A tale of tier 2 cities

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

India’s economic map is being redrawn.

While the nation’s mega cities — or metropolises as they are known — like Bengaluru, Hyderabad, Chennai, New Delhi and Mumbai continue to grow, a subtle, yet pronounced wave of opportunity has been sweeping through its tier 2 and 3 cities.

These cities — which include Chandigarh, Coimbatore, Kochi and Jaipur — offer advantages ranging from lower operational costs to a more laidback lifestyle, decent education opportunities and a reserve of untapped skilled and semi-skilled employees.

Several companies are capitalizing on these opportunities.

Take for example Trident, a textiles company producing linens, rugs, bedspreads and yarns for consumers in both India and abroad. The company is headquartered in Ludhiana, an industrial city that is around 100 kilometers away from Chandigarh, the capital of the state of Punjab.

Multi-national companies wanting a presence in India have also been vying for space outside the major metros. For instance, automaker Kia India set up its manufacturing facility in the district of Anantapur, which is around 215 kilometers away from Bengaluru.

India’s tier 2 and 3 cities are also becoming hotspots for the set up of Global Capability Centers (GCC), which look after a slew of business functions for a parent organization.

The Asian powerhouse is home to around 1,800 of such centers — giving it a global market share of over 50%, data from jobs and talent platform foundit shows. One in five GCCs established their base in a tier 2 city in the first half of 2023 so as to reach out to new talent markets, according to the data.

Pune, a city in the state of Maharashtra is a hub for GCCs specializing in IT, automotives and manufacturing. Meanwhile, Ahmedabad, a city in Gujarat is a key destination for companies in banking and financial services given its proximity to the Gujarat International Finance Tec-City.

Other cities that have been seeing interest among GCCs include Chandigarh, Bhubaneshwar, Jaipur, Lucknow and Visakhapatnam, thanks to improved air connectivity, the set up of new-age private universities and reduced costs.

“These cities have been sprouting up organically as the population grows, and space gets limited,” Shumita Deveshwar, chief India economist at TS Lombard, told CNBC’s Inside India.

Close to 60% of India’s GDP was from its urban pockets, data from government agency NITI Aayog indicates. As more people move to cities, 73% of the nation’s population growth is expected to be in urban areas by 2036, according to the agency, with workers commanding a wage premium of 122% over those in the rural parts of the country.

There is no official tiering of cities in India but population data from the Reserve Bank of India has been used and widely accepted as a classification over the years. As a rough comparison, Mumbai currently has a population of over 20 million while Jaipur’s population is just over 4 million.

There is no official tiering of cities in India but population data from the Reserve Bank of India has been used and widely accepted as a classification over the years. As a rough comparison, Mumbai currently has a population of over 20 million while Jaipur’s population is just over 4 million.

Better job prospects?

Population numbers aside, the urbanization of India’s smaller cities aligns with the nation’s vision to foster a geographically balanced economy offering fertile ground for employers seeking talent and employees wanting a fulfilling career.

“We definitely see the cities outside the top metros doing much better in terms of growth in job opportunities,” Sekhar Garisa, CEO of foundit, said.

“We thought the cities are showing higher growth because of a lower base. But over the last 18 months, we’re seeing that the base impact is not slowing because there is a shift in policies, organizational incentives and candidates’ willingness to work outside metros in tier 2 cities.”

This comes as employees do not feel their career progression is compromised simply because they are working outside a metropolis, with at least three in 10 being open to taking a job in a tier 2 city today, versus none a decade ago, Garisa said.

There is, however, a catch. Salaries in tier 2 cities are typically around 30% to 40% lower than what is paid in bigger cities, Garisa said. After accounting for the the difference in the cost of living, the net compensation differential could be about 20% to 30% in tier 2 cities, Garisa noted.

This differential is narrowing, he said, as people outside the metros are demanding the same compensation because they know the market rate.

A more pressing concern now is job creation across industries and cities as an educated millennial generation faces challenges securing a job.

“India has been a services led economy which hasn’t served it too well in terms of creating the kind of employment we need for the young demographic profile that we have,” says TS Lombard’s Deveshwar.

Her suggestion is for the urbanization of cities to include the creation of jobs that allow people to retain the lifestyle and surroundings they are comfortable with.

Infrastructural demands

India’s urbanization story is embroiled with concerns, starting with whether the make up of the cities allows for the influx of the people expected.

Millions of urban Indians will soon be joined by many more. Yet the Ministry of Housing and Urban Affairs was allocated a mere 1.7% of the recent national budget announced on July 23.

“There is definitely an overcrowding of cities in India. Infrastructure development has not been able to keep pace with the kind of growth in the population,” said Deveshwar.

Beyond investing in its own growth, the bitter — but perhaps more curative — pill India needs is foreign investments either by way of more multinational companies setting up shop in smaller cities, or investments in local projects.

The push comes as foreign investments into India have been slowing — a sign that is “not very good” seeing as it is one of the fastest growing countries in the world, said Deveshwar.

Agreeing, Malcolm Dorson from Global X ETFs told Inside India that “more multinationals need to take advantage of its tier two and three cities, especially from a cost perspective, and building their own manufacturing centers and distribution centers in different parts of the country.”

Global X’s parent, Mirae Asset, is one of India’s largest foreign asset managers.

“This, I think, will translate into foreign direct investment and push GDP as well,” Dorson added.

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The benchmark 10-year Indian government bond yield was little changed this week and stands at 6.864%.

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Global traders will also keep an eye on the jobless data out from the U.S.