Homestays in Karnataka: Case of markets vs regulation…

The Tourism Department of Karnataka has again asked the various homestays to register before 15 Nov 2016 or close down.

Homestays have emerged as an excellent alternative to explore nature and local food:

Living with a family, observing their culture and traditions up close, eating with them, and relaxing with them makes for the perfect vacation, and in Karnataka, more than 10,000 homestays attract guests from across the state and the country.

Deepak Muthappa, a homestay owner, says homestays are popular as they offer an unusual experience.”Travellers today prefer an alternative to the usual resorts and hotels. In Malnad region, the environment and local food are a draw,” he said.  Ajay Pandey, a software engineer in Bengaluru who uses homestays regularly, said: “The traditional Kodava food prepared by the owner’s family is the reason I keep going back to Madikeri. The fresh air and greenery and ambience of home are refreshing and relaxing.”

These places are not registered as hotels etc.  The homestays save on all the transaction costs and taxes. They pass lower costs to customers via lower fares and a customised experience close to nature.

Lately these homestays are seen as places of illegal activity. Some resorts are also masking as homestays just to save the taxes etc.  One view is that this has happened due to lack of regulation:

….in the last few months there have been reports of illegal activities such as prostitution, gambling and rave parties being organized at homestays.

These usually take place in the unauthorized homestays, which are mushrooming in Kodagu, Chikkamagaluru, Shivamogga and Hassan, which are popular weekend getaways. Police recently busted a brothel in an illegal homestay and arrested four people, including the son of an MLA from Tumakuru district. “We have information that some homestays’ links to brothels in Bengaluru, Mysuru, Mangaluru and Mumbai,” said an officer who was part of the raid.

This is putting the industry in a spot as genuine hosts are getting a bad name. Lack of regulation for homestays is the main reason for this. The registered homestays, author ized by the state tourism department, say there is no mechanism to regulate the proliferation of unauthorised homestays, which flout all guidelines.”Unless the tourists verify the credentials of the homestay or look for the tourism department’s registration certificate, they could end up in such unscrupulous places,” said Vinayak Hegde, a homestay owner in Shivamogga.

For m er minister MC Nanaiah, who was chairman of the committee to suggest measures for safety of women and children, said some fraudulent elements were spoiling the goodwill of traditional homestays.”At least 3,000 homestays operate in the Malnad region without certification from the state tourism department. They offer rooms at rates much lower than the licensed homestays. Most of these places do not have families staying in them and are run by people with dubious credentials,” he said. He said il legal homestays draw people from Kerala, Mysuru and Bengaluru. “These illegal activities cannot happen without the tacit support of police and local authorities,” Nanaiah said.

It is estimated that authorized homestays account for about 500 rooms, while unauthorised ones account for twenty times that num ber. The number of homestays has gone up from less than 100 in 2004 to 10,000 in 2016 with the highest number in Koda gu, Chikkamagaluru, Shivamogga and Hassan. Other than Malnad, homestays also operate in Belagavi, Dharwad, Ballari and Bengaluru Rural.

The other view is the main problem is govt policy:

However, the biggest obstacle to the sector’s growth is government policy. From the lack of a proper licensing system to harassment by local gram panchayat authorities, excise and police officials, the woes of homestay operators make for a long list, prompting not less than 400 operators to leave the field over the last two years.

 “It is a hassle to deal with local government officials.The police and excise officers demand bribes. The state government should provide a supportive regulatory environment to homestays, and not treat them as purely commercial establishments. We draw guests by word-of-mouth as we are not formal, structured businesses,” says Shankar Gowda, a homestay owner in Sakleshpura, Hassan.

Hmmm..So what we have is regulation where it should be present is absent and vice-versa. It is unlikely that homestays engaging in illegal acts at such large scale can come up without stealth govt support.

This is like he classic lemons problem which leads good players being sidelined by the bad ones. The good players are reluctant to pay bribes as they think they are running the business fairly. The bad ones are just too eager to pay as only this keeps their business running. This leads to the entire pond becoming dirty.

So some bit of registration etc needs to be done. In absence of a local solution to seperate good from bad players, govt has to step in. But this could lead to rise in transaction costs defeating the entire purpose of homestays which thrive on these low costs.

The tourism minister has specified that he does not want to regulate and kill the industry. They have even lowered the registration costs significantly:


The registration is aimed at maintaining a database of homestays in the state and to monitor their activities. Noting that home stays in Karnataka need some kind of  “regulation”, Kharge said the government intends to promote  the home stay industry. He said: “We are not just trying to regulate them, but  trying to ensure that they give best of services to tourists.”

Stating that earlier for home stay registration, a fee of Rs 10,000 was collected and rating was compulsory, Kharge said it had been brought down to Rs 500 and registration made compulsory. “Now rating is not compulsory, but the department will endorse those home stays that have been rated and help in their promotional or marketing activities.”

Pointing out that there are lot of resorts that are  running on home stays,the Minister said the idea to recognise  and register them, because of the fact that “we don’t know  what they are doing.”

Hmm.. this bit is important to preserve the advantage of homestays. It will be interesting to see how this industry fares in future.

This case has many lessons on economics. politics and law.


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