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Paul Douglas had a surreal experience on his maiden visit to India last year. Although the Los Angeles trader was on a business trip to India’s Silicon Valley – Bangalore – he put up in Mumbai, nearly 1,000 kilometers away. Douglas would fly to Bangalore every morning during his three-day stay and then jet back after wrapping up work.

Douglas found the city’s hotels so expensive, he says, that he preferred “to stay with a friend in Mumbai, fly in for meetings to Bangalore and then catch the day’s last flight back.”

Much like Douglas, foreign visitors to India are experiencing the country’s worst hotel room crunch ever. As its economy booms, with growth projected at 8 percent in 2008-09 despite the global slowdown, demand for hotel accommodation has far outstripped supply. The shortfall is so acute that hotel rooms in most Indian metropolitan areas are either unavailable or to be had only for outrageous prices.

An industry survey estimates that the three major Indian metropolitan areas — Bangalore, Mumbai and Delhi — command some of the highest hotel rentals in the world. The study, conducted by Indusview Advisors, found that Bangalore had the world's highest room rentals, averaging about $500, with Mumbai ($400-450) coming in a notch lower and Delhi ranking third at $350 plus.

Internationally, London hotels charge $300-450 while star properties in Moscow and Rome charge $260-350 and $140-350 respectively. But while the situation is acute even in traditional high-cost cities such as New York ‑ where room rates spiraled up 15.4 percent last year to an average of $320.87, according to an American Express report ‑ some of the strongest surges have been in Asia. With the upcoming Olympics in Beijing this August, China’s room rates have leapt 20 percent since last year. But despite the surge, room rentals in China and Singapore still range around $155 for the former and $137 for the latter as against India’s $350 in the deluxe category.

Shanghai alone boasts 135,000 rooms as against India’s 110,000 in the organized three to five-star categories. According to a report by Federation of Indian Chambers of Commerce and Industry (FICCI), China has 10 times more, and the United States 40 times more rooms to rent out. The New York metropolitan region alone has about as many three to five-star rooms as all of India.

A country smaller than New Delhi, Singapore has nearly half of India’s capacity, with over 50,000 rooms to offer. China also leads India in infrastructure development with 316 hotel projects in the pipeline, almost double India’s current 161.

Meanwhile, the skyrocketing prices are impacting business, especially in Bangalore, which accounts for 51 percent of foreign business travel to India. Rooms here are so scarce that even big local companies like Infosys Technologies and Wipro have had to construct their own hotels and guesthouses to accommodate visitors and save on atrocious hotel bills. Microsoft too, is exploiting its Live Meeting videoconferencing technology to whittle down travel costs of its sales/marketing people.

"The last two years have been especially bad for business people and travelers as demand simply can’t keep pace with the limited supply," says a senior manager at a Delhi-based outsourcing company. "So hotels invariably command premiums for their rooms."

And that they do. Prices at the spiffy, 279-room Oberoi, situated in the heart of Delhi, for instance start at US$345, breakfast not included. Despite the prohibitive price tag, its rooms and suites have been chockablock almost every night since October last year. Ditto at the ritzy Taj Mahal Hotel (a chain offering 7,000 rooms across the country) where last season even VIPs were applying pull to try to find accommodation. In Bangalore, the Leela Kempinski is charging up to $550 on busy days ‑ almost at par with one of the most luxurious hotels in the world, The Peninsula in Hong Kong.

What explains this shortfall and crazy room prices? Several factors, actually. With India gaining economic clout in the world arena, International visitors are flocking in to clinch deals, attend conferences or simply gawk at the Taj Mahal. Proliferating low-cost airlines and subsequent slashed airfares due to enhanced competition have brought domestic travel within reach for the middle classes. Real estate is booming, attracting droves of investors.

The current room squeeze has had other negative fallout. India’s tourism arrivals, which in any case lag most other Asian countries, are anemic. Against India’s paltry 4.6 million tourist arrivals in 2006, China received 49.2 million, Malaysia 17.5 million, Hong Kong 15.8 million, Thailand 13.9 million and even tiny Macau 10.7 million.

This is ironic because India’s potential for earnings from tourism, given its stunning geographical and cultural diversity, is enormous. On average India earns $1,620 from every foreign tourist, triple the amount France does and nearly double of the global average.

“An average tourist tends to stay longer in India because of the size of the country and the spectrum of attractions it offers. But the room shortage combined with infrastructure woes and an imminent tourist rush during the upcoming Commonwealth Games in 2010 will only worsen the crisis,” says P.K. Chari, a Mumbai-based travel agent.

To defuse the situation, the tourism ministry is scrambling for rooms. A couple of years ago, it launched the 'Incredible India Bed and Breakfast Scheme' as a stopgap arrangement to add an estimated 20,000-25,000 rooms to meet the hotel room shortfall in New Delhi for the Commonwealth Games. It invited families to convert their homes into bed-and-breakfast establishments which could charge about $35 a night. The goal was to offer another 10,000 rooms in time for the Games. However, the scheme has met with a lukewarm response with not even 100 families taking the offer.

To entice hoteliers, the Urban Development Ministry has proposed that those who complete their projects before 2010 will be eligible for a range of tax concessions and incentives. The ministries of railways, civil aviation and the state governments, too, are following investor-friendly land policies and adopting a single-window clearance for promoting hotel projects.

But even if new hotels do come up, a Federation of India Chambers of Commerce and Industry study on investment opportunities in hotel infrastructure points out that fresh investment would at best add 53,000 rooms in the next five years, while the current shortfall is 150,000. Also, even if hoteliers do want to take up new projects, prohibitive real estate prices are acting as a huge dampener. This is especially true for Mumbai which ranks at number three after London and Tokyo in global real estate price surveys.

To make matters worse, the government’s restrictive regulations for hotel construction are doing nothing to improve things. The ministries follow archaic laws that limit the amount of land for sale, further driving up prices. To curb this, Union Tourism Minister Ambika Soni has sought a 10-year tax rebate for new budget hotels and is also encouraging Indian Railways to give up some of its vast land holdings for trackside hotels. If these measures are put in place, about $6.5 billion may be invested in constructing hotels.

Meanwhile, foreign investors are rushing to fill the gap. Hilton has won approval for 75 new hotels in India by 2010 while Ramada Hotels has entered into a tie-up with Royal Orchid, an Indian company, to build four- and five-star properties nationwide. The Taj group, meanwhile, is planning $22-a-night hotels with plans for 100 hotels, called Ginger Hotels, within five years.

Accor, a French group, has announced plans along with Emaar, a Dubai-based developer, to invest US$300 million to bring 100 of its "Formula 1" hotels to India. Accor is also bringing the Sofitel chain to Mumbai. Starwood Hotels also plans to invest heavily in hotel construction. The expansion will include brands as diverse as the Sheraton, the Westin, Le Meridien, W and Aloft, an $80-a-night offering for business travelers. In Mumbai, a long-awaited 231-room Four Seasons Hotel will open later this year while the Lemon Tree Hotels chain will execute its plans for 19 budget and mid-range properties with 2,400 rooms across the country.

Rajinder Kumar, the president of the Hotels and Restaurants Association of Northern India, says it is not enough. All the above activity is skewed in focus and will cater only to future requirements, he worries. The need is to urgently tap the unorganized hospitality sector to take care of the current shortfall.

"What the government is not focusing on is the mid-market,” says Kumar. “It should give small hotels and guesthouses incentives so that they upgrade their services to form an organized mid-market segment. Focusing on big hotels is no way to go about things if we have to be ready for the rush during the Commonwealth Games.”