PROJECT ON

FOREIGN DIRECT
INVESTMENT IN HOTEL
AND TOURISM

1.1 DEFINITION of 'Foreign Direct Investment - FDI'

An investment made by a company or entity based in one country, into a company or entity
based in another country. Foreign direct investments differ substantially from indirect
investments such as portfolio flows, wherein overseas institutions invest in equities listed on a
nation's stock exchange. Entities making direct investments typically have a significant degree of
influence and control over the company into which the investment is made. Open economies
with skilled workforces and good growth prospects tend to attract larger amounts of foreign
direct investment than closed, highly regulated economies.
1.2 Introduction
A Study on Foreign Direct Investment (FDI) in Indian Tourism Dr. P. Srinivas Subbarao
Introduction One of the most notable features of economic globalization has been the increased
importance of foreign direct investment around the World. Some view is as an engine of
economic growth and development while others look upon it as a panacea for all ills. It is,
however, important to weigh the costs and the benefits of FDI to gauge whether FDI has positive
impact on economic development.
FDI has the potential to generate employment, raise productivity, enhancing competitiveness of
the domestic economy through transfer skills and technology, strengthening infrastructure,
enhance exports and contribute to the long-term economic development of the worlds
developing countries. More than ever, countries at all levels of development seek to leverage FDI
for development. We in India see FDI as a developmental tool in all sectors and tourism has no
exceptions. Liberalization policies have led to rapid growth in FDI flows in recent years. Basing
on the benefits associated with FDI several developing; as well developed countries compete
fiercely for FDI. They try to attract foreign investors by providing financial and fiscal incentives,
undertaking corporate restructuring and economic reforms and inviting foreign investors in the
privatization of state-run units. In 2001, for example, 71 countries made 208 changes in their FDI
regulatory regimes, out of which 194 have done to attract higher FDI.

1.3 Foreign Direct Investment in India:

The purpose of the Foreign Direct Investment Policy in India is to invite and encourage foreign
Investment in India. Since 1991, liberalized economic policies have transformed India, the
worlds, largest democracy, into a shine of global Investment For the purpose of FDI in an Indian
economy, the following categories assume relevance:
Sector in which FDI is prohibited
Sectors in which FDI is permitted Investment under Automatic Route; and
Investment under Prior Approval Route i.e. with prior approval of the government through the
Foreign Investment Promotion Board (FIPB).
In the Hotel Industry Sector, Foreign Direct Investment (FDI) has been permitted up to 100%
under the automatic route. For foreign technology agreements, automatic approval is granted if:
1. Up to 3 % of the capital cost of the project is proposed to be paid for technical consultancy
services.
2. Up to 3 % of the net turnover is payable for franchising and marketing/publicity fees.
3. Up to 10 % of gross operating profit is payable for management fees, including incentives
fees. Regulatory .

1.4 ADVANTAGES OF FDI

Integration into global economy - Developing countries, which invite FDI, can
gain access to a wider global and better platform in the world economy.
Economic growth - This is one of the major sectors, which is enormously benefited
from foreign direct investment. A remarkable inflow of FDI in various industrial
units in India has boosted the economic life of country.

Trade - Foreign Direct Investments have opened a wide spectrum of opportunities

in the trading of goods and services in India both in terms of import and export
production. Products of superior quality are manufactured by various industries in
India due to greater amount of FDI inflows in the country.
Technology diffusion and knowledge transfer FDI apparently helps in the
outsourcing of knowledge from India especially in the Information Technology
sector. Developing countries by inviting FDI can introduce world-class
technology and technical expertise and processes to their existing working
process. Foreign expertise can be an important factor in upgrading the existing
technical processes.

For example, the civilian nuclear deal led to transfer of nuclear energy know-how
between the USA and India.
Increased competition - FDI increases the level of competition in the host country.
Other companies will also have to improve on their processes and services in
order to stay in the market. FDI enhanced the quality of products, services and
regulates a particular sector. Linkages and spillover to domestic firms- Various
foreign firms are now occupying a position in the Indian market through Joint
Ventures and collaboration concerns. The maximum amount of the profits gained
by the foreign firms through these joint ventures is spent on the Indian market.

Human Resources Development - Employees of the country which is open to FDI

get acquaint with globally valued skills.
Employment - FDI has also ensured a number of employment opportunities by
aiding the setting up of industrial units in various corners of India.

1.5 Tourism Industry in India

Tourism sector holds immense potential for Indian economy. It can provide impetus to other
industries through backward and forward linkages and can generate huge revenue earnings for
the country. In the recent 2007-08 budget, the provision for building tourist infrastructure has
been increased from US$ 95.6 million in 2006-07 to US$ 117.5 million in 2007-08 (Min. of
Tourism, GOI). Tourism is no longer looking at it as a leisure activity, but as a major source of
employment. The labor capital ratio per million rupee of investment at 1985-86 prices in the
tourism sector is 47.5 jobs as against 44.7 jobs in agriculture and 12.6 jobs in case of
manufacturing industries (Market plus Report, Min. of Tourism).
Tourism is one of the third largest net earners of foreign exchange for the country and also one of
the sectors, which employs the largest number of manpower. In order to develop tourism in India
in a systematic manner, position it as a major engine of economic growth and to harness its
direct and multiplier effects for employment and poverty eradication in an environmentally
sustainable manner the state and central governments formulated several policies. But it
continues to suffer from lack of consistent and comprehensive policy. While little effort has been
made to tap the potential of the tourism sector over the last few decades, the central tourism
ministry is formulating policies to facilitate private investments through public private
partnership and focus on development of this sector. India is rated among the top five travel
destinations in the world according to Lonely Planet. ABTA magazine rates India as the most
preferred destination on earth.
Indian tourism is one of the most diverse products on the global scene. India has 26 world
heritage sites. It is divided into 25 bio-geographic zones and has wide ranging eco tourism
products. Apart from this it has a 6,000 km coastline and dozens of beaches (WTO 1997). India's
great ethnic diversity translates into a wide variety of cuisine and culture. It also has a large
number of villages, plantations and adventure locations.

1.6 Need of FDI in Tourism

Foreign tourist arrivals are expected to grow to 10 million by 2010-12 and the domestic tourism
is expected to increase by 15% to 20% over the next five years as per the Ministry of Tourism
expectations basing on the growth in the last one d ecade. There is a rapid growth in average
room rates and is expected to continue until sufficient new supply come on stream (average
increase is 21% since 2004-06 in 4& 5 star segment). Government of India is allowing 100%
FDI in Hotels and Tourism, through the automatic route and also identified the investment
opportunity of about $8-10 billion in the next 5 years in tourism sector.
India has significant potential for becoming a major global tourist destination. It is estimated that
tourism in India could contribute Rs.8,50,000 crores to the GDP by 2020 ( approx. 1800 million
USD) if you properly plan to develop and invest on Connectivity Infrastructure, Tourism
Infrastructure, Tourism Products, Capacity Building and Promotion & Marketing (WTTC
report). It is estimated there is a need of around 10 Billion US $ required for development of
tourism as per the different state tourism estimates for the next five years. When you think about
the long term capital requirement of all states, it is estimated around 56 billion US $ for the next
20 years.
A rapidly growing middle class, the advent of corporate incentive travel and the multinational
companies into India has boosted prospects for tourism. India's easy visa rules, public freedoms
and its many attractions as an ancient civilization makes tourism development easier than in
many other countries.
In order to attract more visitors, India needs to increase room supply, open further its skies to
increase air capacity, and upgrade its airports, roads and other infrastructure to global standards.
Also tourism development needs to be pursued with a focus on sustainability. Though the
Government of India is allowing 100% FDI in automatic route to India in tourism sector and
there is a wide gap between the demand and supply of hotel rooms and other tourism
infrastructure projects, we have attracted the FDI for a volume of 660.87 million US $ which is
1.46 percent of the total FDI inflow into our country from April 2000 to December 2007.

1.7 Sectors Receiving the Maximum FDI Inflows in Hotel & Tourism Industry in IndiaHotel and Tourism is one of the most booming sectors in Indian economy. It has contributed
heavily in the Gross Domestic Product of India.
100 percent FDI is permitted in the Hotel and Tourism in India under various approvals. Under
Automatic route, FDI is allowed only up to 51 percent in this industry. As per FDI guidelines for
hotel and tourism industry in India, following are the sectors, in hotels, which have been
receiving the maximum amount of FDI Inflows for the past few years:

Restaurants

Beach resorts

Tourist complexes which facilitates accommodation and catering to the tourists

As per FDI guidelines for hotel and tourism industry in India, following are the sectors in
tourism which have been receiving the maximum amount of FDI Inflows for the past few years:
Travel agencies

Tour operating agencies and Tourist transport operating agencies

Units which facilitates cultural, adventure and wild life experience to tourists
Units providing surface, air and water transport facilities to tourists
Sectors which offers leisure, entertainment, amusement, sports, and health related

facilities to the tourists

Convention/Seminar units and organizations

1.8 FDI in Hotels and Tourism Industries in IndiaMICE (meetings, incentives, conferences and exhibitions) tourism is also one of the fastestgrowing in the global tourism industry. It caters largely to business travelers, mostly corporates.
It caters to various forms of business meetings, international conferences and conventions, events
and exhibitions. The Ashok, New Delhi; Hyderabad International Convention Centre,
Hyderabad; and Le Meridian, Cochin, are forerunners in the Indian MICE tourism industry,
facilitating domestic and international business meetings and conferences. The Indian Hospitality
Sector is witnessing one of its rare sustained growth trends.
Hotel industry is inextricable linked to the tourism industry and the growth in the Indian tourism
industry has fuelled the growth of Indian Hotel Industry. A major reason for the demand for hotel
rooms is the underlying boom in the economy, particularly the growth in the information
technology enabled services and information technology industries. Rising stock indices and new
business opportunities are also attracting foreign institutional investors, funds, equity and venture
capitalist. The financial year 2008 09 was an unforgettable one for the Indian tourism industry
with the Mumbai terror attacks and the global economic downturn affecting the industrys
performance. The Hotel Industry, too, observed an overall decline in occupancy and revenue in
most cities in India.
100 percent FDI is permitted in the hotel and tourism industry in India under various approvals
Hotels offer restaurants, beach resorts, and other tourist complexes which provide
accommodation or catering and food facilities to tourists
Tourism Sector includes tour operating agencies and tourist transport operating agencies, units
which offer cultural, adventurous and wild life experiences to tourists, and various other
entertainment programs which include, water sport activities, leisure games, amusement parks as
well as the health care units
Automatic approval for foreign technology in the hotel and tourism sector will be availed if 3
percent of the total expense of the project occupies infrastructural developments

Up to 3 percent of the net turn over is payable as marketing fee under automatic route 10 percent
of the gross operating profit is payable as management fee under automatic route.
Hotel and Tourism sector is declared as high priority sector and Foreign Direct
Investment (FDI) upto 100%, under the automatic route is permitted in Hotels & Tourism
Sector, subject to applicable laws/regulations, security and other conditionalties.
As per report received from Department of Industrial Policy & Promotion, the details of the FDI
equity flows from April 2008 to January 2012 in the hotel and tourism sector is as follows:

Sl.No.

Year (Apr-Mar)

Hotel & Tourism Projects

FDI (` in crore)

1.

2008-09

489

2,098.23

2.

2009-10

582

3,566.32

3.

2010-11

403

1,405.15

4.

2011-12 (Apr-Jan)

427

4,041.28

1901

11,110.98

Grand Total

The FDI has been allowed with an objective to encourage investments in the hotel sector in India
and to create job opportunities in hospitality sector.
This information was given by the Minister of State for Tourism, Shri Sultan Ahmed in a
written reply in LokSabha today.
The Indian tourism has experienced a growth of 24.6% during 20092010 timeframe. The
industry is the third-largest foreign exchange earner, accounting for 6.2% of Indias GDP and
8.8% of Indias total employment, according to a report by the Planning Commission. It has
significant linkages with other sectors such as agriculture, horticulture, transportation,
handicrafts and construction. The tourism industry includes travel agencies, tour operating
agencies and tourist transport operating agencies; units providing facilities for cultural, adventure

and wildlife tourism; surface, air and water transport facilities for tourists; and
convention/seminar units and organizations.
According to the Planning Commission, the sector creates more jobs per million rupees of
investment than any other sector of the economy and is capable of providing employment to a
wide spectrum of job seekers, from the unskilled to the specialized, even in the remote parts of
the country. The sectors employment-generation potential has also been highlighted by the
World Travel & Tourism Council (WTTC), which says Indias travel and tourism sector is
expected to be the second-largest employer in the world, employing 40,37,000 people, directly or
indirectly, by 2019.
Travel and tourism is a USD 32 billion business in India, according to industry estimates; in
addition, the
The Indian tourism sector includes medical and healthcare tourism, adventure tourism, heritage
tourism, ecotourism, rural tourism and pilgrimage tourism. Medical tourism also known as health
tourism has emerged as an important segment, owing to Indias skilled healthcare professionals
and the lower cost of healthcare facilities in the country. Wellness tourism is regarded as a subsegment of medical tourism and it involves the promotion and maintenance of good health and
well being. India, with its widespread use of Ayurveda, Yoga, Siddha and Naturopathy,
complemented by its spiritual philosophy, is a well-known wellness destination.
Heritage tourism is oriented towards exploring the cultural heritage of a tourist location. India is
well known for its rich heritage and ancient culture. The countrys rich heritage is amply
reflected in the various temples, majestic forts, gardens, religious monuments, museums, art
galleries and urban and rural sites.
Due to its varied topography and distinctive climatic conditions, India is endowed with various
forms of flora and fauna, and it has numerous species of birds, mammals, reptiles, amphibians
and plants life on offer for tourism. Wildlife tourism includes wildlife photography, bird
watching, jungle safari, elephant safari, jeep safari, jungle camping, ecotourism, etc.

1.9 Policy and Promotion

Cumulative foreign direct investment (FDI) inflows into the tourism and. According to the
Ministry of Tourism, foreign exchange earnings from tourism during 2010 were estimated at
USD 14.19 billion. The government has permitted 100% FDI in the sector under the automatic
route, FDI into all construction and development projects including construction of hotels and
resorts, recreational facilities, and city and regional-level infrastructure.
In terms of incentives, a five-year tax holiday is extended to organizations that set up hotels,
resorts and convention centers at specific destinations. Besides this, the government has initiated
measures to bolster the sector, such as provision of visa on arrival for tourists from Finland,
Japan, Luxembourg, New Zealand and Singapore, and launch of several schemes that promote
rural tourism and infrastructure related with the sector. The government has also launched
campaigns such as Incredible India!, Colors of India, AtithiDevoBhavah and the Wellness
Campaign to promote the Indian tourism and hospitality industry.
For instance, the government has introduced a new category of visa, medical visa (M-Visa), to
promote medical tourism. Further, it has tied up with the United Nations Development Program
(UNDP) to promote rural tourism. The ministry has sanctioned 102 rural tourism infrastructure
projects to spread tourism and socio-economic benefits to identified rural sites with tourism
potential.
During the 11th Five-Year Plan, the tourism ministry had sanctioned an amount of Rs. 31.13
billion for 991 tourism infrastructure projects, including rural tourism and human resource
development projects. Some other schemes introduced by the Government of India include:

Scheme for product/infrastructure and destination development

Scheme for integrated development of tourist circuits

Scheme of assistance for large revenue generation projects

Scheme of capacity building for rural tourism

Several other initiatives undertaken to promote different tourism products include the following:

Rural tourism: Rural tourism showcases rural life, art, culture and heritage at rural
locations. The existing scheme for destination development supports the development of
infrastructure in rural areas. Under this scheme, the thrust is on promotion of village
tourism as a primary product to spread tourism and its socio-economic benefits to rural
and new geographic regions. The Ministry of Tourism has joined hands with the UNDP
for capacity building around 153 rural tourism projects have been sanctioned in 28
states/Union Territories including 36 rural sites where UNDP offers support in capacity
building. Under the Visit India 2009 scheme, around 15 rural tourism sites were selected
as rural eco-holiday sites.

Adventure tourism: Measures to promote adventure tourism include financial assistance

to state governments/Union Territory administrations for development of adventure
tourism destinations and granting of exemption from customs duty on inflatable rafts,
snow-skis sail boards and other water sports equipment. Adventure tourism activities in
India include mountaineering, trekking, mountain biking, river rafting and rock climbing.
In July 2009, the Ministry of Defence gave permission for opening of 104 additional
peaks in Leh area of Jammu & Kashmir for adventure tourism.

Medical tourism:This segment has emerged as an important component of the Indian

tourism industry; initiatives taken for promoting medical tourism include financial
assistance to service providers under the Market Development Assistance Scheme and
issuance of medical visas for patients and their attendants coming to India for medical
treatment. In addition, the government has also requested state governments to promote
medical tourism by offering suitable packages of identified hospitals and price banding
for specific treatments.

1.10 INVESTMENT REGULARTIONS

In the Hotel Industry Sector, Foreign Direct Investment (FDI) has been permitted up to 100%
under the automatic route. For foreign technology agreements, automatic approval is granted if:
1. Up to 3 % of the capital cost of the project is proposed to be paid for technical consultancy
Services. 2. Up to 3 % of the net turnover is payable for franchising and marketing/publicity
fees. 3. Up to 10 % of gross operating profit is payable for management fees, including
incentives fees.