Unlocking Prosperity: Wealth Beyond Tier 1 Cities

-Ishan Singh (Investment Analyst)

India's economic landscape is shifting, with an increasingly significant role being played by Tier 2 and Tier 3 cities. Historically overshadowed by major metropolitan areas, these smaller cities are now emerging as vital contributors to the nation's wealth and growth. This transformation is driven by a blend of economic expansion, changing consumer behaviours, and strategic investments.

Economic Growth Beyond the Metros

Traditionally, India's wealth was concentrated in its largest cities like Delhi and Mumbai. However, the economic spotlight is now turning towards smaller urban centers. This shift is marked by several key trends:

Rising Affluence: The number of high-net-worth individuals (HNWIs) is increasing in Tier 2 and Tier 3 cities. This growth reflects a broader distribution of economic power across the country. Cities like Indore, Jaipur, and Surat are seeing a surge in wealth and investment, indicating that these areas are becoming central to India's economic landscape.

Investment and Financial Activities: The investment landscape is evolving, with significant growth in mutual fund investments from smaller cities. The share of Assets Under Management (AUM) from these areas has jumped from 2.55% in 2014 to 17.44% in 2023. Their share has risen sharply from 10.99 per cent in March 2020 and from a low of 2.55 per cent in June 2014.

Source: The Indian Express*

Changing consumer behaviour like Luxury Spending Trends: In Tier 2 and Tier 3 cities, luxury is increasingly defined by practicality and personal enjoyment. Consumers are investing in high-end cars, jewellery, and fashion, with a noticeable trend towards luxury travel.
 

Source: Atlas of Affluence 2022 Report*

When it comes to categories, cars, jewellery, fashion, and watches remained more popular than footwear and handbags. Discounts influenced 41% of residents outside metropolitan areas in their purchasing decisions, compared to 43% in metropolitan areas. Additionally, non-metro residents were more likely to spend on luxury travel, with 15% of them investing in it, while only 6% of metro residents did the same. The demand for quality and variety is rising. Residents of these cities are not only seeking luxury goods but are also increasingly aware of global trends. This is reflected in the growing presence of high-end stores and luxury brands in cities like Indore and Jaipur.

The Talent Shift: Companies are expanding their focus beyond metropolitan areas to tap into the growing talent pool in Tier 2 and Tier 3 cities. Improved internet access and skill development have made these cities attractive for businesses seeking skilled professionals. This shift is supported by lower operational costs, which offer significant financial advantages over the high expenses in major cities.

Infrastructure and Development: State governments are investing in infrastructure to support this growth. Enhanced connectivity through better roads, railways, and airports is making these cities more business-friendly. Initiatives such as tax breaks, subsidies, and streamlined business registration processes are also encouraging companies to set up operations in these regions.

Lifestyle Advantages: Smaller cities offer a unique lifestyle advantage. They generally provide a better quality of life due to lower living costs, cleaner environments, and less congestion. This makes them appealing not only for companies but also for individuals seeking a better work-life balance and improved health outcomes. The cost of living in Tier 2 and Tier 3 cities is significantly lower compared to metros. This affordability allows residents to enjoy a higher standard of living with more disposable income. It also benefits entrepreneurs who can start businesses with lower overhead costs.

Emerging Economic Hubs: Cities like Pune, Surat, and Coimbatore are shining examples of this shift. Pune, known for its educational institutions, is now a hub for the IT industry. Surat and Coimbatore have become major textile centers, attracting significant investments and creating numerous job opportunities. Even cities like Madurai, traditionally known for its cultural heritage, are experiencing economic growth through industries such as textiles and education. Recently there has been a major increase in the number of people shifting from metropolitan cities to outskirts, mountains etc which will help in increasing the per capita income of the people living in Tier 2 and 3 cities and reduce the wealth gap.

The rise of startup ecosystems in these cities is also notable. Government initiatives like Startup India are fostering innovation and providing support for new businesses. Local success stories, such as Agri-tech solutions and edtech platforms, highlight the burgeoning entrepreneurial spirit in these regions. According to the Economic Survey 2024 over 45 percent of the start-ups emerged out of Tier 2 and Tier 3 cities.

Skill development is crucial for sustaining this growth. Collaborations between governments, educational institutions, and industries are increasing. Programs and courses aligned with emerging industries, such as robotics and data science, are helping to build a skilled workforce that meets the demands of the modern economy. Companies are investing in training programs and creating opportunities in Tier 2 and Tier 3 cities. For example, Siemens' recent facility in Pune underscores how a skilled workforce can attract significant investment and contribute to local economic development.

The Future Outlook

The rise of Tier 2 and Tier 3 cities represents a significant shift in India's economic dynamics. As these cities continue to grow, they will play an increasingly important role in the country’s overall economic prosperity. The collaborative efforts of state governments, businesses, and educational institutions are paving the way for a more balanced and inclusive economic landscape. With ongoing investments and strategic support, Tier 2 and Tier 3 cities are poised to become vibrant hubs of innovation, entrepreneurship, economic growth and wealth generation.

 

*Note: While the data presented may not be the most recent, it remains relevant and reflective of key trends and patterns.