Growth Potential: Tier II and Tier III Cities in India

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1. Introduction

India is going full steam ahead with its FDI and overseas acquisitions. During the period from April to December 2006, FDI inflows amounted to US$ 9,273 million. India Inc. struck deals worth over US$ 40 billion, with 50% being outbound M&As. The real GDP growth rate pegged at 8% over this decade looks highly attractive to investors abroad. And then there is the much-written about middle class, relatively younger and English speaking population that is the focus of most India-related business strategies for a number of firms across sectors. All these factors point to development, and a scaling up of quality of life. What makes the picture near perfect is the likelihood that this growth is going to be more evenly spread than ever before, and will certainly not be concentrated and restricted to the tier I or the metro cities.

If the sudden media focus is anything to go by, most of the development is expected in the tier II and III cities, which is really where the teeming Indian middle class lives. Be it in terms of education – several are home to some good quality universities that produce the thousands of graduates and engineers; or in terms of employment – with outsourcing, IT and retail gunning for these smaller cities in search of space or customers or employees or all of the above.

Just what kind of development can these cities expect to see? Who is going there and why? How will this impact the regular guy on the street? Is there really some potential in these cities? Surely there must be some challenges? This report aims to answer these questions and much more. So buckle up and get ready to take off on a trip to the “real” India.

2. The classification – how is it done?

Interestingly, the tiers or classification differs sector to sector. There is one classification of Indian cities into A (including A1, A2 and so on), B, C and D based on HRA (house rent allowance) and CCA (city compensatory allowance), which essentially classifies these cities based on cost of living. IMA, a firm servicing the IT and outsourcing sector, segregates cities in tiers to differentiate between major IT centres followed by the “second rung” and the “third rung” cities. Players in real estate development classify them based on the stage of real estate development these cities are witnessing. We find that there are significant overlaps; with real estate development catching up as IT firms or retail majors show an interest in these cities.

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