With an economy growing at over nine per cent per annum, and billions of dollars in foreign investments flowing into the country, India’s luxury hotels sector is faring extremely well. But for guests staying at these hotels, it means exorbitant prices, and lack of adequate rooms.

India has about 100,000 luxury hotel rooms, whereas estimates are that it needs about 150,000. Plans are on to double the number of rooms over the next five years, but despite the huge expansion, tariffs are likely to remain high in the coming years, and demand will continue to soar.

Hotel chains in India – both domestic and international – are planning to hike their tariffs by between 20-25 per cent from this month, which sees the start of the busy tourism season. Most of the luxury hotels – which include both business hotels and luxury resorts – are located in Mumbai, Delhi, Bangalore, Chennai and Kolkata, besides states like Kerala, Goa and Rajasthan.

During the peak tourist season – beginning September and ending in March – it is well nigh impossible to get rooms without advance booking in any of these properties. Most of the luxury hotels report occupancy rates in excess of 80 per cent during the peak season, and the properties are reluctant to offer discounts.

Beginning this week, most of the leading hotel chains are jacking up rates in the three leading cities – Mumbai, Delhi and Bangalore – by as much as 25 per cent. In a city like Mumbai, where there is an acute shortage of hotel rooms, a customer has to pay between Rs20,000 and 25,000 – plus taxes – for a modest room in a 5-star hotel.

Higher-end rooms and suites cost much more; yet, it is difficult to find rooms during the season. It is a similar story in Bangalore and Delhi, though both cities have far more hotels than Mumbai. The influx of international business visitors, lured by the country’s buoyant capital markets and the explosive growth of the economy, has proved to be a boon for the luxury hotels.

India’s tourism sector has been growing rapidly, with an over 15 per cent jump in foreign tourists last year. Domestic tourism – with about 300 million tourists – is also growing at a brisk clip. India’s open skies policies, which has seen the proliferation of domestic airlines, including low-cost carriers, has seen millions of Indians going out on holidays every year.

THE hotel industry in India has, however, failed to keep pace with required growth. With New Delhi hosting the Commonwealth Games in 2010, demand for rooms will soar in the national capital region.

One reason why hotel chains have not been able to keep pace with the demand is the huge cost of land in India. In cities like Mumbai, Delhi and Bangalore, there is an acute shortage of vacant land. Government agencies like the Bombay Metropolitan Region Development Authority and the Delhi Development Authority, routinely auction the few vacant plots to the highest bidders.

Developers have been paying fancy prices for the plots in the race to win the bids. Consequently, when a hotel is built, tariffs are sky-high, reflecting the high cost of doing business in India. While the Indian economy has been witnessing dramatic reforms in recent years, land laws remain archaic.

In a city like Mumbai, the government – under pressure from politicians from all parties – continues to cling to regressive laws like the Urban Land Ceiling Act, which prevents productive use of vast tracts of land. The government owns thousands of acres of land in the city, and when slum-lords occupy it and develop slum colonies – and charge hefty rents for the hovels from poor migrants – politicians prefer to remain silent.

But the moment a plot of land is sold to a developer or a large hotel chain for a new property, or a residential colony there is a hue and cry. Ministers are, therefore, reluctant to allot land for 5-star hotels, or for residential projects, despite the fact that the government earns billions of rupees in revenues from these projects.

Five-star hotels – which are taxed at the highest rates - besides adding to the government’s kitties, and boosting gross domestic product, generate jobs that fetch handsome returns for the employees. Hotels also create indirect jobs, with travel and taxi operators, musicians, artists, plumbers, construction labourers and others getting productive employment.

Yet, with politicians in India still clinging to a fraudulent ‘socialist dream’ – which frowns on promoting 5-star culture, many politicians are found at these properties on many evenings – there is reluctance on openly backing luxury hotels. The few entrepreneurs who have taken the risk of setting up 5-star properties talk of the harassment they face at the hands of petty officials, senior bureaucrats and politicians.

While many of the unscrupulous elements expect free food and liquor at luxury hotels, the chains are fleeced at every stage – from getting environmental clearances, to getting permits for setting up bars, discotheques, lounges and clubs.

In states like Goa and Kerala – which have witnessed a boom in 5-star properties in recent years – many of the hotel chains face extortionate demands from petty politicians, corrupt trade union leaders, so-called environmentalists and other activists, who demand a price for ‘staying quiet.’ The price for not bribing them could mean stiff ‘local’ opposition to the projects, ‘mass agitations,’ even court cases and media campaigns by the well-oiled and funded ‘anti-5-star lobby.’

Not surprisingly, some of the established properties also fund the agitators, worried that the new properties could eat into their business.

DESPITE the formidable challenges that they face, most of the international and domestic hotel chains have drawn up ambitious expansion plans for India. The refusal of professional groups to satisfy rent-seeking politicians, extortionists and sundry ‘activists’ results in a sharp escalation in the cost of setting up such properties.

And this gets reflected in the room tariffs. Business tourists end up spending significantly more for rooms in India’s metros than in cities like Dubai, Singapore, Kuala Lumpur, Bangkok and Colombo. Continuing shortage of rooms and high-priced properties could turn off prospective clients.

It is not unusual for many business tourists to stay in cities like Chennai and Hyderabad – where room rents are reasonable – and to fly in every day to Bangalore, where the tariffs are prohibitive. The high-cost of doing business in the three leading metros – Mumbai, Delhi and Bangalore – is benefiting smaller cities such as Chennai, Hyderabad, Pune and even Gurgaon.

When industries like information technology, ITES (IT enabled services) and financial services are doing well, the travel and tourism sector will also continue to gain significantly. However, if the cost of doing business in India continues to climb — and the margins get squeezed — many of the players will definitely migrate to lower-cost nations in Asia (Vietnam, Thailand) and Europe (Russia, Poland, Romania).

Of course, the federal government is aware about the risks of such a business model, and has been pushing states to liberalise land laws and bring down tax rates. In fact, the central government has refused to fund ambitious projects of the Maharashtra government – under the Jawaharlal Nehru National Urban Renewal Mission – unless it scraps the outdated Urban Land Ceiling Act.

The state legislature was all set to have scrapped the act at its recent session, but vested interests once again lobbied with political parties and got the proposal delayed. In the process, the state government has lost billions of rupees in funding, and the acute paucity of land in India’s financial and commercial capital will continue to stunt its growth.