PROJECT ONFOREIGN DIRECT INVESTMENT IN HOTEL AND TOURISM SECTOR

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 INTRODUCTIONA 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.The Government of India has recognized the key role of the foreign direct investment (FDI) and foreign institutional investment (FII) in its process of economic development, not only as an addition to its own domestic capital but also as an important source of technology and other global trade practices. In order to attract the required amount of FDI and FII, it has bought about a number of changes in its economic policies and has put in its practice a liberal and more transparent FDI and FII policy with a view to attract more foreign direct institutional investment inflows into its economy. These changes have heralded the liberalization era of the foreign investment policy regime into India and have brought about a structural breakthrough in the volume of FDI and FII inflows in the economy. Growth of Indian economy is playing hide and seek with the double digit growth (Gross Domestic Product) mark. The latter is a key index, which the foreign investors check before committing large sums of money for investment. Of its own, the Indian economy will find it difficult to reach this target, except for an occasional burst of activity; like the one in 2003. To sustain it, outside help is needed and domestic house is to be placed under strict discipline.Democracy is a great buzzword, if it translates into order and political stability. Labor unrest, political opportunism and corporate irregularities are a few issues, which tarnish democracy and discourage outside investors. But the current government in both its terms has opened up the economy to welcome foreign investment to keep up with the strong domestic demand for quality goods and services. This has attracted unprecedented amount of foreign investment in the last decade, but of the two forms of foreign investment foreign portfolio investment (FPI) and foreign direct investment (FDI), the former has reached our shores much more than the latter.As FPI essentially interacts with the real economy via the stock market, the effect of stock market on the countrys economic development will also be examined. Research shows that the perceived benefits of foreign portfolio investment have not been realized in India. It can be seen that the mainstream argument that the entry of foreign portfolio investors will boost a country's stock market and consequently the economy, does not seem be working in India. The influx of FIIs has indeed influenced the secondary market segment of the Indian stock market. But the supposed linkage effects with the real economy have not worked in the way the mainstream model predicts. Instead there has been an increased uncertainty and skepticism about the stock market in this country. On the other hand, the surge in foreign portfolio investment in the Indian economy has introduced some serious problems of macroeconomic management for the policymakers like inflation, currency appreciation etc.On the other hand FDI is what the government really needs to attract in various sectors like infrastructure, education etc. it is much more stable than the foreign institutional investment which comes via the stock market route, and has more accountability and brings fundamental and tangible benefits to the economy. The dependence on FPI is pushing many developing countries, including India, towards a more stock market oriented financial system. This makes it imperative to evaluate the relative merits and demerits of a stock market based financial system in a developing country as compared to the Chinese model where conditions are conducive to foreign investment in the real sector. The global recession in 2008 proved how volatile the money pumped in by the FIIs into the secondary segment of the financial market is, leading to huge losses for the domestic investors who had to bear the brunt even though the economy as such was insulated from the adverse effects of the recession. Whereas the sectors where there was FDI didnt experience such knee-jerk reactions.In this context, this report is going to analyze the trends and patterns of foreign direct investment (FDI) and foreign institutional investment (FII) flows into India during the post liberalization period.

1.3 HISTORYIn the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread tobecome a truly global phenomenon, no longer the exclusive preserve of OECD countries.FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. Figure below shows net inflows of foreign direct investment as a percentage of gross domestic products (GDP). The largest flows of foreign investment occur between the industrialized countries North America,WesternEurope and Japan. But flows to non-industrialized countries are increasing sharply.

1.4 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. 1.5 TYPES OF FDI

1.6 ADVANTAGES OF FDI1) Raising the Level of Investment: Foreign investment can fill the gap between desired investment and locally mobilized savings. Local capital markets are often not well developed. Thus, they cannot meet the capital requirements for large investment projects. Besides, access to the hard currency needed to purchase investment goods not available locally can be difficult. FDI solves both these problems at once as it is a direct source of external capital. It can fill the gap between desired foreign exchange requirements and those derived from net export earnings.2) Up gradation of Technology: Foreign investment brings with it technological knowledge while transferring machinery and equipment to developing countries. Production units in developing countries use out-dated equipment and techniques that can reduce the productivity of workers and lead to the production of goods of a lower standard.3) Improvement in Export Competitiveness: FDI can help the host country improve its export performance. By raising the level of efficiency and the standards of product quality, FDI makes a positive impact on the host countrys export competitiveness. Further, because of the international linkages of MNCs, FDI provides to the host country better access to foreign markets. Enhanced export possibility contributes to the growth of the host economies by relaxing demand side constraints on growth. This is important for those countries which have a small domestic market and must increase exports vigorously to maintain their tempo of economic growth.4) Employment Generation/Development: Foreign investment can create employment in the modern sectors of developing countries. Recipients of FDI gain training of employees in the course of operating new enterprises, which contributes to human capital formation in the host country.5) Benefits to Consumers: Consumers in developing countries stand to gain from FDI through new products, and improved quality of goods at competitive prices.6) Revenue to Government: Profits generated by FDI contribute to corporate tax revenues in the host country.

1.7 DISADVANTAGES OF FDI

FDI is not an unmixed blessing. Governments in developing countries have to be very careful while deciding the magnitude, pattern and conditions of private foreign investment. Possible adverse implications of foreign investment are the following:1. When foreign investment is competitive with home investment: profits in domestic industries fall, leading to fall in domestic savings.2. Contribution of foreign firms to public revenue : through corporate taxes is comparatively less because of liberal tax concessions, investment allowances, disguised public subsidies and tariff protection provided by the host government.3. Foreign firms reinforce dualistic socio-economic structure : It increase income inequalities. They create a small number of highly paid modern sector executives. They divert resources away from priority sectors to the manufacture of sophisticated products for the consumption of the local elite. As they are located in urban areas, they create imbalances between rural and urban opportunities, accelerating flow of rural population to urban areas.4. Foreign firms stimulate inappropriate consumption : patterns through excessive advertising and monopolistic market power. The products made by multinationals for the domestic market are not necessarily low in price and high in quality. Their technology is generally capital-intensive which does not suit the needs of a labour-surplus economy.5. Foreign firms able to extract sizeable economic: and political concessions from competing governments of developing countries. Consequently, private profits of these companies may exceed social benefits.6. Profit distribution, investment ratios are not fixed: Continual outflow of profits is too large in many cases, putting pressure on foreign exchange reserves. Foreign investors are very particular about profit repatriation facilities.7. Political Lobbying: Foreign firms may influence political decisions in developing countries. In view of their large size and power, national sovereignty and control over economic policies may be jeopardized. In extreme cases, foreign firms may bribe public officials at the highest levels to secure undue favours. Similarly, they may contribute to friendly political parties and subvert the political process of the host country.1.8 Recent global and regional FDI trends

The rise of FDI flows in 2011 was widespread in all three major groups developed, developing and transition economies. Developing economies continued to absorb nearly half of global FDI and transition economies another 6 per cent.This graph gives a pretty good indicator of how relative FDI inflows have changed since 2002 we can see that right from the year 2002 there has been an increase in FDI investments in the developing economies. The increase in the GDP growth or the bull phase which most of the developing economies experienced from 2003-2008 could be attributed to the increased FDI.

1.9 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.

1.10 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.

1.11 Sectors Receiving the Maximum FDI Inflows in Hotel & Tourism Industry in India Hotel 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 touristsAs 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

1.12 FDI in Hotels and Tourism Industries in IndiaMICE (meetings, incentives, conferences and exhibitions) tourism is also one of the fastest-growing 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 approvalsHotels offer restaurants, beach resorts, and other tourist complexes which provide accommodation or catering and food facilities to touristsTourism 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 unitsAutomatic 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 developmentsUp 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 ProjectsFDI (` in crore)

1.2008-094892,098.23

2.2009-105823,566.32

3.2010-114031,405.15

4.2011-12 (Apr-Jan)4274,041.28

Grand Total190111,110.98

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 Ahmedin a written reply in Lok Sabha 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 sub-segment 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.

1.13 POLICY AND PROMOTIONCumulative 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 tourismSeveral 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.

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1.14 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.

CONCLUSIONThere are certain points which makeIndia a hot destination for investment in tourism department. First is the positive attitude of the government, whohas allowed 100 percent FDI in this sector. Last year in the Indian union budget 2010, the Indian government has given more than INR 1000 crore to the Ministry of Tourism. Second, the tax holidays arebeing given to the organizations who want to invest in this sector. All this makes Indias tourism industry a great investment option.Tourism industry in India is growing and it has vast potential for generating employment andearning large amount of foreign exchange besides giving a fillip to the countrys overall economicand social development. But much more remains to be done. Eco-tourism needs to be promoted sothat tourism in India helps in preserving and sustaining the diversity of the India's natural andcultural environments. Tourism in India should be developed insuch a way that itaccommodatesand entertains visitors in a way that is minimally intrusive or destructive to the environment andsustains & supports the native cultures in the locations it is operating in. Moreover, since tourism isa multi-dimensional activity, and basically aservice industry, itwould benecessary thatall wingsof the Central and State governments, private sector and voluntary organisations become activepartnersintheendeavourtoattainsustainablegrowthintourismifIndiaistobecomeaworldplayer in the tourism industry.Tourism Industry is a very dynamic industry and so are its challenges and strategies, therefore alearning approach towards best-practices would yield better results in enhancing competitivenessof this industry. Also, the need for sound perspective in planning and private-public-communityparticipationisimperativeforthispurpose.Thispaperwasanattempttoilluminatetheareathrough simple yet effective examples and cases collected from around the world, based on theircontribution in making their respective Tourism Industry more competitive. It leaves a backgroundfor further research, asassessing theimplications ofusing theabove mentioned best-practices inIndian Tourism Industry can be another rewarding study

. Foreign exchange earnings went up by 23 % (2003).. International tourist arrivals increased by 16 %.. INDIA selected among the top 10 preferred destinations: The Conde Nast Traveller.. Among the top 5 destinations: The Lonely Planet Travel Guide.

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