CNBC's Inside India newsletter: An exploration of tier 2 cities

This report is from the CNBC "Inside India" newsletter, which provides timely and insightful news and market commentary on the emerging powerhouse and the big businesses driving its rapid growth. If you find it interesting, you can subscribe here.

The big story

India's economic map is being redrawn.

The growth of mega cities like Bengaluru, Hyderabad, Chennai, New Delhi, and Mumbai continues, while a subtle yet significant wave of opportunity has been emerging in their tier 2 and 3 cities.

Chandigarh, Coimbatore, Kochi, and Jaipur are cities that provide benefits such as lower operational costs, a relaxed lifestyle, good education opportunities, and a pool of skilled and semi-skilled workers.

Several companies are capitalizing on these opportunities.

The textiles company, based in Ludhiana, produces linens, rugs, bedspreads, and yarns for consumers in India and abroad.

Companies seeking a presence in India outside major metros have also been competing for space. For example, Kia India established its manufacturing facility in Anantapur district, which is approximately 215 kilometers from Bengaluru.

Global Capability Centers (GCCs) are being established in India's tier 2 and 3 cities, which handle various business functions for their parent organizations.

Over 50% of the global market share in Asian powerhouse is held by around 1,800 such centers. In the first half of 2023, one in five GCCs established their base in a tier 2 city to reach out to new talent markets, according to data from jobs and talent platform foundit.

Pune, located in Maharashtra, is a major center for IT, automotive, and manufacturing GCCs, while Ahmedabad, situated in Gujarat, is a significant destination for companies in banking and financial services due to its proximity to the Gujarat International Finance Tec-City.

GCCs are showing interest in cities such as Chandigarh, Bhubaneshwar, Jaipur, Lucknow, and Visakhapatnam due to improved air connectivity, new-age private universities, and lower costs.

As the population grows and space becomes limited, cities are emerging naturally, according to Shumita Deveshwar, the chief India economist at TS Lombard, who shared this insight with CNBC's Inside India.

According to NITI Aayog, nearly 60% of India's GDP comes from urban areas, and this trend is expected to continue as more people move to cities. By 2036, the agency predicts that 73% of the nation's population growth will occur in urban areas. Additionally, workers in urban areas can expect to command a wage premium of 122% over those in rural areas.

According to the Reserve Bank of India's 2011 census, there is no official tiering of cities in India, but a widely accepted classification is based on population data.

Cities are classified into six tiers based on population size. A tier 1 city has over 100,000 residents, while a tier 2 city has between 50,000 to 99,999 people. In 2011, the population count in tier 3 cities was around 20,000 to 49,999.

Better job prospects?

The urbanization of India's smaller cities supports the country's goal of promoting a balanced economy that provides opportunities for employers and employees.

Sekhar Garisa, CEO of foundit, stated that cities outside the top metros are experiencing significant growth in job opportunities.

"Although we initially believed that cities were experiencing higher growth due to a lower starting point. However, over the past 18 months, we have observed that the base effect is not diminishing because of changes in policies, organizational incentives, and candidates' willingness to work in tier 2 cities."

According to Garisa, at least three in 10 employees are open to taking a job in a tier 2 city today, compared to none a decade ago, as they do not feel their career progression is compromised by working outside a metropolis.

Garisa pointed out that salaries in tier 2 cities are usually 20% to 30% lower than in larger cities after factoring in the cost of living.

As people outside the metros become more aware of the market rate, the compensation gap is narrowing, he stated.

The urgent issue now is generating employment opportunities across various sectors and locations, as the young and well-educated millennials struggle to find work.

Deveshwar, of TS Lombard, remarks that although India has a services-based economy, it has not been successful in generating the required employment opportunities for the young population.

Her proposal involves urbanizing cities while preserving the lifestyles and surroundings of their inhabitants through job creation.

Infrastructural demands

The urbanization story in India is complicated by questions about the suitability of city composition to accommodate the anticipated population growth.

Although the recent national budget allocated only 1.7% of the budget to the Ministry of Housing and Urban Affairs, millions of urban Indians will soon be joined by many more.

Deveshwar stated that there is definitely an overcrowding of cities in India due to the rapid population growth, which has outpaced infrastructure development.

To cure its bitterness, India requires foreign investments, either through multinational corporations establishing businesses in smaller towns or funding local initiatives.

Deveshwar stated that the slowing of foreign investments into India is "not very good," given that it is one of the fastest growing countries in the world.

Malcolm Dorson from Global X ETFs advised Inside India that multinationals should leverage tier two and three cities for cost savings and establish their own manufacturing and distribution centers across the country.

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

Dorson stated that this would lead to foreign direct investment and increase GDP.

Need to know

Apple has partnered with Bharti Airtel to offer free music and video streaming services to its premium customers in India, following intense competition in the country's $28 billion media and entertainment industry, featuring Netflix, Amazon Prime Video, Disney+ Hotstar, and Mukesh Ambani's JioCinema.

India is treading a delicate diplomatic path by strengthening ties with Ukraine. The Indian Prime Minister's recent visit to Ukraine was closely monitored by Russia, India's long-standing ally. India is among the few countries to maintain strong economic and diplomatic relations with both Moscow and the West since the Russian invasion of Ukraine in 2022 intensified global tensions, sanctions, and animosity towards the Kremlin.

To achieve its goal of becoming a developed nation by 2047, India must first address gender inequality. Modi aims to make India a $5 trillion economy by the end of the decade, but economists warn that he may struggle to reach his targets if the country does not focus on increasing the number of women in the workforce.

The Walt Disney Co and Reliance Industries' merger of their Indian assets was approved by the Competition Commission of India, despite concerns over their control on cricket broadcasting rights. The CCI stated that the deal is still subject to modifications submitted voluntarily by the two firms.

What happened in the markets? (needs to updated)

This week, Indian stocks surpassed their global counterparts in performance, with the index gaining 1.4% in the last five trading days and a 15.7% increase in value so far this year.

This week, the 10-year Indian government bond yield remained relatively stable at 6.864%.

Venugopal Garre of Bernstein expressed skepticism about India's consumption story and explained why he believes the "next few years of activity will be centered" around the country's power sector on Biz Focus Hub this week.

UBS Investment Bank's Asia economic research head, Tao Wang, stated that India has a high probability of experiencing rapid growth and closing the gap with China, provided it focuses on improving its infrastructure.