1. A STUDY ON FOREIGN DIRECT INVESTMENT (FDI)
IN INDIAN TOURISM
*Dr.C. Thilakam ** U.Jothimani
Abstract
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 world’s 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. This paper focus with Tourism
Industry in India, Impact of tourism in India Need of FDI in Tourism industry in India, and
recommend some measures to attract more FDI in Tourism sector , FDI in Hotels and Tourism
Industries in India.
*DR.C. THILAKAM , Professor & Head, Department of Commerce , Manonmaniam Sundaranar
University , Tirunelveli-627012
**U.JOTHIMANI, Research Scholar, Manonmaniam Sundaranar University, Tirunelveli-627012

2. Introduction
The Indian tourism industry is interwoven with the country’s monetary
development. As GDP continues to mature, it increases deals in fundamental infrastructure like
transportation systems, which is necessary to support the tourism industry. The hotel industry is
directly connected to the tourism industry in India. Over the last decade, India has transformed
into one of the most popular tourism destinations in the world, largely as a result of the
government’s “Incredible India” campaign which showed India in a new light to overseas
tourists. In 2005, the appearance of global tourists improved by 16 percent, leading the
resurgence of Indian tourism.
As new destinations extend the tourist entry is likely to rise. Numerous
procedures have been taken in infrastructure, which will shine Indian hospitality for overseas
guests. Under the automatic path, 100 percent FDI is allowed in hotels and tourism. Travel and
tourism is a US$32 billion business in India with an input to 5.3 percent of Indian GDP. Many
worldwide hotel groups are setting up their businesses in India and many global tour operators
are establishing operations in the country.
Tourism Industry in India
The tourism industry of India is economically important and grows rapidly. The World Travel &
Tourism Council calculated that tourism generated INR6.4 trillion or 6.6% of the nation's GDP
in 2012. It supported 39.5 million jobs, 7.7% of its total employment. The sector is predicted to
grow at an average annual rate of 7.9% from 2013 to 2023. This gives India the third rank among
countries with the fastest growing tourism industries over the next decade.
According to provisional statistics 6.29 million foreign tourists arrived in India in
2011, an increase of 8.9% from 5.78 million in 2010. This ranks India as the 38th country in the
world in terms of foreign tourist arrivals. Domestic tourist visits to all states and Union
Territories numbered 1,036.35 million in 2012, an increase of 16.5% from 2011. The most
represented countries are the United States (16%) and the United Kingdom (12.6%). In
2011 Maharashtra, Tamil Nadu and Delhi were the most popular states for foreign tourists.
Domestic tourists visited the states Uttar Pradesh, Andhra Pradesh and Tamil Nadu most
frequently. Chennai, Delhi, Mumbai and Agra have been the four most visited cities of India by
foreign tourists during the year 2011. Worldwide, Chennai is ranked 41 by the number of foreign
tourists, while Delhi is ranked at 50, Mumbai at 57 and Agra at 65 and Kolkata at 99.
In order to develop tourism in India in a systematic manner, position it as a major
engine of economic growth and to harness it’s 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.

3. Development of Tourism in India
Early Development
The first conscious and organized efforts to promote tourism in India were made in 1945 when a
committee was set up by the Government under the Chairmanship of Sir John Sargent, the then
Educational Adviser to the Government of India (Krishna, A.G., 1993). Thereafter, the
development of tourism was taken up in a planned manner in 1956 coinciding with the Second
Five Year Plan. The approach has evolved from isolated planning of single unit facilities in the
Second and Third Five Year Plans. The Sixth Plan marked the beginning of a new era when
tourism began to be considered a major instrument for social integration and economic
development.
But it was only after the 80’s that tourism activity gained momentum. The Government took
several significant steps. A National Policy on tourism was announced in 1982. Later in 1988,
the National Committee on Tourism formulated a comprehensive plan for achieving a
sustainable growth in tourism. In 1992, a National Action Plan was prepared and in 1996 the
National Strategy for Promotion of Tourism was drafted. In 1997, the New Tourism Policy
recognises the roles of Central and State governments, public sector undertakings and the private
sector in the development of tourism were. The need for involvement of Panchayati Raj
institutions, local bodies, non-governmental organisations and the local youth in the creation of
tourism facilities has also been recognised.
Present Situation and Features of Tourism in India
Today tourism is the largest service industry in India, with a contribution of 6.23% to the
national GDP and providing 8.78% of the total employment. India witnesses’ more than 5
million annual foreign tourist arrivals and 562 million domestic tourism visits. The tourism
industry in India generated about US$100 billion in 2008 and that is expected to increase to
US$275.5 billion by 2018 at a 9.4% annual growth rate. The Ministry of Tourism is the nodal
agency for the development and promotion of tourism in India and maintains the "Incredible
India" campaign.
According to World Travel and Tourism Council, India will be a tourism hotspot from 2009-
2018, having the highest 10-year growth potential. As per the Travel and Tourism
Competitiveness Report 2009 by the World Economic Forum, India is ranked 11th in the Asia
Pacific region and 62nd overall, moving up three places on the list of the world's attractive
destinations. It is ranked the 14th best tourist destination for its natural resources and 24th for its
cultural resources, with many World Heritage Sites, both natural and cultural, rich fauna, and
strong creative industries in the country. India also bagged 37th rank for its air transport network.
The India travel and tourism industry ranked 5th in the long-term (10-year) growth and is
expected to be the second largest employer in the world by 2019. The 2010 Commonwealth
Games in Delhi are expected to significantly boost tourism in India further.
Moreover, India has been ranked the "best country brand for value-for-money" in the Country
Brand Index (CBI) survey conducted by Future Brand, a leading global brand consultancy. India
also claimed the second place in CBI's "best country brand for history", as well as appears

4. among the top 5 in the best country brand for authenticity and art & culture, and the fourth best
new country for business. India made it to the list of "rising stars" or the countries that are likely
to become major tourist destinations in the next five years, led by the United Arab Emirates,
China, and Vietnam.
IMPACT OF TOURISM IN INDIA
Tourism industry in India has several positive and negative impacts on the economy and society.
These impacts are highlighted below.
POSITIVE IMPACTS
1. Generating Income and Employment: Tourism in India has emerged as an instrument of
income and employment generation, poverty alleviation and sustainable human development. It
contributes 6.23% to the national GDP and 8.78% of the total employment in India. Almost 20
million people are now working in the India’s tourism industry.
3. Source of Foreign Exchange Earnings: Tourism is an important source of foreign exchange
earnings in India. This has favourable impact on the balance of payment of the country. The
tourism industry in India generated about US$100 billion in 2008 and that is expected to increase
to US$275.5 billion by 2018 at a 9.4% annual growth rate.
4. Preservation of National Heritage and Environment: Tourism helps preserve several places
which are of historical importance by declaring them as heritage sites. For instance, the Taj
Mahal, the Qutab Minar, Ajanta and Ellora temples, etc, would have been decayed and destroyed
had it not been for the efforts taken by Tourism Department to preserve them. Likewise, tourism
also helps in conserving the natural habitats of many endangered species.
5. Developing Infrastructure: Tourism tends to encourage the development of multiple-use
infrastructure that benefits the host community, including various means of transports, health
care facilities, and sports centers, in addition to the hotels and high-end restaurants that cater to
foreign visitors. The development of infrastructure has in turn induced the development of other
directly productive activities.
6. Promoting Peace and Stability: Honey and Gilpin (2009) suggests that the tourism industry
can also help promote peace and stability in developing country like India by providing jobs,
generating income, diversifying the economy, protecting the environment, and promoting cross-cultural
awareness. However, key challenges like adoption of regulatory frameworks,
mechanisms to reduce crime and corruption, etc, must be addressed if peace-enhancing benefits
from this industry are to be realized.

5. NEGATIVE IMPACTS
1. Undesirable Social and Cultural Change: Tourism sometimes led to the destruction of the
social fabric of a community. The more tourists coming into a place, the more the perceived risk
of that place losing its identity. A good example is Goa. From the late 60's to the early 80's when
the Hippy culture was at its height, Goa was a haven for such hippies. Here they came in
thousands and changed the whole culture of the state leading to a rise in the use of drugs,
prostitution and human trafficking. This had a ripple effect on the country.
2. Increase Tension and Hostility: Tourism can increase tension, hostility, and suspicion
between the tourists and the local communities when there is no respect and understanding for
each other’s culture and way of life. This may further lead to violence and other crimes
committed against the tourists. The recent crime committed against Russian tourist in Goa is a
case in point.
3. Creating a Sense of Antipathy: Tourism brought little benefit to the local community. In
most all-inclusive package tours more than 80% of travelers’ fees go to the airlines, hotels and
other international companies, not to local businessmen and workers. Moreover, large hotel
chain restaurants often import food to satisfy foreign visitors and rarely employ local staff for
senior management positions, preventing local farmers and workers from reaping the benefit of
their presence. This has often created a sense of antipathy towards the tourists and the
government.
4. Adverse Effects on Environment and Ecology: One of the most important adverse effects of
tourism on the environment is increased pressure on the carrying capacity of the ecosystem in
each tourist locality. Increased transport and construction activities led to large scale
deforestation and destabilisation of natural landforms, while increased tourist flow led to
increase in solid waste dumping as well as depletion of water and fuel resources. Flow of tourists
to ecologically sensitive areas resulted in destruction of rare and endangered species due to
trampling, killing, disturbance of breeding habitats. Noise pollution from vehicles and public
address systems, water pollution, vehicular emissions, untreated sewage, etc. also have direct
effects on bio-diversity, ambient environment and general profile of tourist spots.
 Need of FDI in Tourism
Hotel & Tourism: FDI in Hotel & Tourism sector in India
100% FDI is permissible in the sector on the automatic route.
The term hotels include restaurants, beach resorts, and other tourist complexes
providing accommodation and/or catering and food facilities to tourists. Tourism related industry
include travel agencies, tour operating agencies and tourist transport operating agencies, units
providing facilities for cultural, adventure and wild life experience to tourists, surface, air and
water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units

6. for tourists and Convention/Seminar units and organisations. For foreign technology agreements,
automatic approval is granted if
 Up to 3% of the capital cost of the project is proposed to be paid for technical and
consultancy services including fees for architects, design, supervision, etc.
 Up to 3% of net turnover is payable for franchising and marketing/publicity support fee,
and up to 10% of gross operating profit is payable for management fee, including
incentive fee.
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 tourists
As 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
FDI in Hotels and Tourism Industries in India-
 100 percent FDI is permitted in the hotel and tourism industry in India under various
approvals
 Hotels offer restaurants, beach resorts, and other tourist complexes which provide
accommodation or catering and food facilities to tourists
 Tourism 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 units
 Automatic 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
developments
 Up to 3 percent of the net turnover is payable as marketing fee under automatic route

7.  10 percent of the gross operating profit is payable as management fee under automatic
route
Measures to attract more FDI in Tourism sector
According to WTTC India is fully poised to seize this opportunity
given its “outstanding wealth of natural reserves and rich cultural heritage, its thriving business
community and high levels of entrepreneurship” However, this opportunity can be seized only if
India adopts a fundamentally new and proactive approach to tourism development. Among the
many measures proposed by WTTC, rationalizing of taxation and evolving a uniform taxation
system conducive to tourism forms a significant recommendation. India is losing out on the
market share, vis-a-vis competing destinations. As is evident from the adjacent figure, from 1990
onwards India’s market share has come down in respect of the major source countries. On the
other hand, competition is increasing. The number of countries with over 1 million tourist
arrivals has increased from 15 in 1950 to 70 in 1999, whereas India’s rank is at 40.
Recommendations
 There was need to rationalize the taxation on the hotel industry and adopt a single luxury
tax across the country. For provision of single-window clearances at the local, State and
Central Government levels to reduce procedural delays.
 Tax holiday would encourage FDI in this sector and more players to set up hotels, to
bridge the shortage of rooms which according to Government estimates stood at one lakh
rooms.
 Section 72 (A) of the Income Tax Act should be amended such that it is made applicable
to the Hospitality sector also by using the word ‘undertaking’ in lieu of ‘industrial
undertaking’.
 It is recommended to increase the depreciation rate to 100% in order to incentives hotels
to install pollution control equipment and energy generating devices to protect the
environment.
 For the calculation of Book profit for the MAT provisions under Sec. 115 JB, Sec
80HHD profits should be allowed as a deduction on par with the deduction available to
Sec 80HHC/E/F profits, as under these relevant sections all the assesses deal with foreign
Exchange.
 Service Tax should be computed based on the value of service provided, in the nature of
VAT; rather than on the gross amount
 Concessions under Section 10(5) (B) of IT Act should be restored and spa consultants
should also be included Inland Air Travel Tax should be applied at the rate of 5% of the
basic ticket price.
 The Government should implement the kelkar Committee recommendations in reduction
of basic custom duty on aviation turbine fuel. There by the inland travel prices will
reduce.

8.  Tax Deduction at Source pertaining to payments made to hotels under Section 194-1 of
the Income Tax Act should be reduced to 5%.
 The depreciation rate on hotels should be reverted to 20% from the current rate of 10%.
 Section 72 (A) of the Income Tax Act should be amended such that it is made applicable
to the Hospitality sector also by using the word ‘undertaking’ in lieu of ‘industrial
undertaking’.
 Tourism should be declared as infrastructure industry and Hotels and Convention centre
should be included in Sec 80IA of the Income Tax Act,1961 and also entitlement to tax-exempt
income on investment under Section 10 (23) G of the Income Tax Act,1961.
 Extend the exemption available under sec 801B for Specified hotels and Non-specified
hotels till 2010 and also apply these exemptions to convention centers/multiplex theaters
in parity with hotels for a period of 10 years.
Conclusion
The Travel & Tourism industry provides tremendous opportunity to India in terms of
contribution to its GDP and employment generation. According to CII estimates, an additional 1
million visitors can help generate revenues of Rs.4, 300 crore annually. Thus, Government
policies, which would focus at increasing tourist arrivals in the country and facilitate investments
in tourism infrastructure, would lead to significantly higher multiplier effect on the key economic
parameters of the Indian economy.
Reference
 Batra G.S., Tourism in the 21st century, (1996) Anmol publications Pvt. Ltd.,. Federation
of Hotels & Restaurants Association of India ltd,
 www.fhrai.com,
 http://www.investmentcommission.in/tourism.htm#v
 http://tourismindia.com
 http://www.india-briefing.com
 Krishna, A.G., 1993 “Case study on the effects of tourism on culture and the
environment:
 India; Jaisalmer, Khajuraho and Goa”
 Honey, Martha and Gilpin, Raymond, Special Report, 2009, “Tourism in the Developing
World - Promoting Peace and Reducing Poverty”
 Market Research Division, Ministry of tourism, GOI, 2009 “Tourism Statistics 2008”
 www.ibef.org
 www.incredibleindia.org