of the areas that need immediate attention. The absence of visa-on-arrival is a critical impediment to tourism growth. Tourists from certain select countries could be provided this facility, to start with. The taxes that currently prevail for the tourism sector is another area where energies need to be focused. Rationalization of taxes is imperative to facilitate tourism growth. 9

16 The highly successful Incredible India campaign launched by the Ministry of Tourism, Government of India has brought the Indian tourism product into sharp focus, both in the domestic, as well as international markets. The realization that India has a highly diverse and unmatched collection of tourism destinations has gradually dawned on important stakeholders and the individual tourist alike. The year 2005 has been a highly successful year so far as tourism in India is concerned. For the third successive year, India witnessed a positive growth in foreign tourist arrivals, reaching a level of 3.92 million in the Year 2005 against 3.46 million during the last year. The growth rate of 13.2% during 2005 was achieved over a growth of about 25.8% witnessed during the year 2004; and the expected growth the world over during 2005 is estimated to be about 5-6% only. With this growth, the share of India in world tourism, which was hovering between 0.38% to 0.39% for a number of years, is expected to be around 0.49%. Economic benefits of tourism Indicators Year India World Contribution of Tourism to GDP %* 11%(2002) %# 11.6% (2003) %# 10.4%(2004) %# 10.6%(2005) Employment in Tourism Sector million(8.27%) NA million (8.78%) NA million (9%) million (8.1%) million (9.3%) million (8.3%) 1 Indian Figures: Tourism Satellite Account for India (TSA) Source : *Tourism Satellite Account, January # estimates 10

17 FUTURE EMPLOYMENT GENERATION Tourism employment growth in the year showed that the tourism sector employed 38.6 million people directly or indirectly. This was 8.3% of the total employment in the country. The employment grew by 8.78% in to reach 41.8 million people. The employment in the tourism sector is estimated to grow at a CAGR of 8% per annum. TERMS OF REFERENCE FOR THE STUDY i) to evaluate whether the scheme has encouraged the private sector to set up budget hotels in the country; ii) to evaluate whether it has solved the hotel rooms shortage in the budget category at major tourist destinations, as was intended; iii) to study the constraints being faced by the industry to apply for the subsidy under the scheme; and iv) based on the findings of the evaluation, to give recommendations about the need for continuation of the scheme during the 11th Plan ( ), and if yes, what need be done to make it more effective particularly with reference to :- Coverage in respect of geographical location; Coverage in respect of various categories of classified hotels and other new areas of accommodation establishments; Quantum of subsidy; and Simplification of Procedures for sanction of capital subsidy. OBJECTIVE The objective of the study is to assess & review the impact of Capital Subsidy scheme of Ministry of Tourism, Govt of India which is available to the budget category hotels in the country and to recommend whether to continue the scheme during the 11 th five-year plan in the same form and manner or to suggest modifications/changes to make it attractive to the entrepreneurs and thereby augment the supply of the budget hotels in the country. Further, to identify other forms of fiscal/ non-fiscal incentives needed to attract the 11

18 investments in the budget category segment or introduce some other scheme that might be more useful for the growth of budget sector in the country. The present scheme was introduced for the 10 th five-year plan and is valid till March SCOPE OF THE STUDY 1. To assess the existing hotel accommodation in India covering both private and public sector catering to the tourist traffic in the country. 2. To assess the contribution of the scheme in creation of budget accommodation at tourist centres/ destination 3. To assess the impact of existing scheme of capital subsidy at various locations in the country and to assess the benefit by those schemes to various operators both in public and private sector in the country. 4. To identify and address the issues relating to (a) procedural problems in administration of subsidy (b) Locational issues (c) Quantum of subsidy (d) Any other bottle-necks, if any 5. To study the other incentives / concessions provided by the state govts for the budget accommodation segment and the impact of the same. 6. To assess the need for various incentives to be provided to different categories of hotel projects in various states according to their popularity and requirement. 7. To provide recommendations on the need for continuation of scheme during the 11 th plan with the required modifications in the present scheme to make it more attractive and also suggest other incentives useful for the growth of tourism industry in the country. 12

19 THE METHODOLOGY TFCI as part of in-house exercise had earlier carried out a detailed desk research relating to the demand-supply scenario, trends in the budget hotel segment in various regions and states which are showing growth in the budget hotel segment. Further, discussions were held with the industry players, associations, banks and financial institutions. Detailed questionnaires were designed for various survey segments including (a) hotel units which have availed the subsidy, (b) units which have not availed the subsidy, (c) banks/ financial institutions who carried out the appraisal, processing and forwarding the claim to the govt. The questionnaires were administered by direct interviews/ mailers etc. The questionnaire used for the survey of hotels beneficiaries and non-beneficiaries, are enclosed in Annexure-IIA &iib Detailed discussions were held with hotel association office-bearers, banks and financial institutions providing subsidy, government officials, tourism productdevelopers / planners/investors, travel & leisure association office bearers, officials of hotel chains with plans of setting up budget hotels in India, local agencies. The list of respondents is attached as Annexure. IA,IB, IC & ID. All available information / literature, plans, statistics relevant to the study objective have been collected from department of tourism at the selected centre, local hotel & restaurant associations, tourist offices in each centre, and hoteliers having availed subsidy. Study parameters were finalised in consultation with the client and an initial desk research was carried out for understanding the status of capital subsidy among various categories of hotels in various states. The checklist, list of respondents, questionnaires for the contacts to be interviewed were finalized. 13

20 During the course of survey, we have looked at various tourism policies of different states including Kerala where the number of beneficiaries is highest. Exhaustive data was collected by way of primary research with the help of structured questionnaires prepared for hotels that have availed the subsidy and funding agencies across different states in the country. Budget hotels, that have not availed subsidy, have also been contacted to know the reasons for the same. Besides, experts from the industry were also consulted to know their views and feedback regarding the current scheme, as well as others that could be introduced for the growth of budget hotels in the country. The compilation of the fact-base followed by analysis and synthesis has been presented with recommendations. 14

21 STUDY FLOW CHART PRELIMINARY DISCUSSION & FINALISATION OF STUDY PARAMETERS SCHEME - EVALUATION & ASSESSMENT FINALISATION OF INFORMATION CHECKLIST / INPUTS Survey Finalisation of respondent segments and questionnaires for the survey of hotels/fi s Field Survey * Expert interviews / discussions with connected Agencies / officials Validation, analysis and generation of report APPROVAL STUDY THE IMPACT OF SCHEMES Assessment of impact on development of accommodation Constraints faced by industry to avail subsidy APPROVALS /COMMENTS FROM CLIENT SUBMIT FINAL REPORT SUGGESTING BROAD ACTION PLAN FOR IMPROVEMENT OF THE SCHEMES 15

22 CHAPTER-II TOURISM INDUSTRY: REVIEW INTRODUCTION The market for the hotel industry is largely dependent on the trends in tourism and the socio-economic climate in the country as well as beyond the borders of the country. Prior to 1980s, the Indian hotel industry had slow growth, as the economy was not in a liberalized era. With the partial opening of the Indian economy in mid-eighties, which generated commercial interest in India, significant benefits started accruing to the tourism sector, which gave some pace to the growth of hotel industry. The economic liberalization initiatives of the early 1990s viz. industrial reforms, foreign direct investment (FDI) in industries, foreign institutional investment (FII) in bourses, reduction in import duties, rationalization of taxes, etc. intensified trade and investment and consequently caused spurt in both domestic and international business travel. This resulted in exponential growth of demand for quality hotel rooms across major commercial & industrial hubs of the country. The premium segment hotels were particularly benefited on account of increase in foreign tourist arrivals, which accounted for large portion of their demand. Further, the economic buoyancy resulted in higher disposable incomes and leisure time, which generated demand for hotels at tourist destinations both from international and domestic tourists. The above developments resulted in high growth, both in terms of demand and addition to supply of the hotel rooms in the country in early 1990s. The high growth in the hotel industry continued till 1997 and major investments were made resulting in a consistent increase in room capacity. However, the high rate of growth in hotel industry could not be sustained after 1997 due to general slowdown in the economy aggravating disparity between demand and supply and also on account of Southeast Asian currency crisis which made some of the neighbouring destinations more attractive and less expensive for the tourists. 16

23 With the easing of tensions across the borders of the country and consequent repeal of travel advisories during August 2002, the tourist arrivals to the country started growing from October 2002 onwards. Though the tourist arrivals slightly dipped in March 2003 on account of cancellations resulting from the US-led attack on Iraq, the foreign tourist arrivals witnessed a spurt from April 2003 onwards on account of an early end to the Iraq war and the SARS scare in Southeast Asian countries which drove tourists to other unaffected destinations including our country. The SARS scare also boosted domestic tourism as outbound Indian travellers opted to travel within the country. In addition, the travel advisories also forced the Indian tour operators to increase their focus on domestic travellers which also resulted in significant rise in domestic tourist traffic in recent years. The following table presents tourism key indicators of the country and its relative share of Delhi. Key Tourism Indicators Number of Arrivals in Million Foreign Exchange Earnings (in USD bn.) Forex per visitor(in US $) Total Arrivals to New Delhi 33.70% 28.60% 30.80% 32.20% 32.00% 32.10% Total Arrivals to Mumbai 26.70% 25.40% 24.10% 25.10% 24.90% 25.00% Total Arrivals to Chennai 12.00% 11.50% 10.50% 10.30% 9.90% 10.00% Total Arrivals to Kolkata 4.30% 3.80% 3.70% 3.30% 3.10% 2.90% Exchange rate (US$1.00)Rs Source: HVS- Report Hotels in India Trend & Opportunities The recovery in the Indian economy and progressive easing of controls on industries, infrastructure and banking sectors have attracted substantial FDI and FII inflows and as such, more business travellers which have contributed to the increased demand for hotel rooms. The increasing investment in the development of infrastructure viz. roads, ports, airports, housing, power, telecom, airways, etc. has also contributed to the growth of hospitality sector. The increasing exports of automobiles, auto ancillaries, engineering goods, pharmaceuticals and IT and IT-enabled services (ITES) have also contributed positively to the growth of hotel sector. In addition, the general improvement in 17

24 economic and commercial activities has resulted in growth of MICE segment (Meetings, Incentives, Conventions and Exhibitions) and supplementary growth in demand for quality accommodation. HOSPITALITY SECTOR: THE GROWTH IMPERATIVE The increased demand for hotel rooms is being fuelled by both domestic and international travel (business and leisure) as indicated in table below. The Indian government has in the past, initiated several measures to provide much-needed boost to travel and tourism, e.g. abolishment of the inland air travel tax, reduction in excise duty on aviation turbine fuel, removal of a number of restrictions on outbound chartered flights, etc. The continued Incredible India campaign has had a positive impact on tourist arrivals in Today, there are more than 2004 hotels comprising rooms in the country according to the FHRAI. Of these, about 60% cater to the mid-market (budget) segment. There are many aspects of setting up a budget hotel in India. The budget hotel industry is highly price-sensitive. High land prices, archaic laws of land use, absence of single-window clearance system, etc., have been major disincentives in this sector. In the past, the central and state governments have initiated some steps to encourage the hospitality industry. The Govt. of India, Ministry of Tourism launched interest subsidy scheme in 1973 for setting up hotel projects in1,2,3-star category and heritage hotels with an objective to promote tourism. Due to the procedural issues in the scheme, it was discontinued in the April 2002 and the one-time capital subsidy scheme was introduced.the scheme would be operational upto the end of the 10 th five-year plan i.e 31 st March To decide on the approach during the 11 th five-year plan, Ministry of Tourism decided to review the existing scheme and its impact on the budget segment. 18

25 AVAILABILITY OF HOTELS BEFORE LAUNCH OF CAPITAL SUBSIDY SCHEME The following table presents the supply of category wise approved accommodation and hotel rooms in the country before the launch of the capital subsidy:- Category-wise Distribution of Hotels Category Five star deluxe & Five star Four star Three star Two star One star Heritage Approved (Unclassified) Total SOURCE:,Ministry of Tourism, Govt of India AVAILABILITY OF HOTELS AFTER LAUNCH OF CAPITAL SUBSIDY SCHEME CATEGORY NO. OF HOTELS Five Star Deluxe Five Star Four Star Heritage Hotel Three Star Two Star One Star Classification awaited Total SOURCE: Ministry of Tourism, Govt of India 19

26 CATEGORY NO. OF ROOMS Five Star Deluxe Five Star Four Star Heritage Hotel Three Star Two Star One Star Classification awaited Total SOURCE: Ministry of Tourism, GOI The state-wise number of approved hotels is enclosed as Annexure- III India compares poorly to other countries in the region, e.g. there are about 600,000 hotel rooms in China and 200,000 hotel rooms in Malaysia. In fact, India needs more than 150,000 more rooms by 2010 to meet its modest short-term target of hosting 5 million inbound tourists and sustain the positive growth of travel and tourism according to a study conducted by FICCI. CATEGORY- WISE AVAILABLITY OF HOTEL ROOMS IN INDIA ( ) AVALIBILITY OF HOTEL ROOMS IN COUNTRY( ) NUMBER OF ROOMS Five Star Deluxe Five Star Four Star Heritage Hotel Three Star Tw o Star One Star Classification aw aited YEARS 20

27 Over the last five-year period from to , the compounded annual growth rate has been the strongest in the budget segment. During this period, the revenue per available room (RevPAR) for the 3-star category has grown at 11%, the 4-star segment has grown at 9% and slowest growth was recorded in the 5-star deluxe segment, that grew at a marginal 1.2% only (source: survey for done for FHRAI by HVS International). REGION-WISE BREAK-UP OF HOTEL ROOMS AS ON DECEMBER 2006 REGION-WISE BREAKUP OF HOTEL ROOMS IN INDIA Unapproved Approved 1 Star STAR CATEGORY 2 Star 3 Star Heritage 4 Star South West East North 5 Star 5 Star Deluxe NO. OF ROOMS Region-wise Break-up of hotel accommodation - December 2006 Category North East West South Total Hotel Rooms Hotel Rooms Hotel Rooms Hotel Rooms Hotel Rooms 5 Star Deluxe Star Star Heritage Star Star Star Approved Sub Total Unapproved Total Source: FHRAI 21

28 It can be observed from the table above that the availability of rooms is maximum in South around rooms in 558 hotels as compared to rooms in north in 617 hotels. Maximum number of three star hotels is in south with rooms. With rise in domestic tourism, overall occupancy in the non-luxury sector has already touched 65%-70% across the country. Demand for the mid-priced or nonluxury segment is being fuelled by a surge in mid-management corporate travel (young or junior business executives, medical representatives) and domestic tourism. Foreign corporate and holiday travelers also fuel demand for budget hotels. *********** 22

29 CHAPTER - III SUBSIDY SCHEME OF CENTRAL GOVERNMENT INTEREST SUBSIDY SCHEME Ministry of Tourism (formerly Department of Tourism under the Ministry of Civil Aviation and Tourism), GOI introduced an interest subsidy scheme in 1973 for setting up hotel projects in1,2,3-star category and heritage hotels with an objective to develop tourism in India so as to exploit the potential of earning precious foreign exchange. As per the original scheme the interest subsidy upto an aggregate loan assistance of Rs million for each hotel project subject to the company being regular in meeting its commitment to the lender. Subsequently, there had been certain changes in the eligibility for interest subsidy from time to time. Initially in 1973 when the scheme was floated the interest subsidy component was 3% for all 1-star /2-star /3-star as well as heritage hotels. Subsequently in 1978 the subsidy rate for heritage hotel was revised to 5%. The broad guidelines for the same are as under: i. The interest subsidy was available for a new project as well as for the expansion of existing hotel; expansion project may be defined as one, which envisages increase in room capacity by at least 25% of existing room capacity. ii. The project should have prior approval of DOT. iii. The interest subsidy for one to three star category hotel stands increased from 1% to 3% p.a. on the entire loan assistance. iv. The interest subsidy would be for approved heritage hotel projects located outside the four metropolitan cities viz. Delhi, Kolkata, Chennai and Mumbai. v. The interest subsidy was also to one to three-star category hotels located on specified circuits / destinations. 23

30 vi. To increase the growth in heritage hotels, DOT in May 1993 introduced the capital subsidy of cost of project with a cap of Rs million. Procedure for claiming the interest subsidy The interest subsidy scheme floated by MOT was available through designated Financial Institutions i.e. IFCI, ICICI, IDBI, TFCI, Sate Finance Corporations (SFCs), State Industrial Development Corporation (SIDCs), SIDBI for approved projects in 1-3-star category hotels & heritage hotels. The institutions had been sanctioning financial assistance to the hotel projects at the normal lending rate and passing on the eligible interest subsidy to the borrower / company after receipt from DOT / Government of India. While claiming the interest subsidy in respect of an assisted unit for the first time, the Institutions were required to furnish a copy of their sanction letter, a copy of the repayment schedule and also a copy of the approval granted by DOT besides a certificate from the financial institution that the borrower had paid the installment of principal as well as interest on time and there was no default. The consolidated claim was then processed at the DOT, which in turn, remitted the amount to the lending institutions. The Ministry of Tourism commissioned a study in 2002 to study the impact of interest subsidy scheme and the study recommended the one-time upfront subsidy instead of the interest subsidy and also due to the procedural bottlenecks in the administration of the scheme, it was decided to discontinue the scheme with effect from 1st April 2002 and launch one-time Capital subsidy scheme in August 2003 w.e.f from 1 st April CAPITAL SUBSIDY SCHEME To encourage growth of budget hotel accommodation for promotion of tourism in the country, the scheme of Incentive to Accommodation Infrastructure was introduced during the 10 th plan to provide incentives to new approved hotel 24

31 projects in 1 to 3-star and heritage basic categories in the country except the four metropolitan cities of Delhi, Mumbai, Kolkata and Chennai. The details of the Scheme for grant of Capital Subsidy are as follows:- 1. The Scheme applies to all hotels in 1 to 3-star and heritage basic categories where the hotel projects have been completed and classified during the 10 th Plan period. 2. The incentive is in the form of capital grant of 10% of the total principal loan taken from designated financial institutions or up to Rs lakh to one star, Rs lakhs to two star and Rs lakh to three star and the heritage basic category projects, whichever is less. 3. The amount of incentive is released to the designated financial institutions i.e. Tourism Finance Corporation of India, Industrial Finance Corporation of India, ICICI, IDBI, SIDBI, State Financial Corporations and State Industrial Development Corporations, HUDCO and Scheduled Banks directly after completion of the project and its classification in the category in which it was approved. 4. There is no incentive on the additional loans taken for creating additional facilities, accommodation, cost escalation, etc. 5. Project loan / term loan sanctioned by Scheduled Banks are considered as sanctioned by a designated financial institution for all places except at metro cities Delhi, Mumbai, Kolkata and Chennai. 6. The benefits under the Scheme are not available if the loan is availed for re-financing of an earlier loan. 7. The hotels availing the capital subsidy under this scheme can apply for upgradation in classification beyond three star category only after a period of five years from the date. 8. In the case of heritage hotels where the investment is required mainly for refurbishment of existing building, which includes creation of additional facilities and accommodation, the incentive are available on the main loan only and not towards any additional loan. 25

32 Procedure for claiming the Capital Subsidy The amount of incentive available under the capital subsidy scheme is released to the designated financial institutions i.e. Tourism Finance Corporation of India, Industrial Finance Corporation of India, ICICI, IDBI, SIDBI, State Financial Corporations and State Industrial Development Corporations, HUDCO and Scheduled Banks directly after completion of the project and its classification in the category in which it was approved. The documents to be submitted for availing the subsidy include classification certificate, loan approval, project approval and completion certificate of the hotel. A sum of Rs crore was the approved plan out-lay for the tenth plan which was fully utilized till the end of the plan i.e. March 2007 as informed by the H&R division of ministry of tourism, Govt. of India... ********** 26

33 CHAPTER - IV SURVEY ANALYSIS AND FINDINGS 1. Category wise distribution of hotels availing capital subsidy The total numbers of hotel projects that have availed capital subsidy in different star categories are 62. The number of classified hotels that have availed capital subsidy and the number of rooms in the hotel are listed below:- Category Heritage 3* 2* 1* Total Hotels Hotel rooms Category wise hotels availing subsidy 2% 5% 3% Heritage 3* 2* 1* Out of the total projects having availed subsidy, 56 are in the 3-star category followed by 2* and 1-star. There was also 1 heritage hotel from M.P. This shows that maximum beneficiaries (90%) are in the 3* category and the scheme has not benefited the lower category. It is also seen that the room addition has been maximum in the three-star categories since the launch of the scheme as shown earlier. 90% 27

34 The list of respondents of the survey are enclosed in Annexure -IA 2. Break-up of the hotel projects assisted by various Institutions/Banks From the 62 different star-category hotels that have availed capital subsidy, 18 have availed it from various SFCs with more than 78% having availed from KFC. Around 39 units have availed it from banks and 5 have availed it from other designated FIs /Banks like HDFC. The break-up of the hotel projects that have been assisted through various banks/institutions is given below:- Sl. No. Financial Institution No. of projects % share 1. Banks SFCs DFIs 5 8 Total % share of projects by funding agencies 8% 29% 63% Banks SFC DFIs It can be noticed from the above table that 63% units have availed loan from banks, followed by 29% from state financial corporations and 8% from DFIs. Out 28

35 of the total SFCs, 78% had availed loan from KFC showing a high level of awareness in Kerala. 3. Projects Financed By KFC Out of the total hotels having availed the subsidy, 22% had availed from KFC alone. It has been revealed that maximum subsidy was disbursed through KFC. The category-wise hotels funded by KFC are given in table below:- Category 3* 2* 1* Total Hotels 14 nil nil 14 Hotel rooms 328 nil nil 328 It can be observed from the above table that the capital subsidy availed thorough KFC is only for 3* category hotels. It can be observed from the table given that the 30% of units having availed subsidy belonged to Thrissur. The centre-wise details of the capital subsidy availed through KFC is shown in the table given below: Centre-wise projects financed by KFC in Kerala No. of projects Kannur Alappuzha Thrissur Trivandrum Kollam Chittur Kochi Pallakad Centres 29

36 4. Amount of subsidy released The total amount of capital subsidy released by MOT upto January 2007 since the launch of the scheme was Rs crores out of the total 10 th plan outlay of Rs.45 crores. The total amount of subsidy released does not include the amount given as interest subsidy as the hotels classified before 2002 were eligible for interest subsidy. The year wise capital subsidy disbursed and the number of units having availed of the subsidy is given below:- Year Numbers Amount (Rs. In lakhs) (Jan) Total Source: H & R Division, Ministry of Tourism It has been observed during the field survey after interacting with various financial institutions, SFCs and banks that the subsidy has been availed mainly by threestar hotels about (90%). The reason for the promoters going in for higher categorization is due to higher subsidy available to them at present and in the later stage, a higher tariff can be charged with few extra services. The other trend observed was that during more hotels had availed of the subsidy as compared to mainly because the scheme was applicable to projects which were approved and classified after Since a hotel takes around 2-3 years for completion, the hotels which were approved in 2002 became eligible for subsidy only after Lately it was noticed that many hotels had applied and lot of them were waiting for classification to become eligible for the subsidy. All the hotels which were approved before 2002 were eligible for interest subsidy. 5.0 Location-wise break-up of subsidy The survey revealed that around 61% subsidy was availed by units from Kerala. The southern states had mainly benefited from the scheme with 80% of 30

37 beneficiaries from various states of south which included Karnataka, Tamilnadu, Andhra Pradesh etc. Units in Punjab had availed around (6.27%). There was no subsidy claim from Rajasthan, Uttar Pradesh, Uttaranchal, Chattisgarh and only two claims from Madhya Pradesh. North-east also had not benefited from the scheme mainly due to the lack of awareness about the scheme in this area. The percentage share of each state is given below:- State Number of units Capital Subsidy % share of each state Kerala Gujarat Punjab Maharashtra Karnataka Tamilnadu West Bengal Andhra Pradesh M.P Total STATE-WISE BREAK-UP OF SUBSIDY CLAIMED 13% 3% 2% 4% 3% 3% 6% 5% 61% Kerala Gujarat Punjab Maharastra Karnataka Tamil Nadu West Bangal Andhra Pradesh M.P. 31

38 6. Source of Information about the subsidy Out of the total respondents, 45% indicated Ministry of Tourism as the main source of information about the subsidy followed by banks and institutions which were about 26%. 16% respondents indicated industry associations as their source of information. Others (13%) got the information from the consultants and news papers. SOURCE OF INFORMATION 13% 16% 45% 26% Ministry of Tourism Industry Associations Banks/Financial Institutions Consultants/Newspapers It was observed from the study that hotel owners were not fully aware of such scheme provided by MOT. During the survey of the non-beneficiaries, it was observed that if awareness level was increased, lot of other promoters would have been benefited by the scheme. Efforts on the part of ministry and the designated institutions need to be augmented to improve the awareness level, if the scheme is to be continued during the 11 th plan. 7. Cost of Project The maximum projects surveyed were in the three star category with the project cost ranging from Rs crore (52%) followed by projects with cost of Rs. 4-8 crore (38%). The projects costing more than 8 crore were only 10%. Out of the total projects that have received subsidy, only 3 projects were in 2* category and one project was a one-star hotel. The project cost range of 2* hotels was Rs. 32

39 1.77 cr to Rs.4.65 cr and the one-star hotel had a project cost range from Rs.1.7 cr to Rs.3.8 cr. RANGE OF PROJECT COST IN 3* CATEGORY 10% Rs.2 cr - 4 cr 38% 52% Rs.4.1cr - 8Cr More than 8 cr Project cost range in a three star category No of Projects Rs.2 cr - 4 cr 21 Rs.4.1cr 8 cr 15 More than 8 cr 4 Total 40 # Project cost for all the units was not available. Average project cost in terms of a 3* hotel was Rs.4.5 cr. 7.1 Subsidy as a percentage (%) of total project Cost The analysis of project cost vis-a- vis subsidy revealed that the subsidy element in terms of 3*, 2* and 1* works out to 5.1%, 4.7% and 6.4% respectively. 8. Problem in availing Subsidy During the survey respondents were asked, if they had to face any problem in availing of the subsidy. 86% of the entrepreneurs had not faced any problem, whereas 14% had to face problems mainly on account of delay of upto six 33