Hotel Industry in India – Some Correlates between Prices and Macro Economic Issues

By Dripto Mukhopadhyay

Hospitality has become one of the major businesses in the India. Large number of international brands has entered the sector in recent times. The sector has been marked with increase in number of premium segment hotels in different parts of the country, along with smaller ones that cater the need for the middle class and lower middle class domestic tourists. In this particular blog, I would restrict myself in highlighting a few crucial attributes of the hospitality sector in India and some of the consequences thereof.

To start with let’s look at some of the macro economic indicators relating to hospitality sector. As obvious, hospitality sector includes hotels and restaurants. Though apparently this should include informal sector also, as the norm goes in national accounting system, data pertaining to this sector majorly reflects the trend of the registered sector because of sheer nature of the sector. Gross Domestic Product (GDP) relating to hotel & restaurant sector is presented in Figure 1. The visual presents the GDP of the sector at 2004-05 prices and the share of hotel and restaurant sector to total GDP of the country from 2000-01 to 2011-12. It is evident from the graph that hotel and restaurant sector GDP has increased to 3 times during the last decade starting 2000-01. It showed a gradual increasing barring the period 2008-09 and 2009-10 as the period was marked with global economic recession. However, the share of the sector in total country GDP rose till 2007-08 significantly and since 2008-09 suffering a dip followed by a stagnating share. This is a reflection of happenings in the world economy as well as of the Indian economy. Though apparently India recovered quickly enough from the recession, due to some of the fiscal measures by the Central Government, but the recovery was quite brittle in nature. It has become evident from high GDP growth registered soon after 2008-09, but poor GDP growth during last couple of years. Poor performance of industry sector, majorly due to reduced demand from domestic market, led the slow down.

However, investment in hotel and restaurant sector was not hampered by timid GDP growth during recent years. Gross Fixed Capital Formation (GFCF) in hotel and restaurant sector and its share in total GFCF of the country is given in Figure 2 below. There was a steady growth in investment in this sector, especially since 2003-04. The momentum dampened a little during the year 2008-09, but picked up again and has shown steep growth. The red line in the graph representing share of the sector in country’s GFCF almost shown the same trend with some stagnation in increase in share between 2005-06 and 2009-10. This was primarily because of huge investment in some other sector, especially IT and ITES.

In my last blog (27th April), I constructed a time series of Hotel Price Index for India. However, the price Index given in that blog was in nominal term. I am sure that all the readers of this blog are aware about the definitions of nominal and real prices. However, in case someone is not clear about the concept, I am adding a couple of lines on this aspect. Hotel rates, generally which are called as “rack rates” are always available in “current prices”. Current price is the prevailing price at a particular time point. So, a dataset that contains 10 different prices at 10 different time points at nominal price, reflects the room rates prevailed at those 10 different time points at market rate. The drawback of the nominal prices is that it does not take care of the inflation part and therefore, not much useful when compared over time. When the nominal prices are adjusted with the help of inflation rates (pertaining to a specific sector), it is called as “price in real term” or at “constant prices”. With constant prices, comparing actual change in price level is made easier since it provides purchasing power parity.

In Figure 3 below, I have presented hotel price indices in nominal price as well as in real term. One can see the difference between these two as unmistakably stark from the graph. Though the price at nominal prices has changed almost 2.5 times during the last decade, it remained almost at the same level throughout in terms of real prices with marginal variations in both sides. This helps in inferring a few important points:

  • Since the hotel prices remained almost same over the period of time in real term, it did not make a dent into the pocket of domestic tourists because income level has also increased in commensurate to inflation rate, barring a section that belongs to the lower income group.
  • Since in most of the developed countries and many of the developing countries inflation rate is very low, it did not make much of a difference to them especially due to the fact that dollar value has become much stronger during the last decade.
  • In purchasing power parity terms, the current hotel rates in India, in fact, are lower for most of the foreign tourists than the same during 2000-01.

However, this becomes clear if one does this exercise for different segments of hotel categories. perhaps segment-wise analysis can provide even further valuable insights regarding this issue.

In continuation of the above, I have given the trend of foreign tourists’ arrivals (FTA) and number of domestic tourists (DT) and compared them with hotel price index in real term. In both figures, it is clear that both FTA and DT have grown unabated during most of the period that are covered in this analysis. The marginal differences can be seen during 2008-09 when HPI (real) has gone down following a decline in FTA. However, in case of domestic tourists, it was only increase, though the HPI has decreased since 2008-09 significantly. These trends raise some questions:

  • Is it that the owners of the hotels have restricted the price at a certain level to lure tourists?
  • What about the cross-price elasticity if we consider the countries that are competitors to Indian destinations? Did they follow the same path?
  • Or, it is something else that has caused the price to remain at the same level or decline to some extent other than the concern about tourists’ pockets?

We can identify that factor “something else” from Figure 6 below. If we remember our earlier discussion on investment in hotel and restaurant sector, we find a clear rational economic behaviour from the hospitality sector in India. I have presented a scatter between hotel price index in real term and an index that represents GFCF or in other words investment in hotel and restaurant sector in Figure 6. The blue line shows undoubtedly why the price remained almost at the same level or even declined. The key word is COMPETITION. The industry is facing steep competition on the face of new investments and new entrants including big names in the world hospitality. The monopoly that was enjoyed by several players during the 90’s or at the beginning of 2000’s, does not exist any further. Rising competition, coupled with volatile economy world over, have forced the players to maintain the price at a certain level compromising with profitability.

The competition is certainly a boon for the customers since they are able to obtain better services at a lesser price. However, this poses a serious question from sustainable tourism point of view. With the fact that tourism sector contributes about 5% of total carbon emission in the world and accommodation or hospitality sector is one of the significant contributors to that, how sustainable is this trend on the face of rising tourism activities and rising competition. Looking forward towards a “Green hospitality” or environment friendly hospitality sector, how much is achievable if the profitability is compromised significantly? After a critical point, does survival become major concern than saving environment? These are some of the questions that need to be researched in a greater detail from the point of view of sustainable tourism development. Role of the Government or regulators will be crucial also to promote sustainable hospitality for a sustainable tourism development. Perhaps some of the issues relating to these paradigm I will seek answer to in my next blog.

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