Trade liberalization of the tourism sector in India

By Priya Chetty on July 22, 2015

Tourism is one of the core drivers of the economy in India and it is classified in the field of the service industry. Some of the benefits associated with the tourism industry are:

  • It contributes to a decreased rate of unemployment.
  • Development of the foreign exchange system.
  • Promotion of other economic activities in the country.

A notable research done earlier this year on the Indian tourism industry stated that in 2014, tourism contributed 7.3% of the overall Gross Domestic Product (G.D.P) of India. It is expected to grow to 8.2% in 2015 (Crooks, Turner, & Snyder, 2011). This is directly proportional to the growth rate of India’s economy. There are four major types of tourism in India:

  1. Medical tourism.
  2. Rural tourism.
  3. Adventure tourism.
  4. Corporate meeting, conferencing and Exhibitions (M.I.C.E) tourism.

Medical tourism is when people from other countries travel to India to get high-quality, affordable treatment, for which India is one of the best nations in the world. Rural areas of India are quite popular among tourists across the world because the people living in rural areas are known to preserve the ancient India’s way of life. They experience this rural Indian living through ‘rural tourism’. For adventure tourism, tourists seek India’s natural beauty and also historical monuments such as the Taj Mahal, temples such as Khajuraho, Caves such as Ajanta Caves, etc. (Nair & Durham, 2014).  India as a booming economy is also a popular choice for meetings and conferences. However, the government of India has worked hard to ensure that it supports the growth and development of tourism. In the effort to encourage and uphold tourism, the government has introduced several reforms for tourism trade liberalization.

Trade liberalization in tourism sector

In most countries, business activities from people of different nationalities are treated differently. Governments may enforce rules and regulations to favor its citizens. Such rules include restrictions of the amount of investments by foreigners in a given sector of the economy. India for a long time has been charging high taxes to firms owned by foreigners especially in the tourism industry. Tourism is well known to be a chief contributor to the India’s economy. It contributes to the economy activity in two major ways: forward and the backward linkages (Ali & Ngude, 2015). The backward linkages is when tourism takes inputs from other industries. These are manufactured items from the local industries and also the agricultural products. In the forward linkage, it provides direct inputs in the economy. Both are crucial since they contribute directly to economic growth (Ali & Ngude, 2015).

The government of India had been limiting the number of investors who build infrastructure such as hotels and resorts through different channels of foreign investment such as FDI (Foreign Direct Investment), M&A (Mergers & Acquisitions), etc. This was a conventional initiative that was meant to encourage the locals to take the chance to develop themselves. The government had fixed rates that foreign companies were supposed to pay before investing in the country (Kelegama, 2014). In the recent Trade liberalization reforms, the government has encouraged trade by allowing 100 percent foreign direct investments in tourism. To motivate the investors, the Indian government is offering five-year tax holiday to hotels, resorts and other foreign investments that encourage tourism. Most of the companies such as the Hilton, Accor, and Intercontinental hotels are expected to be major international investors. The reduction of restrictions across country borders for travel agents, tour operators and the tour guide is a great step that was made in the trade liberalization. India has been able to access plenty of skilled labor from other nations especially in tourism industry. There was reduced revenues collected from the lodging, food and beverages services which was a great boost to tourism industry (Dehejia & Panagariya, 2014).

Impact in growth of tourism industry after the reform in trade liberalization

The recent reforms on trade liberalization have had a positive impact on the tourism sector. Reforms that were made in 2014 contributed positively by increasing the number of tourists in India. In 2013, tourism contributed around 5.1% of the GDP and it increased in 2014 to 7.3%. The tourism industry has estimated to get approximately an annual rate of 7.7 percent increase in the next 10 to 20 years (Ali & Ngude, 2015).

The number of foreign investors has gradually doubled in India. Research carried out by the recent Government of India stated that for every USD 1 million invested in India, there are 78 jobs that are created (Make in India, 2015). For example, if in 2013, the total investments amounted to USD 50 million it means that 3900 jobs were created. If in 2014 the investment doubled, the number of jobs that were created would double that is 7800 jobs. Considering the number of jobs created is high, the rate of unemployment would reduce and the standards of living in India would increase accordingly (Nair & Durham, 2014). The reforms improved the relationship between India and other countries especially the developed countries.

Tourism is one of the fast growing industries. In India, tourist come from all over the world to experience their rich historical, religious and culture background. Tourism on the other hand, has contributed to the increased rate of economic development due to government’s support through reforms in trade liberalization. This has been highly appreciated and embraced by the tourism industries and many international companies have heavily invested in India. The reforms have also benefited the Indian Tourism Industry by getting different skills from other tourism industries all over the world.