Growth Potential: Tier II and Tier III Cities in India

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3. Overview

Tier II and Tier III cities are appearing as highly attractive destinations to a variety of businesses – retail, outsourcing, IT and real estate investments and development.

• A. T. Kearney’s 2006 Global Retail Development Index (GRDI) ranked India as the most attractive market for retailers citing the projected 8% GDP growth in 2006, the retail market (at an estimated US$ 350 billion) to grow by 13%, positive Government policy (that allowed 51% foreign ownership in single-brand retail entities) and the billion strong population as thumping reasons for this assessment.
• Zagada and Waagstein Research’s India IT Services Executive Report 2007: “Depth and Completeness.” indicates that India will soon be producing over 600,000 graduates annually in subsequent years and that the IT sector would grow by a projected 35% in 2007. Interestingly this same report also finds that rising costs and capacity constraints are driving IT firms to tier II and III cities like Chennai, Hyderabad, Pune, Jaipur, Chandigarh, Ahmedabad and Mysore.
• Gartner India and several other research firms have predicted that India is likely to lose some of its significant market share in the offshore BPO business – a drop fuelled by rising labour costs and shortage of skilled labour. Industry analysts point out that the concentration of BPOs in pockets like Bangalore, Gurgaon and Mumbai has meant that they target the same talent pool, pushing up demand. The most apparent solution is to seek (greener?) pastures in tier II and III cities.
• Overseas real estate investors are now looking at India with renewed interest following the partial relaxation of FDI rules. A report (part of the “World Winning Cities” Series) by real estate consultants Jones Lang LaSalle also highlights India as an attractive investment option, with the most benefit likely to accrue to those investors with “long term strategic vision and a commitment to India”. The report is bullish on tier II cities like Chennai, Hyderabad and Pune.

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