Religious tourism has emerged as a significant and powerful driver of local economic development, particularly in destinations where spiritual significance is combined with recreational and cultural attractions. This study empirically analyzes the role of religious tourism in the Nainital district of Uttarakhand and investigates the sequential relationships between service quality, tourist satisfaction, tourist spending behavior, and local economic impact. To achieve this objective, primary data were collected from 251 tourists visiting major religious and tourist sites in the Nainital district using a structured questionnaire. The study employs the Partial Least Squares–Structural Equation Modeling (PLS-SEM) technique for the simultaneous evaluation of measurement and structural models. The findings of the measurement model confirm high indicator reliability, internal consistency, convergent validity, and discriminant validity across all latent variables (constructs), demonstrating the statistical robustness of the measurement framework used. The results of the structural model indicate that service quality has a significant and positive impact on tourist satisfaction, which, in turn, significantly influences tourist spending behavior. The study also found that tourist spending is a strong predictor of local economic impact, reflected in dimensions such as job creation, growth of local businesses, and overall economic development. Mediation analysis confirms a clear sequential indirect effect, concluding that service quality contributes to economic development primarily through the combined mediation of tourist satisfaction and tourist spending. The study's findings provide valuable practical insights for policymakers and tourism destination managers. The results suggest that investing in accommodation standards, cleanliness, comfort, safety, and overall service quality can lead to increased tourist satisfaction and per capita spending, directly benefiting the local economy. By presenting an integrated, model-based understanding of religious tourism-based economic development, this research makes a significant contribution to the literature on tourism economics and provides a practical analytical framework for sustainable and inclusive tourism planning in religious tourism destinations such as Nainital district.