Bets on growth in India

Bets on growth in India

Having only gained its independence from Britain in 1947, India has made incredible strides in the last several decades to become one of the world’s largest emerging economies. With a population of 1.1 billion people, it is the second most populous country in the world, surpassed only by China. As the U.S. and Europe were hard hit by the financial crisis over the last few years, slowing hotel development to a near standstill, hotel operators sought alternative markets for growth, hoping to diversify their portfolio of assets and curb the effects of the growing doom and gloom in their existing markets. Looking at the development strategies announced by the major, international brands over the last year, nearly all of them have stated that a primary focus is emerging markets — primarily China, India and Brazil. However, it remains to be seen if the large-scale growth expectations for India come to fruition.

India’s steady economic growth over the last few fiscal quarters, which has been reported at a rate of over 8.5%, continues to impress investors and developers. Not only is India seeing economic growth, but rising consumer wealth and a growing middle class have made industry professionals look to India as an “economic driver” in coming years. The increase in private wealth and business opportunities has fostered demand for hotel rooms, and brands are seeking to seize those opportunities with aggressive development plans. While opinions vary as to whether the focus should be on the luxury/upscale segment or mid-tiered or budget segments, the reports are unanimous that the Indian hotel development pipeline is one of the largest for 2010-2011. Starwood, Hilton, Hyatt, Marriott, Fairmont and Carlson all have announced openings and projects under development in the country, with a focus on central business districts such as Mumbai, Chennai, New Delhi, Bangalore and Kolkata. Earlier this year, the Ministry of Tourism for India stated India needs 150,000 hotel rooms over the next three years, and there appears to be no lack of interest by the brands in meeting that need.

Yet, despite all of the positive news surrounding India’s growth, it is not immune to certain growing pains. Inflation continues to be a concern for the Indian economy, and the central bank has been cautiously monitoring this throughout the year. Additionally, news of large outstanding debts — such as to India’s domestic airlines, which have billions of dollars of outstanding debt — has left some questioning the quality of those loans and where the credit industry in India is headed. While foreign direct investment continues to increase in India in various industries, the corruption scandal related to the alleged illegal issuing of licenses in the telecom industry may give foreign investors pause. The lack of sufficient infrastructure also continues to be a problem for development. India requires extensive work to improve its highways, airports and ports as well as other basic infrastructure facilities. In the aftermath of the Commonwealth Games that was hosted in New Delhi earlier this year, news of poor conditions for the athletes and a crumbling footbridge led to heavy criticism of India’s ability to adequately prepare for the event despite the billions of dollars invested in the various projects. Several of the hotels (which had been constructed specifically for the event) complained of lower than anticipated occupancy as a result of the government’s failure to live up to the expectations of attendees.

Notwithstanding the problems that may have plagued India over the last few years, it continues to be a focus for hotel development, and one would argue rightly so. Only a few weeks ago, President Obama visited India with the goal of fostering and building relations between the world’s two largest democratic powers, seeking to open the Indian market even more to U.S. investment — which surely would only bolster the need for greater hotel inventory. He, in fact, stayed at the famed Taj Mahal Palace hotel in Mumbai, which terrorists seized two years ago — along with other areas of the city — killing 166 people. Despite a downturn in occupancy after that, India has rebounded. 

It is this resiliency and continued economic growth that provide a foundation for India to be a winning bet for the hotel industry. It remains to be seen whether India is equipped for the magnitude of growth that is anticipated by hotel operators over the next five years. However, while there is little question that there is potential for development that should be pursued, one cannot ignore the inherent risks in entering an emerging market with such gusto. So, my view is to proceed, but proceed with caution.