Tier 2 and Tier 3 Cities: The New Growth Markets of India

Introduction

According to the National Council of Applied Economic Research (NCAER) report, tier 2 and 3 cities contributed 40% to India’s GDP in 2015. The same report plus leading management consultants like McKinsey predicts it to grow by 45% in the future. No small number by any means. For far too long, the contribution of small cities to India’s growth and prosperity has been under the radar. Perhaps due to the excessive focus on metropolitan cities.  

Fast forward to 2024, tier 2 and 3 cities in India are changing; they are all the rage in the business landscape today. From retail giants and leading IT companies to new-age startups and innovators, businesses are flocking to these cities to get a slice of the economic potential and growth. 

A plethora of factors have led to the massive change in perception about small Indian cities and their potential; key government policies, programs and support being at the top. Small towns and cities as new growth markets are crucial for the goal of Viksit Bharat by 2047. Infrastructural development, benefits galore for businesses, the emergence of startups, and the digitalization of the economy, are other factors. 

Another often overlooked reality is the growing aspirations of the middle class and the latest innovations and ideas springing from these locations. We will explore these facets in this blog because it’s high time to talk more about the heartbeat of Bharat, the small cities of India. 

Government’s Spirited Efforts 

India is the fastest-growing major economy in the world. Thanks to the supportive government policies in the past decade. To take development to the inner parts of the country, the government has taken strong steps which are underscored by the number of effective schemes and programs.

Some of the prominent government initiatives include Startup India Scheme, Smart Cities Mission, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Pradhan Mantri Awas Yojana (PMAY), Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT). 

Businesses are attracted to invest in small cities due to schemes encouraging entrepreneurship, tax benefits and the enormous infrastructure project undertakings already in the pipeline. 

Immense Infrastructure Development Work

In a move to improve infrastructure in cities and towns of India, the Urban Infrastructure Development Fund (UIDF) was initiated in the 2023 Union Budget. A budget of Rs 10,000 crore per year was allocated to cover 459 Tier 2 cities and 580 Tier 3 cities.

In the past few years, road networks have improved, new airports have been added, and the convenience peaked. All of these positive developments have boosted the interest of businesses, both local and global. 

What’s the result? PAN-India companies are now interested in establishing their presence in the cities. Take a look at the real estate sector, where tier 2 and tier 3 cities have received capital investments in retail, land, plus industrial and land in the recent past. The flex spaces have also seen an uptick in demand in these cities. 

Business Benefits & Beyond

Businesses are now investing in these new growth markets because of the many benefits such as affordable real estate, increased internet penetration, low labour cost, low operational cost and better convenience. 
 

In addition, businesses are expanding to tier 2 cities such as Bhopal, Jaipur, Kochi, Surat, and Visakhapatnam and tier 3 cities like Vijayawada, Udaipur, Jhansi because of its rising business potential in terms of the following:

• Availability of skilled talent
• Employee’s loyalty
• Understanding of the local market, language and culture
• Development of a diverse team
• Growing middle-class aspiration 
• Boost in spending
• Growing consumption pattern

Startups Shining

Given the massive influx of the working population in the metro cities, houses have become unaffordable, travel to work time has increased, there’s traffic, pollution and whatnot. Thus, the reverse immigration to small cities has been in effect ever since the pandemic struck. The returning professionals, leaders and innovators have given rise to startups in small cities in India. Work from home and hybrid models have thus become a go-to strategy for businesses that offer flexibility to their employees to work from wherever they want.

Here, however, it is important to note that the rise in startups is also because of the growing number of innovators, idea-tors and entrepreneurs who are delivering unique solutions to local problems.  

Era of Digitalization

Increased internet penetration has offered unique opportunities for the youths in small cities to learn and grow professionally. The Fintech revolution has helped them to use the government schemes supporting entrepreneurship.

On the opposite end of the spectrum, businesses today can reach their consumer base in these cities, able to sell their products and services and increase profits, thanks to digitalization. The best example here would be the e-commerce industry, which has grown exponentially due to tier 2 and tier 3 cities of India. 

As India take giant leaps in economy and aim to become a global superpower, the tier 2 and 3 cities will play a crucial role of a booster for sure. There is immense opportunity already at display. A significant but consistent push from the government, growing business interest and passion for innovation imbibed in the cities augurs well for India of the future.

Narayan Bhargava Group is a diversified conglomerate offering end-to-end business solutions for more than 40 years. Our business management consultants can help you expand in India, plus our comprehensive range of solutions can assist in achieving tremendous business growth. To know more, contact us today!