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Can the domestic tourist come to the rescue?

Tourism is most directly hit as a result of the coronavirus issue and is likely to have a strong negative impact on the Indian economy. Being a fairly labour intensive industry the impact this has is also compounded. While international tourism is bound to stay low even in the aftermath of the crisis, can domestic tourism provide the necessary support?

In today's post, we understand India's dependence on tourism, analyze the cascading impact of a fall in tourism on the rest of the economy, and understand the issues and constraints over a domestic tourist-driven recovery.

How important is tourism for India?

9.2% of GDP. That is how important tourism is to India. In terms of the dependence of GDP on tourism that puts us at #3 in the world. Even more importantly, the labour-intensive sector contributes more than 8.1% (4.2 crore+ jobs!) to our employment. Most of this employment is directed towards tour guides, hotel staff, bus drivers and cleaning staff and the like - folks who are most likely to use a large portion of their income for regular day to day consumption. In a slowing economy with rising unemployment, a hit to this industry can understandably be quick a strong negative for the system.

The first source that will be hit is international tourists. Traveling to a developing country in the immediate aftermath of a major disease outbreak isn't top of the list for most people. What is reassuring, however, is that international tourists contribute 12% of the US$240bn that India earns via tourism and allied activities. For better or for worse, the domestic tourist still constitutes a majority of the volume and value share in the tourism market, and that would mean we can probably bounce back sooner than expected.

So what is being done to boost it?

Given the impact the sector has on our growth and employment, it is natural that the government focusses on developing the sector. To help with the growth of sectors, the government has given a 5 year tax holiday for hotels around world heritage sites, hoping that this will facilitate the growth of better facilities around key sites. In a recent initiative, PM Modi also urged folks to visit 15 domestic destinations by 2022 - an ambitious figure for most Indians. For international tourists, e-visas have been launched to help with the ease of travel.

That being said, it is important to realize that ~95% of the travel in India is leisure spend, with business spending at just ~5.2% of the total. Leisure spend is largely discretionary, and is generally reduced or avoided altogether in times of economic hardship. With our economy going through a relatively rough patch with growth languishing at below 5%, and increasingly looking like it might slip further, whether the domestic consumer would be willing to spend for travel is an issue in itself. Getting domestic spend in tourism going is critical however, because as discussed above it generates employment and income at the levels we need it most.

Can the domestic traveler help?

If things start looking better in two months' time on the coronavirus, the middle-class Indian consumer sits on an interesting issue. After having spent two months in a remote environment, there would be a drive to go outside and travel. On the other hand, remnants of fear from the corona days will also be present. Club that with the overall weak economic situation, and the traveller will need a 'driving factor' to take the travel decision.

The easiest way for the government to incentivize this is by dropping travel rates. With train travel rates under the government's control, this could be a good place to start. Alternate travel channels like air travel can be allowed a bit more leeway by allowing the lower crude prices to pass through. Once people are out of their homes and traveling to a place, the other spends on hotels, local shops, and guides will all start flowing.

With one of our major industries- auto already facing headwinds for the last year or so, maintaining and improving the health of our tourism space in the aftermath of the coronavirus will be critical. And something that the government would hopefully work actively towards.

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About the Author: The post is written by Ganesh Nagarsekar. Ganesh is a graduate from IIM Calcutta and has worked with J.P. Morgan and Goldman Sachs, before founding GSN Invest.


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