India's Hospitality Market: Unleashing Opportunities

India's Hospitality Economy Potential: An Outlook for the Next 10 Years and Ways to Seize the Opportunities

By Rahul Pandit?

Tourism contributes 6.8% to GDP and 9.2% to employment in India. Punching 35% above its weight per rupee invested, it provides 45 million jobs. Elevating the hospitality economy to the global mean of 10% GDP would unlock immense potential, contributing $1 trillion to India’s projected $10 trillion economy by 2035, generating 67 million jobs.

Rebounding from the Pandemic

The pandemic snuffed out 28% of upcoming and planned supply but delivered a 12% demand rebound as a parting gift.? This 40% demand-supply gap rejuvenated the hospitality market, restoring profitability.?

India’s air travel capacity is set to grow 200% over five years, adding 1,400 aircraft to the current 771. Assuming that half of the daily 500,000 air travellers, 4 million intercity rail passengers, and 7 million bus commuters are making a return journey, India’s lodging demand exceeds 5 million beds.        

Branded hotel inventory, currently under 200,000 rooms, is poised for significant growth. Greenfield inventory will expand at a 6% CAGR, ?while conversions will contribute another 2%. Domestic demand, growing at a 7% CAGR, will be bolstered 4% by international MICE and corporate travel from 2027. This 11% annual demand growth, minus a black swan, will outpace the 8% supply addition over the next decade, delivering inflation-beating RevPARs, attracting sustained investment to the sector.

This expansion of returns will generate cap rate compression, pushing up the EV of hotel stocks. The market will reward consolidation, promoting economies of scale.

Structural Drivers of Growth

1.???? Urbanisation: Urban areas are 3% of our land mass but contribute 70% to GDP. Today 34% of India is in its cities, it will be 50% by 2047. People uprooted rapidly at scale, enjoying higher disposable income, crave time and space to connect, nature to heal, and religion to nourish their identities. This will fuel the demand for leisure retreats, wellness resorts, and pilgrimage travel.        

2.???? Infrastructure Development: India’s 148 airports will reach 230 by 2030. Rs. 5.35 lakh crore Bharatmala will create 35,000 kilometres of highways, Rs. 8 lakh crore Sagarmala will develop ports, and the Rs. 100 lakh crore Gati Shakti will promote integrated logistics. Additionally, 20 new industrial cities along 11 infrastructure corridors will spur massive budget and mid-scale accommodation demand across India.?        

Emerging Trends in Hospitality

1.???? Leisure Becomes Mainstream: Better roads and heavier cars will expand the radius of road travel from 2-4 hours to 6-8 hours, creating opportunities for diverse leisure options. As leisure breaks become integral to the quality of life, middle-class households will make travel a consumption habit, funding vacations through EMIs.

2.???? Rise of Lifestyle Brands: As youth blend business and leisure, the opportunity to have fun and the freedom to work from a sofa, bed, or lounge, emphasising convenience over product, will accelerate the absorption of micro to luxury lifestyle brands. This will also spur domestic operators to revitalise their traditional brands to compete with exciting, high-energy global brands.

3.???? Dining as a Differentiator: With a middle class cash-rich and time-poor, dining out will become mainstream. Hotels will do well to offer their real estate to partner food entrepreneurs curating innovative culinary experiences to attract footfalls and deliver distinct brand value.

4.???? Weddings Market: The 7% CAGR? $130 billion market of 10 million annual weddings is a segment unique to India. PM Modi’s “Marry in India” call will strengthen this segment’s contribution to the hospitality economy.

5.???? Themed Events: Themed events, sports and music will create large destination-shifting markets for agile Operators to drive brand recall and bolster their toplines. The successful organisation of the 400 million people Mahakubh has demonstrated India’s capability for executing such templates at scale.

6.???? Branded Residences: With upwardly mobile customers yearning for the convenience of professional services at a marquee address, branded residences delivering superior yields per square foot are set to emerge as a significant market opportunity for real estate developers.

7.???? Growth in Outbound Travel: Outbound travel spending, currently $18 billion, is set to grow to $55 billion by 2035. Premium travel is booming, evidenced by a 10% rise in business class searches on MMT, with 32% of outbound travellers making two or more trips annually.

8.???? Luxury Brands Gain Prominence: Global operators will need to plant their luxury brands as flagship showcases in India to drive traction for their loyalty programs. Familiarity with these brands will influence Indian travellers’ choices abroad.

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Overcoming Challenges

1.???? Environmental Concerns: The Energy Policy Institute at the University of Chicago estimates that Delhi residents will lose 7.8 years of their lives due to air pollution, Mumbai residents will sacrifice 2.6 years. Addressing environmental quality is crucial for attracting inbound demand.        

2.???? Inbound Tourism Lag: India has a dismal 1:3 ratio of inbound to outbound travellers versus a healthy 2:1 for Vietnam and an admirable 3:1 for Thailand. Thirty million Indians vacationed abroad, while we welcomed only 10 million foreign visitors.        

3.???? Talent Crunch: Hotel management degree programs reported a 64% vacancy rate in 2023. Integrating tourism education into school curricula, emphasising hygiene and environmental stewardship, can help create a litter-free India, while generating skilled jobs and boosting domestic tourism.        

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Strategic Interventions

Five states – Maharashtra, Gujarat, Tamil Nadu, Karnataka and Andhra Pradesh - will contribute almost ?50% of India’s GDP by 2030, generating demand for luxury brands. However, Gujarat’s liquor restrictions and Tamil Nadu’s conservative spending will skew development to upscale products.

1.???? Policy Incentives: Maharashtra’s up to 100% SGST reimbursement for 15 years for new hotels is a welcome example of co-opting the sector in supply creation. Similarly, Assam’s 100% SGST reimbursement, supported by the centre’s Northeast Unnati up to 100% CGST credit, will attract significant hospitality investments to the state.

2.???? Theme Parks: Theme parks turbo-charge tourism. Universal Tokyo attracts 23 million visitors annually, and Disney Florida 59 million. A state-backed initiative to develop a global-scale theme park will significantly boost India’s tourism economy.

3.???? National Priority Status:?Recognizing tourism as a strategic sector of national importance and placing it under the Concurrent List would facilitate faster decision-making and focused policy execution. A Standing Cabinet Committee on Tourism, chaired by the Prime Minister, would ensure alignment with broader economic goals.

The Road Ahead

India will become one of the top three hospitality markets globally over the next 10 years. Atithi Devo Bhava!