TILL recently tourism did not receive policy priority to make it an engine of growth. In the post-independence period, planners were understandably preoccupied with achieving food sufficiency and mitigating foreign exchange shortages to devote much attention to tourism. While food sufficiency was achieved in the 1980s, persistent shortage of foreign exchange accentuated by periodic exogenous shocks kept policy-makers distracted.

Promotion of tourism requires multiplicity of coherent action concerning both the centre and the states – significant upgradation in infrastructure and alignment of fiscal policies with competing destinations, to name a few. Above all, it needs a mindset change; tourism is not a luxury of the rich but has multiplier benefits for the economy with high trickle down effect.

The economic reforms which commenced in the 1980s and accelerated in the 1990s, following the policy response to the balance of payment crisis of 1991, resulted in broad-based economic liberalization. It also enabled India to secure a GDP growth rate of 6% in the 1990s which has since accelerated to 6.5% with a medium-term prognosis of 7.5% growth rate. The tenth plan and the midterm review recognizes ‘the vast employment generating potential of tourism and the role it can play in furthering the plan’s socio-economic objectives.’ It believes that the ‘travel and tourism sector creates more jobs per million rupees of investment than any other sector of the economy. More importantly, this employment is generated rapidly at a relatively low cost across a wide spectrum of skills.’

India’s share in international tourism was 0.34% in 2002 and increased to 0.40% during 2003. This trend continued in 2004 with international arrivals touching 3.37 million, an increase of 23.5% over those in 2003. The upward trend has continued in 2005 with international arrivals likely to exceed 4.2 million. In addition, domestic tourism is rising rapidly and is estimated at 375 million. Overall, tourism is expected to generate foreign exchange earnings of over $5 billion in the current year.

According to the World Travel and Tourism Council (WTTC) tourism and related activities generate direct and indirect employment of about 25 million. It is estimated that one foreign tourist creates 0.91 jobs in India and even making allowances for the import leakage factor of 45% assumed in the National Tourism Policy document, one foreign tourist creates 0.57% jobs in India. The employment coefficient ratio in tourism is thus significantly higher than the average employment ratio.

The midterm review of the tenth plan has set an employment target of 3.6 million jobs a year with consequential multiplier effect in other services connected with tourism like hotels, restaurants, transport and shopping. In recognition of the need to improve tourism infrastructure and position the India brand, the allocation for this sector was increased from 0.27% of the total gross budgetary support in the ninth plan to 0.43% in the tenth plan. The central plan outlay for the sector as a whole too has been increased to Rs 2900 crore from Rs 595 crore in the ninth plan. In addition, substantial investments are separately planned for air transport, urban infrastructure, roads and railways. As a consequence, the tenth plan allocation for the states and the Union for tourism was increased to Rs 4602 crore as against Rs 1108 crore during the ninth plan.

 

The strategic objectives for the tourism sector as outlined in the tenth plan and the midterm review comprises of five key objectives: positioning tourism as a national priority, enhancing India’s competitiveness as a tourism destination, improving and expanding product development, creating world class infrastructure, and drawing up effective marketing plans and programmes.

An absence of coherence and asymmetric policies between different agencies of centre and the states needs redressal. Unless both the centre and the states act in concert and a coherent policy framework is evolved, sustaining the recent growth trends would remain problematic.

 

Another key area is improving tourism infrastructure. Beyond a point, cocooning tourism infrastructure from the overall infrastructure in the country is not practical. Nonetheless, completion of ongoing projects and effective utilization of allocated resources for the tourist circuit is important. Infrastructure requirement, including investment in urban areas, municipal roads and facilities, clean drinking water and drainage sanitation needs priority attention. However, a multiplicity of agencies makes accountability difficult in overseeing implementation and effective monitoring.

Out of the 1310 tourism projects which were undertaken in the tenth plan, 740 projects are still incomplete. Their expeditious completion deserves special attention. In the tenth plan, three existing tourism infrastructure schemes were merged into two new schemes, namely, the integrated development of tourism circuits and product infrastructure and destination development. These projects are now being fully funded by the central government with state governments having to provide land and external infrastructure. They include six tourism circuits to be identified on an annual basis and during the first two years of the plan; 24 circuits have already been selected with work in progress. A new scheme for tourism infrastructure development fund is also under consideration along with enhanced allocation for the North East region.

 

Beyond these, in view of the renewed emphasis of the present government on infrastructure upgradation, we need the following additional measures:

Roads: Significant improvement in the road network has been accomplished and others are in the process. These include the golden quadrilateral and the North South and East West projects being implemented by the National Highway Development Authority. Additional funds have also been provided for upgrading the state highways as well as for the rural road connectivity programme. However, in the road sector, the following additional measures are necessary.

* Roads leading from national or state highways to important tourist heritage sites need upgradation in a number of places. These connecting roads should be declared part of the national highway being executed by the Highway Development Authority. Road connectivity to the 20 world heritage sites deserves priority.

* A large number of new petrol outlets are coming up along national and state highways. The tourism ministry in concerted effort must cast an obligation on the owners to provide wayside amenities, particularly hygienic toilets and other requirements for travellers.

* The rural road network programme is an ongoing activity and will take many years to complete. However, within the programme and the funds earmarked for each state, the connectivity for a ‘rural tourist circuit’ should be accorded priority. This will open up tourism in the rural areas, which is particularly important in view of a dramatic increase in the number of domestic tourists.

Civil Aviation: Improved air connectivity, both within the country and to international destinations, is vital for sustaining increased tourism activity. A progressive opening of the domestic skies, new domestic private companies, particularly no-frills airlines, and tangible moves to upgrade the quality of metro airports augurs well for the future. However, some further steps are necessary.

* It is critical to make domestic air travel affordable. While international petrol prices are driven by factors on which we have little control, we need a sensible fiscal policy. Aviation Turbine Fuel (ATF) which attracts sales tax ranging from 4% to 25% in the states needs to be harmonized and ATF declared a deemed good making it eligible for 4% central sales tax.

* The policy for creating regional aviation hubs through public-private partnership needs greater clarity.

* The policy to upgrade, modernise and recommission a large number of existing airports through private sector participation needs early action.

* To enhance competition in the domestic market, equity participation by foreign airlines in the domestic sector should be permitted.

* Policies relating to helicopters to improve connectivity with regional aviation hubs needs to be realistic to attract private investment.

* Last but not the least, the human resource component of major civil aviation expansion while primarily the responsibility of the civil aviation ministry, has important implication for tourism development.

Hotel Infrastructure: If India is to accommodate 10 million tourists by 2007-08 and cater to the needs of 350 million domestic tourists, adequacy of hotel accommodation remains a major concern. Currently, the capacity of 90,000 rooms needs to be augmented by an equivalent number according to the World Travel and Tourism Council (WTTC). If domestic tourism is to be encouraged, an additional 120000 rooms appears inescapable. This will still be modest compared to the availability in competing destinations as would be evident from the following Table:

 

Augmenting the capacity of hotel rooms raises complex challenges. First and foremost, the availability of land. State governments have multiplicity of rules and procedures for land availability for hotels. It has also been accorded low priority. State governments must be persuaded to create ‘hotel land banks’ which can enable swifter allocation of land at affordable costs. The cost of land while reflecting market prices must take into account that if this cost is a pass through for the room tariff, hotel rooms in India will be uncompetitive as compared to other destinations.

Indeed, tourists have complained that rooms in India are far more expensive than alluring western or other Asian destinations. Hoteliers on the other hand, complain that both the cost of debt and the cost of land are responsible for high room tariff cost. This needs to be reconciled and guidelines framed which harmonises the interest of tourism with economic costing for available land.

Second, government land belonging to the railways and defence can be identified for setting up budget hotels which can support rising domestic tourist activity.

Third, estimates suggest that construction of 160000 rooms by 2010 would need an additional investment of Rs 48,000 crore over the next five years. In addition, finances will be required for the construction of budget hotels to meet a rapidly rising demand. Recognised industrial houses or established hotel groups can easily raise debt in the domestic market but should be encouraged to access external commercial borrowing in view of the prevalent low rates of interest regime. A mechanism for unbundling of risk including cost of exchange rate fluctuations can be devised; a line of credit for external borrowing can be extended through State Bank of India, ICICI Bank or IDBI.

Furthermore, many past investment by hotel groups were undertaken at high cost of borrowing; imaginative restructuring of debt profile is critical for enabling fresh borrowing. The Ministry of Tourism must initiate a dialogue with the Finance Ministry to evolve a suitable mechanism for restructuring high cost debt.

Greenfield investments by a new generation of entrepreneurs in budget or heritage hotels need special consideration. The Tourism Finance Corporation or the state counterparts are inadequate to meet new demands as well as ensure that the perceived risk of such investments does not overburden the cost of the debt.

Active encouragement to international hotel chains which have evinced keen interest in India needs to be fully capitalized as foreign investments would ease pressure on available domestic finances.

 

A competitive fiscal regime is central to sustaining the current tourism momentum. A CRISIL study compares our tax structure with other competing destinations and concludes that:

* Indian tourism suffers high taxation in terms of its multiplicity, complexity and incidence of double taxation.

* That 21 paise goes to the tax kitty in every rupee a tourist spends.

* While the central government realizes seven paise, the balance 14 paise is kept by the state government

* Reducing tax burden to 10 paise will have a multiplier effect, both on tax collection and tourism growth.

* CRISIL has proposed a reduction to 10 paise in a rupee which in their calculation can increase GDP by Rs 1,23,000 million with an additional tax revenue of Rs 460 million and additional employment generation of 0.67 million.

* Indian taxation of 21% compares unfavourably with other competing destinations as would be evident from the accompanying graph (see below).

 

A major effort at rationalizing the central taxes commenced some years ago and has resulted in: (i) abolition of Expenditure Tax; (ii) benefits under Section 10(23G) to financial institutions that advance long-term capital to hotels in three-star and above categories; (iii) benefits under Section 72A of the Income Tax Act for unabsorbed loss and depreciation on amalgamation to hotels; (iv) abolition of IATT (Inland Air Travel Tax) and Foreign Travel Tax (FTT); (v) basic customs duty on imported liquor being brought down to 160%; (vi) Service Tax on foreign exchange being earned by tour operators has been exempted for tax calculation; and (vii) reduction on basic customs duty on imported equipment for ropeway projects to 5% without payment of CVD and SAD.

The central government, however, has an important unfinished tourism tax reform agenda which include: extension of Section 80IA, particularly for hotels in areas which face a significant room deficit; convention centres being accorded the benefit under Section 80IB and Section 10(23)G and; further rationalization of customs duty and special additional duty on imported wines and spirits.

 

The domestic manufacturers of spirits have effectively lobbied to keep import duties at unsustainably high levels. Equally, import duty on wines are unexpectedly high and in the long run do not protect Indian wine makers. A lower import duty will encourage many joint venture partnerships for wine cultivation in India and in the process improve productivity, efficiency and quality. Duty on wines must be reduced on a credible understanding that the state governments would not raise their excise duty or other levies to neutralise the benefit to consumers.

As far as state governments are concerned, fiscal policy changes must include the following:

* The present asymmetry in the application of luxury tax which varies from 0-20% needs rationalization at 5% on actual prices of rooms with a tariff in excess of Rs 1000 per day.

* The food and beverage related taxes are also complicated, vary widely and need to be rationalized at a uniform level of 5% across different categories.

* The taxes on tourist vehicles are bizarre. They lack uniformity, vary for different states, sometimes a road tax on per seat basis ranging from Rs 18,000 to Rs 72,000 per month for a 35 seater coach. At this price, a tourist vehicle hardly becomes an economic proposition. We need to rationalize the tax at a significantly lower level and have only a single tourist transport tax with vehicles being permitted to travel in a region of two or three contiguous states avoiding inconvenience to passengers.

* As mentioned earlier, sales tax on ATF be pegged at 4% (current rate varies from 4-39%).

 

 

While discussing the potential for tourism as a growth multiplier, there is scope for innovation. In a recent seminar in Madrid, an entire session was devoted to ‘Event as a way to foment tourism’. In 2004 Spain attracted 18566 meetings with the total number of participants in these meetings touching over five million, covering 199 cities, catapulting Spain to the second position in hosting international meetings ahead of UK, Germany and Italy. The famous football player Jorge B. Valdano, who is now manager of Real Madrid, commented that Germany is contemplating an investment of 15 billion euros for the football event in 2006, contributing 0.75% to its GDP. Tourist destinations all over the world have adjusted and readapted to changing consumer preferences with increasing attention to special events like football, golf, music concerts, gastronomy and health to name a few. While India is yet to fully exploit its beach and sun, architecture and palaces, it must think of a coherent policy to attract international events. Rajiv Gandhi’s success in the Asian Games permanently altered Delhi’s infrastructure and landscape. We do not have a ‘Vision on Events’ like soccer, golf and music concerts, international conventions, not to speak of future Olympics. Decisions cannot be taken overnight nor strategy devised in isolation. Constructive events require coordinated efforts of multiple ministries and organization with coordination at perhaps the highest level.

The competitive race for Olympics 2012 in Singapore saw the presence of British Prime Minister Tony Blair, French President Jacques Chirac and the Queen of Spain showing the effort and commitment which countries need to secure positive outcomes. Perhaps we need a Commissioner General (India Events) with Ambassador rank created in the prime minister’s office to scan, select and coordinate to seek and secure significant events to India. This cannot be left to the isolated efforts of the Ministry of Tourism, Youth Affairs, Sports and Culture. This would also be consistent with what other countries are pursuing.

 

Quite often, benefits accorded by the central government are neutralised by the actions of state governments, particularly in the area of tax policy. This results in mere transfer of foregone revenues by the centre in favour of the states without affecting the intended beneficiaries. Similarly, multiplicity of agencies and widely divergent policies on land allocation, varying rates of stamp duty, eligibility criteria, permissible floor area, taxes imposed on motor vehicles, freedom in inter-state movement, varying rates of sales tax, all create inherent conflicts and contradictions.

The Ministry of Tourism had constituted a National Tourism Advisory Council (NTAC) in 2002. The state tourism ministers conference in September 2002 discussed the need for putting tourism in the concurrent list of the Constitution, apart from rationalization of taxes in hotels and tourist vehicles and completing the earlier plan projects. The proposal for moving tourism to the concurrent list in the Constitution was circulated to all state governments and all states except five – Andhra Pradesh, Karnataka, Kerala, Tamil Nadu and Rajasthan – have concurred with the proposal. The approach of the central government to persuade these five recalcitrant states may not yield tangible outcomes.

The proposal of moving tourism to the concurrent list was initiated by the NDA government and it would be reasonable that they do not resile from their earlier commitments. The UPA government is also committed to this approach. The Ministry of Tourism should consider seeking cabinet approval and thereafter moving a constitutional amendment for shifting tourism to the concurrent list in view of the majority of the states having supported the proposal in line with making tourism a national priority. This Bill is likely to achieve bipartisan support and neither its introduction nor its passage should be made contingent on the consent of the five remaining states.

 

While the constitutional amendment to move tourism to the concurrent list may take time, some immediate steps are necessary. The National Development Council (NDC), where chief ministers of all states are members, is an important forum to discuss issues of centre-state relations. In the past, power sector reforms was one area which needed coordinated action. The NDC had constituted a group with some designated chief ministers, along with the power minister, finance minister and others working a coordinated strategy. Tourism policy needs a similar arrangement.

The NDC may constitute an empowered group under the chairmanship of the prime minister with chief ministers from five important tourist destinations along with the finance minister and tourism minister as members for a coordinated action. This would be far more effective than a cabinet committee on tourism because in several areas tangible action cannot be taken without the participation and cooperation of state governments. The prime minister as chairman of the NDC could initiate action along these lines without waiting for another formal meeting of the NDC which may be some months away.

 

Tourism is high on the radar screen of policy-makers. The world is agog with the India excitement. India is the new dominant global fashion. A coherent policy on tourism will sustain this new found love for India. The world is becoming increasingly interdependent with seamlessless transfers of capital, technology and disaggregation of economic activity through innovative outsourcing. Freer movement of people will become inevitable; driven by demographic differentials, the ageing composition of mature societies and a quest for emerging economic opportunities.

While ‘Nations without Borders’ may not be round the corner but a progressive erosion of sovereignty where people seek better life quality, leisure, medical care, mental and physical rejuvenation is an emerging reality. These are varied aspects of the same process and tourism has multiple forms. Indeed, tourism is one of the more acceptable and pleasant facets of globalisation.