Turbocharging Tourism in India: Can MSMEs spark a transformation?

India’s Tourism and Hospitality sector, a vital player in the nation’s economic growth, shows promise with key statistics projecting significant expansion by 2030. Despite challenges like untapped potential and post-pandemic shifts, the 2023 Union Budget and the ‘Visit India’ year signal a proactive approach. The Goa Declaration and the New National Tourism Policy outline missions, emphasizing eco-friendly practices and MSME support.

Tourism and Hospitality, as one of India’s most significant service sectors, play a crucial role in propelling the nation’s growth and prosperity. It is a key component of the Make in India initiative, serving as a pivotal economic driver that stimulates job creation and rapid development.

This sector acts as a catalyst for the expansion of multi-use infrastructure, including top-notch hotels, resorts, fine dining establishments, efficient transportation networks (aviation, roads, shipping, and railways), and state-of-the-art healthcare facilities.

India boasts a diverse geography, encompassing world heritage sites and various niche tourism offerings such as:

These diversified tourism categories have led to a significant increase in tourist arrivals, creating numerous employment opportunities.

The tourism and hospitality sector in India is expected to achieve US$ 50.9 billion in Foreign Exchange Earnings by 2028, marking a substantial rise from the US$ 28.9 billion recorded in 2018. Furthermore, Foreign Tourist Arrivals (FTAs) are predicted to reach 30.5 million by 2028.

Source: Statista & Ministry of Tourism

Despite India’s extensive geographical diversity, there is still untapped potential in the realm of tourism. The country is home to 42 UNESCO World Heritage Sites, however, it struggles to attract the same number of international visitors as smaller countries such as Hong Kong, Dubai, and Vietnam.

The 2023 Union Budget has prominently positioned tourism as a key focus area. The Ministry of Tourism is committed to promoting the industry through active collaboration with all states, convergence of government programs, and the establishment of impactful Public-Private Partnerships. The said approach aims to achieve comprehensive development in at least 50 selected destinations nation-wide through a challenge mode process.

Role of MSMEs in the tourism sector

As the Leaders of Brazil, Russia, India, China, and South Africa gathered for the Eighth BRICS Summit in Goa, India in 2016, the overarching theme was centered on the aspiration of constructing solutions that are responsive, inclusive, and collective solutions and came up with a roadmap for tourism industry.

The Goa Roadmap for Tourism is designed to serve as a guide for national governments within the G20 countries and beyond, along with other stakeholders in the tourism sector. One of the critical pillars of the Goa Roadmap is addressing the challenges of tourism MSMEs to ensure that they achieve desired scale, while committing to digital, green and sustainable transitions.

 

MSMEs in the tourism and hospitality sector in India are a vital component of the industry, contributing significantly to economic growth. These businesses span various services and play a crucial role in providing a diverse range of offerings to tourists.

Accommodation: Includes hotels, homestays, and other lodging options.

Food and Beverages: Encompasses restaurants, cafes, and eateries catering to tourists.

Tourist Attractions: Involves both cultural and natural attractions that draw visitors.

Transportation: Encompasses travel services such as car rentals, bike rentals, bus services, and cruise liners.

Recreation and Adventure Activities: Includes outdoor adventure companies offering activities to tourists.

Events and Conferences: Involves event planners and venues hosting conferences and events.

Travel Trade: Comprises travel agents facilitating bookings and travel arrangements.

Other Tourism Services: Encompasses a variety of services like spas & wellness centers, souvenir shops, and tour guides.

Challenges for MSMEs in the Tourism and Hospitality Sector

IBT engaged with a number of industry leaders and experts to understand the current growth challenges faced by India’s tourism MSMEs. Following are the key issues that emerged:

Taxation Hurdles: MSMEs face challenges due to the burdensome tax structure, including GST on foreign visitors and TCS for international travel. When you book overseas tour packages of value over Rs 7 lakh in a financial year, you will have to bear TCS of 20%, which is applicable from October 23.

In this regard, Fenil Bhayani, MD, 99Destinations, comments, “Currently, India is experiencing a trend where more Indian residents are traveling abroad (outbound traffic) compared to foreign tourists visiting India (inbound traffic). This trend can be attributed, in part, to the Goods and Services Tax (GST) system. Indian authorities impose GST on services provided to inbound travelers, which can make travel within India relatively more expensive for foreign tourists. As a result, some foreign tourists opt to book their travel services through third-party countries like Dubai.” This is a loss of business for domestic players.

Seasonality and Economic Volatility: The sector’s susceptibility to seasonal variations and economic uncertainties poses challenges for MSMEs. Since the demand is seasonal, business owners are not able to provide stable income streams to their employees, and there is consequently high rate of employee turnover.

Skilled Workforce Shortage: MSMEs encounter difficulties in finding skilled employees, especially in the aftermath of the pandemic. Sanjay Aggarwal, Proprietor, Sun & Sand Tours & Travels, shares, “We are not getting the skilled workforce required for the operations of the sector at present. Post the COVID impact, a lot of people moved out of the sector to pursue other avenues.”

Technological and Sustainable Transitions: MSMEs struggle to adapt to new technologies such as digitization and AI, along with the transition towards green and sustainable practices.

Limited Access to Low-Cost Credit: MSMEs face barriers in obtaining affordable credit, hindering their financial stability and growth. From the perspective of Jaison Chacko, Secretary General – The Federation of Hotel & Restaurant Associations of India, “The hospitality industry faces challenges related to securing long-term, affordable financing. In 2013, the government introduced a resolution offering subsidies to hotels with a budget exceeding Rs 200 crore. However, this policy primarily favored larger players, leaving smaller businesses at a disadvantage.” 

Formalization and Innovation: MSMEs need to enhance their formalization, innovate, and align with market trends to stay competitive. Jyoti Mayal, President, Travel Agents Association of India, exclaims, “There have been a lot of adversities post-Covid in terms of employment and business operations that hinder MSMEs’ growth and sustainability. Whether its strategic planning or cash flow or be it human resource management these small enterprises face obstacles every now and then.”

Adherence to International Standards: MSMEs struggle with meeting international benchmarks and complying with regulations, affecting their global competitiveness.

Global Market Accessibility: Limited capability and understanding of MSMEs to enter and thrive in global markets, restricting their growth potential.

Proposed Solutions for Overcoming Challenges in the Sector

Efforts are underway to offer advantages to MSMEs catering to tourism services in selected destinations. This involves meticulous mapping of MSMEs based on their specific segments in these areas.

Rajiv Mehra, President of IATO, restated the importance of providing enhanced financial support to the sector, coupled with high-quality skill training and improved market access. He also emphasized the necessity for regulatory simplification and adds, “Empowering MSMEs to be more competitive and resilient on a global scale requires a comprehensive and collaborative approach involving governments, industry associations, financial institutions, educational institutions, and other stakeholders. It’s important to tailor these strategies to the specific needs and context of each MSME, as challenges can vary widely between sectors and regions.”

On the other hand, Manek Bakshi, Owner of Anantaram Holidays, recommended increased support in marketing MSME tourism exports and expediting the visa clearance process for greater benefits. A crucial aspect of the initiative involves identifying and rectifying key infrastructural gaps in these regions to facilitate smoother business operations for MSMEs.

Jaison Chacko feels that a strong entrepreneurial culture could being path-breaking transformation for the tourism sector, as he states, “Furthermore, there’s a scarcity of startups in this sector. To support Micro, Small, and Medium Enterprises (MSMEs), the government should establish a startup ecosystem to provide stronger support. The industry lacks uniform standards, especially when compared to global benchmarks.”

We must endeavour to be on the right side of techologies such as AI, even though tourism is highly oriented to direct human interface. Rajiv Mehra, however, sees these technologies as pivotal in future, “Digitization and AI have brought about transformative changes in the tourism industry, leading to improved customer experiences, enhanced operational efficiency, and the ability to adapt to rapidly evolving market dynamics. Tourism businesses that embrace these technologies are better positioned to thrive in an increasingly competitive and tech-savvy landscape.”

Sanjay Aggarwal of Sun & Sand Travels believes that while some basic enquiries can be received by technology for instance, a lot customers want personalised service. He adds, “While technology has some use, especially with the lack of skilled manpower, it can take upto 50-60% of the work. But in the remaining 30-40%, human intervention is still required.”

On the shortage of training infrastructure, Fenil Bhayani argues, “When there are fewer institutes available to train the workforce, it can have several significant implications for a country or region. This scarcity of training institutes can result in a shortage of skilled labor and impact economic development. With fewer training institutes, there are limited opportunities for individuals to acquire the skills and knowledge needed for various industries.”

Jyoti Mayal feels that partnering with consultancies can lead to strong growth prospects, “By addressing strategic planning, human resource management, skill development, process optimization, and sales funnel management, consultancies offer holistic solutions for growth. Moreover, they assist in overcoming challenges related to finance, technology, skilled labour, and compliance. With the right guidance and support, MSMEs can unlock their full potential and contribute to India’s thriving economy.”

Conclusion

India’s Tourism and Hospitality sector, a crucial driver of economic growth, faces untapped potential despite impressive statistics. The Goa Declaration and ‘Visit India’ year reflect concerted efforts to address challenges. The focus on MSMEs, pivotal players in the sector, involves overcoming hurdles through infrastructure enhancement, training, technology adoption, and global market access.

An overarching approach to address the growth challenges of Indian tourism MSMEs, like lack of skilled manpower, seasonality, reliable flow of credit, lack of a startup ecosystem, lack of standardisation, limited capability to address global markets, high burden of taxation and regulation can provide a strong impetus to their growth. This, in turn, can be a game changer for the Indian tourism sector.