Falling Rupee: Boon or Bane for Tourism Industry

Human beings have always been so fascinated with "FALLING THINGS", especially when it's falling in LOVE…… but the falling rupee value is always a concern for us.

Being an amalgamation of different industries, the tourism sector is highly vulnerable to external pressures and it's no exception to currency fluctuations. Tourism activity and forex markets are closely bound together. Every international tourist must exchange her/his currency with the currency of the destination country in order to make payments in the destination. This phenomenon is inevitable and makes the industry prone to currency fluctuations in forex markets.

A Double-edged sword

Depreciating Rupee value is a double-edged sword for the central bank and the Indian government, why?

Let's unravel both sides of a coin.Tourism is widely claimed as an export industry and tourism exports play a key role in earning foreign currencies to the country. Theoretically, the depreciating rupee makes exports cheaper for foreign nations and expands the exports of India. Surprisingly, the depreciation has a detrimental effect on imports and the imports will be more expensive than before. 

Applying the same to tourism, inbound and outbound tourism activities are considered as exports and imports of a destination respectively. India receives millions of inbound tourists every year and the curve is rising unwaveringly. Since the rupee depreciation makes exports cheaper for foreign countries, India as a destination would become cheaper for international travellers, especially for tourists from the USA. This would increase international footfalls to India. 

India’s outbound travel is also growing strong & sending millions to other nations, thanks to the growing living standards and income levels of the middle class in India. The steep decline in rupee value makes imports expensive and international travel becomes expensive for us (especially in the case of the USA). This phenomenon either makes Indians go for cheaper and affordable choices in the USA such as cheaper hotels, food, etc., or completely look for another destination that is economically feasible. 

The depreciating rupee value will have an adverse effect on merchandise and service imports. The tourism and hospitality industry is a huge importer of a wide range of goods ranging from food, alcohol, interior decoration, pantry, sanitary ware, telecommunication services. etc. A falling rupee will increase the cost of importing intermediate and final goods & services; this either reduces the profit margins of businesses or end up emptying the pockets of end consumers. So, depreciating currency value is detrimental to the tourism and hospitality industry as the prices of tourism goods and services inflate due to a rise in input costs.

Comparison between rupee value and tourism activity

So far, we have seen what theories say about currency fluctuations and their implications on travel activity. Let’s now play with some numbers,

The exchange rate between INR against USD

The bonding between the India Rupee vis a vis the US Dollar has been a very tough journey with many crests and troughs. The Indian rupee has seen a gradual decline over the decades beginning from Rs 31.37 in the beginning of 1994, i.e., post-liberalization. With market forces deciding the value of INR, it has seen an unhurried decline in the subsequent years. To summarise, it was 35.80 in January 1996, Rs 40.90 in 1998, the half-century mark on the 6th of March, 2012, three quarters on the 19th of March, 2020, and a historic high of 82 on the 7th of Oct, 2022.

Inbound and Outbound tourism of India

The inbound and outbound tourists to and from India have seen a manifold rise since the beginning of this century. Inbound tourists curve has been on an upward plank reaching its peak of 17.91 million in 2019 just before the pandemic. Outbound tourists also stood equal with its counterpart and have seen a significant rise for decades reaching its peak of 26.92 million in 2019 before the pandemic.

Bilateral tourism trade

The bilateral tourism trade between India and the USA just followed in the footsteps of the above phenomenon. The inbound and outbound tourism to and from India has been on a phenomenal rise till the pandemic hit the world. India received 1512.032 thousand tourists from the USA and departed 1473.52 thousand to the same in 2019. (Data source: RD)

Summing it up, the rupee’s value against the dollar has seen its decline gradually since 2000. On the other hand, outbound travel has also grown enormously since 2000. The number of Indian nationals visiting foreign destinations has gradually increased over decades contributing millions of dollars to tourism and hospitality sectors in both India and other nations.The international footfalls to India have also improved over the years yielding a large chunk of foreign reserves to India. 

The juxtaposition of the rupee value and the outbound tourists clearly says that though theories speak louder, the true picture is completely different in the long run. As mentioned above, the declining rupee value will make imports expensive, i.e., foreign destinations tend to become costlier with every dip in the rupee value against the dollar. According to the demand-supply theory, an increase in the price of a commodity reduces the quantity demanded of the commodity. But in this case, even the increase in the cost of foreign travel over a long period of time has not altered consumer behaviour.  Indians have thronged heavily to foreign destinations since 2000 and this phenomenon is mainly due to rising middle-class incomes in the country. Though macro indicators have a significant impact on consumer behaviour, the travel activity is motivated and influenced by many other factors such as destination climatic conditions, desire for escape, rest and relaxation, prestige, health and fitness, adventure, social interaction, accessibility, safety and security, travel infrastructure, etc.

On the other hand, inbound travel or exports (theoretically speaking) have also seen a gradual rise with the depreciating rupee value against the dollar. Though the data back the theories, travel activity is also motivated by a set of other factors mentioned above. We cannot completely rely on this data and conclude that only the rupee decline has instigated the growth of inbound tourism. But rupee value has a significant impact on rising footfalls in India.

Conclusion

Tourism has grown enormously in years, (i.e., both inbound and outbound activity) without being affected much by the dollar movements. Though theories speak a lot about the relationships, the data clearly shows that India has been growing as a tourism destination since two decades and currency fluctuations hardly affected travel activity in India. India as a source market is growing exponentially due to the increased living standards and disposable income in the middle-class population. It is predicted that India will grow significantly as a source market in the future, all thanks to changing demographic dynamics in the country. India as a destination offers a wide range of tourism options to international travellers such as ancient temples, rich heritage, unique cuisines, varied cultures, unmatchable architecture, serene nature, long coastal stretches, welcoming hill stations, freezing Himalayas, and many more.  A destination offering these many features is an all-season and a desired destination for foreign travellers. The travel activity is motivated by a diverse set of factors as mentioned above and the currency fluctuations will have a negligible impact on the tourism activity in the country. So, the stakeholders of the tourism industry need not worry about the rupee depreciation much, instead focus on reviving and promoting tourism in the country.

Published on: March 2023

Image Source: Internet