Why India's smaller cities are poised for rapid growth

Step aside Mumbai, Delhi and Bangalore. India's smaller cities such as Jaipur are on the rise and catching the eye of companies, developers and investors.

March 22, 2018

Step aside Mumbai, Delhi and Bangalore. India’s smaller cities such as Chandigarh, Jaipur and Lucknow are on the rise and catching the eye of companies, developers and investors.

In recent years a growing number of ‘Tier II’ cities have attracted more than $1 million in investment. Jaipur, for example, is known for its IT-enabled services and telecoms, while Vadodara is becoming a favourite with energy investors.

Start-ups are also moving in, drawn in part by more incubators and accelerators offering business support – indeed, around 40 percent of these are now outside of India’s prime cities – as well as lower operating costs and the presence of skilled talent pipelines from nearby educational institutions.

Where there’s growing business, there are growing numbers of business travelers, which hotel groups have been quick to spot. Louvre Hotels Group – part of Chinese conglomerate Jin Jiang International Holdings that acquired a majority stake in India’s Sarovar Hotels last year – is planning to strengthen its position by adding 12 properties over the next two years, focussing on tier-2 and 3 cities.

It’s all boding well for the rapidly developing local economies of smaller cities; the likes of Surat, Jaipur, Indore and Patna are seeing growth of over 40 percent, exceeding that of Kolkata, or even Mumbai. 

Retailers head where the growth is

The strong economic base of emerging cities is creating opportunities for retailers. Cities including Lucknow, Jaipur, Chandigarh, Kochi, Indore, Nagpur and Bhubaneshwar are developing thriving retail sectors, buoyed by factors such as an increasing population and rising income levels high, as well as cheaper land prices helping the construction and expansion of stores and malls.

Meanwhile, bigger brands such as H&M and those belonging to large business conglomerates such as Tata-owned Trent, Aditya Birla’s Pantaloons and Future Group’s Big Bazaar and Easyday as well as the likes of GAP, Nautica and US Polo are expanding in smaller cities.

 “Retailers are actively looking beyond the big metros to explore opportunities offered by a large consumer base, which is hungry for experiential retail,” says Pankaj Renjhen, Managing Director of Retail Services, JLL India.  “Smaller cities are the future centres of retail growth in the country due to factors including the availability of land at cheaper prices, lower rental costs and new high-street formats. Plus a younger generation of retailers now willing to experiment with new leasing formats which are more readily available outside of the big cities.”

It’s not just about physical stores. More consumers in India’s smaller cities are going online – and etailers and logistics providers are betting on this growth. Deutsche Post DHL is planning a four-year investment of more than €250 million in India, its biggest investment yet in the country, while Flipkart has injected US$460 million into its logistics arm, Ekart, as part of its strategy to improve its reach in Tier 2 and 3 markets.

Improvements to local infrastructure and the availability of land is supporting new initiatives. “There are opportunities to develop warehousing space around smaller cities, which along with better connections to global and national transport networks, make for a winning combination. Many of these cities have strategic locations servicing growing hinterlands of India’s sub-regions,” says Ashutosh Limaye, Head of Research and REIS at JLL India. 

City aspirations

In many ways, the emergence India’s smaller cities are simply following the wider patterns of urbanization in the country.  Its urban population is expected to surpass 850 million by 2050 with 50 percent of the country living in the cities. Furthermore, more than 55 percent of the population in 2050 will be in the 19 to 59 age group – the key working demographic.

“This necessitates creating newer urban centres that can also serve as economic engines of growth, and suitable employment opportunities for people who will migrate to, or reside in, these new cities,” says Alok Jha, Assistant Vice President, Research and REIS, JLL India.

At the same time, Indian megacities are facing tremendous pressures ranging from inadequate infrastructure, urban chaos and gridlock, lack of sanitation to declining tax bases as well as budgets as cities’ support services creak under the burden of increased inward migration.

It’s therefore an opportune time for India to spread its rapidly-increasing urban population across new emerging urban hubs, Jha believes.

Yet it’s not a straightforward process. The sustainable rise of India’s smaller cities is hindered by the towering allure of megacities. Affordable housing and office markets also need to develop. And then there’s the negative perceptions of living and working in the country’s smaller cities among India’s top tier of highly skilled workers.

“The glamour and liberal lifestyle provided by India’s metros is a major pull factor, and coupled with the fact that brighter talent prefers to work in the corporate offices, it’s difficult for smaller cities to attract and retain talent. Smaller cities, however, have begun offering better lifestyle, quality of life and infrastructure. So, it will be interesting to see how much, and how quickly, they overcome this limitation,” observes Limaye.

Jha, however, believe that with substantive investments towards improving living conditions and infrastructure as well as economic growth, smaller urban centres in India have the potential to scale up and match the pull factors of their bigger cousins.

Limaye agrees such measures would help: “It would require capacity and vision in urban planning for Tier 2 and 3 cities to scale up without running into the issues that plague the bigger metros. However, with more than 80 cities in the smart cities’ program being smaller ones, and the recent political focus on providing better healthcare outside the main metro areas, there’s potential for emerging hubs to improve their liveability factors while they flourish economically.”