Tourism led growth hypothesis : empirical evidence from India

Tourism activities are considered to be one of the major sources of economic growth. The importance of tourism to economic development has been widely recognized due to its contribution to the balance of payments, GDP and employment. Tourism has gradually grown over the years as a full fledge industry. The significant impact of international tourism in stimulating economic growth is admirable. For this reason, the relationship between international tourism and economic growth would seem to be an interesting and contemporary empirical issue. Current research paper attempts to examine the causal relationships between GDP and Receipts from tourism sector in India. Augmented Dickey-Fuller (ADF) for unit root, Johanson for cointegration and Granger causality test to examine the causal relation have been employed between GDP and Receipts from tourism sector in India by using the data over the period of 1991-2017. The findings of the study showed the presence of unidirectional causality from tourism earnings to economic growth. Keyword: Tourism, Growth, India, Causality, Development Tourism Led Economic Growth Concept International tourism is recognized to have a positive effect on long-run economic growth through different channels. On one hand, tourism sector stimulates other industries by direct, indirect and induced effects and on other hand it contributes to generate employment and causes positive economies to scale (Brida et al., 2008). It generates a vital amount of foreign exchange earnings and also contributes to the sustainable economic growth (WTO, 2012). Nowadays many developing countries are focusing on economic policies for encouraging international tourism as a potential source of economic growth of a country. According to the World Travel and Tourism Council (WTTC), travel and tourism is the biggest sector in the world on virtually any economic measure including gross output, capital investment, employment etc. (Aslan et al., 2009). Tourism is one of the economic sectors that has the potential to grow at a high rate and can ensure substantial development of the infrastructure of the destinations. It has capacity to capitalize on the country’s success in the service sector and generates a multiplier effect on the economy (Eleventh five Years Plan, 2007-2012). It has the potential to stimulate other economic sectors through its backward and forward linkages and cross-sectoral synergies with sectors like agriculture, horticulture, poultry, handicrafts, transport, construction, etc. As a result, additional income and employment opportunities are generated through such linkages. Thus, the expansion of the tourism sector can lead to economic growth of any country (Chang et al., 2010). The relationship between tourism and economic growth is one of the main topics of discussion in the growing field of tourism (Figini and Vici, 2010). Lea African Journal of Hospitality, Tourism and Leisure, Volume 7 (2) (2018) ISSN: 2223-814X Copyright: © 2018 AJHTL Open AccessOnline @ http//: www.ajhtl. com 2 (1988) and Sinclair (1998) have highlighted the potential of the tourism sector in promoting growth, creating jobs and generating revenue for the government. There are a number of empirical papers confirming the tourism industry’s contribution to a country’s economic growth like Kulendran and Wilson, 2000 for Australia; Shan and Wilson, 2001 for China; Balaguer and Cantavella-Jorda, 2002 for Spain; Lanza et al., 2003 for European Countries; Durbarry, 2004 for France; Narayan, 2004 for Fiji; Dritsakis, 2004 for Greece; Gunduz and Hatemi, 2005 for Turkey; Oh, 2005 for Singapore; Kim et al., 2005 for Taiwan; Louca, 2006 for Cyprus and Brida et al., 2008 for Mexico. Along with the increasing importance of the tourism industry for a country’s economy, the issue of exploring the causality relationship between tourism receipts and economic growth has gained more attention. Thus, over the past decades, international tourism has been gaining importance in many economies of the world and the development of tourism has generally been considered a positive contribution to economic growth (Khalil, 2007). Several previous studies in tourism sector have highlighted the tourism sector’s potential to promote growth, create jobs and generate revenue for the government. But the very few empirical studies on tourism that exist do not offer information on its long-term effect on economic growth. Current research paper is based on idea about the tourism-led economic growth hypothesis. However it is a major question if there is a unidirectional, bidirectional or reciprocal relationship between tourism and economic growth. Three hypotheses can be identified as tourism-led economic growth hypothesis, economic-driven tourism growth hypothesis and reciprocal causal hypothesis (Oh, 2005). The above arguments justify the relationship of tourism and economic growth of any country. The paper has been organized into four sections. Section I presents a general overview of tourism industry. Section II reviews the existing studies on the causal relationship between tourism and economic growth. Section III describes the data and research methodology and Section IV presents the results of empirical analysis and concluding discussion. The Importance of the Tourism Sector in India This section provides a general overview of Indian tourism industry. As far as India is concerned, it is one of the popular tourist destinations in Asia. It offers a wide range of places to see and things to do. The delighting backwaters, hill stations and landscapes make India a beautiful country. Historical monuments, forts, beaches, places of religious interests, hill resorts, etc. add to the majesty of the country. They attract tourists from all over the world (WTO, India, 2012). Tourism is the second largest foreign exchange earner in India (WTTC India, 2012). Besides it, tourism sector employs a large number of people, both skilled and unskilled. Hotels, travel agencies, transport including airlines benefit a lot from this industry. Tourism promotes national integration, cultural activities and traditional handicrafts sector. But, Indian government very lately noticed a crucial role of tourism expansion for economic development. In 2002, Ministry of Tourism (MoT), India paid considerable attention on developing campaigns for the promotion of tourism sector. Furthermore, Indian government allocated financial resources for the development of infrastructure. Nowadays India is one of the most important countries as far as international tourism is concerned. In 2017, India was ranked 16 in terms of international tourism receipts and 41 in terms of international tourist arrivals (UNWTO). The contribution of tourism to the economic development of India has been recognized widely due to its contribution to the balance of payments, production and employment. Its importance to employment is strengthened by the relatively labour-intensive nature of tourism and the limited substitution of capital in the production of tourism services. Table I presents the number of Foreign Tourists Arrivals (FTAs) in India during the year 1991 through 2017 along with the growth rates. Tourism in India has African Journal of Hospitality, Tourism and Leisure, Volume 7 (2) (2018) ISSN: 2223-814X Copyright: © 2018 AJHTL Open AccessOnline @ http//: www.ajhtl. com 3 registered a significant growth in recent years. In May, 1992 the National Action Plan for tourism was announced to motivate private sector to participate in the tourism sector. Moreover, the credit for the increase in foreign tourists’ arrival goes to the Planning Commission because it allotted funds for the development of tourism infrastructure during the eighth five year plan. Beside it, there had been a remarkable growth in foreign tourist arrival from the year 2002 to 2005 due to the various efforts made by government of India including promoting India through the ‘Incredible India’ campaign in overseas markets. This has led to an increase in the tourism growth by about 65 percent during the period of three years i.e. 2.38 million in 2002 to 3.92 million in 2005. Table 1: Share of India in International Tourist Arrivals and Foreign Exchange Earnings from 1991through 2017 Year Number of FTAs in India (in Million) % Change over the Previous Year FEEs from Tourism in India(in US$ Million) % change over the previous year 1991 1.67 1861 1992 1.86 11.3 2126 14.2 1993 1.76 -5.5 2124 -0.1 1994 1.88 6.9 2272 7.