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Indian policy mistakes threaten soaring tourism growth

Government and courts seem intent on sabotaging hospitality sector boom

| India
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Vehicles move along New Delhi's Connaught Place.   © Reuters

In the run-up to India's 2014 general election, the manifesto of Prime Minister Narendra Modi's Bharatiya Janata Party clearly identified tourism as a priority sector for development. On the campaign trail, Modi said his party would seek to develop 50 tourism circuits to promote local economies, given the sector's high employment potential.

Tourism is now growing quickly, but recent moves by the government and the courts threaten to stymie further development. More coordination is needed to ensure a better ordering of policy priorities.

The Ministry of Tourism counted 1.65 billion domestic tourist trips in 2016, marking growth of 15.5% over 2015. The increase can be attributed to favorable demographics, rising household incomes, more aspirational lifestyles, and increasing urbanization.

About 8.9 million international tourists visited India in the same period, an increase of more than 10% over 2015. Tens of millions of Indians are directly and indirectly employed by the tourism and hospitality sector, and several regions of India have tourism and hospitality as one of their top-three income and jobs generating industries.

On the back of the surge in tourism, the hospitality and food and beverage services sectors are also experiencing an unprecedented boom. Most of the major global hospitality brands are present in India and intent on expanding their reach across the large and diverse country. Local brands are also booming, and entrepreneurs are coming up with new ideas.

The food services sector alone generated revenues of about $50 billion in 2016, according to the National Restaurant Association of India's 2016 India Food Services Report, which forecast growth to more than $80 billion by 2021. The food services sector also contributes more than $3 billion a year to government coffers -- a contribution that could double if the authorities enforced taxes on the unorganized segment.

However, various government departments, and, most recently, India's Supreme Court, are threatening this growth. On May 19, the GST Council of India, a federal/state body that is overseeing the imposition of a nationwide goods and services tax, said that air-conditioned restaurants and hotels that charge room tariffs above 5,000 rupees ($77.5) a day are luxury establishments and will have to impose 28% GST on customers. This will be the highest rate of GST, which was launched on July 1.

The GST shock follows a government decision in January to ban compulsory service charges in restaurants. Hotels and restaurants also face multiple hurdles before they can open. There are dozens of city-level and state-level licenses and permissions that must be applied for, and operators have to reapply for each new location.

"Inspector Raj"

Furthermore, officials in large cities such New Delhi and Mumbai arbitrarily ban the use of terraces as extensions of restaurants, which severely impacts the financial viability of many. In February, the New Delhi Municipal Council barred 21 restaurants from using the rooftop at the landmark Connaught Place commercial complex.

India's infamous "Inspector Raj" is often unleashed on hotels and restaurants, even though some of the conditions of compliance are out of place in the 21st century. In recent years, government institutions such as the National Green Tribunal, the Architectural Survey of India and the Central Pollution Control Board have also started to intervene more aggressively in matters that relate to tourism and hospitality infrastructure.

India also has some of the most onerous regulations on the stocking and sale of alcohol. Most worryingly, the prohibition of the sale of alcohol has become a political weapon. The state of Bihar was one of the larger Indian states that imposed prohibition in April 2016, and several others, including the big state of Tamil Nadu, are taking measures to restrict the availability and sale of alcohol. Such measures are already denting the growth of the tourism and hospitality sector, and the financial viability of hotels and restaurants overall.

As if this was not enough, the Supreme Court has banned the sale of alcohol from April 1 in any establishment within 500 meters of a national or state highway. The ban covers not only shops that sell alcohol but also restaurants and bars, even if they are located inside a hotel or a club. The stated objective is to curb drunken driving on highways.

The judges have not yet shared any data or empirical evidence to support the contention that this move will make the roads safer. But with distance limitations already imposed in relation to places of worship and educational institutions it is becoming increasingly difficult for the hospitality sector to find regulation-compliant locations.

The fact that there is still growth in this sector, and that fresh investments are still being made, only underscores the tremendous opportunity that exists in tourism, hospitality, and food services, notwithstanding Indian policymakers' dogged efforts to find new ways to create more obstacles.

Arvind Singhal is chairman and founder of Technopak Advisors, a management consultancy based in New Delhi.

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