The story of the city level 2

This report is from this week’s CNBC “Inside India” newsletter which brings you the right news, insights and market commentary on emerging powerhouses and the big businesses behind their meteoric rise. As you see? You can subscribe here.

India’s economic map is being redrawn.

As the country’s mega cities – or metropolises as they are known – like Bengaluru, Hyderabad, Chennai, New Delhi and Mumbai continue to grow, a subtle and obvious wave of opportunity has swept through tier 2 and 3 cities.

These cities – which include Chandigarh, Coimbatore, Kochi and Jaipur – offer advantages ranging from lower operational costs to a more relaxed lifestyle, decent educational opportunities and a pool of skilled and semi-skilled workers.

Some companies are taking advantage of this opportunity.

Take for example Tridenta textile company that produces linen, carpets, bed sheets and yarn for consumers in India and abroad. The company is headquartered in Ludhiana, an industrial city about 100 kilometers from Chandigarh, the capital of Punjab state.

Multi-national companies looking to have a presence in India have also been vying for space outside major metros. For example, car maker Kia India is setting up a manufacturing facility in Anantapur district, which is about 215 kilometers from Bengaluru.

Tier 2 and 3 cities in India are also hotspots for setting up Global Capability Centers (GCCs), which handle business functions for parent organizations.

The Asian powerhouse is home to around 1,800 of these centers – giving them a global market share of more than 50%, data from projects and talent platforms show. One in five GCCs established a base in a tier 2 city in the first half of 2023 in order to reach new talent markets, according to the data.

Pune, a city in the state of Maharashtra is a hub for the GCC specializing in IT, automotive and manufacturing. Meanwhile, Ahmedabad, a city in Gujarat is a prime destination for companies in banking and financial services due to its proximity to the Gujarat International Finance Tec-City.

Other cities that have attracted interest among the GCC include Chandigarh, Bhubaneshwar, Jaipur, Lucknow and Visakhapatnam, due to better air connectivity, setting up of new-age private universities and reduced fees.

“These cities have grown organically because the population has grown, and space has become limited,” Shumita Deveshwar, head of India economics at TS Lombard, told CNBC’s Inside India.

Close to 60% of India’s GDP comes from urban pockets, data from government agency NITI Aayog shows. As more people move to cities, 73% of the nation’s population growth is expected to be in urban areas by 2036, according to the agency, with workers commanding a 122% wage premium over those in the country’s rural areas.

While there is no official level of cities in India, the generally accepted classification is based on population data from the 2011 Reserve Bank of India census.

Here, cities are categorized into six levels based on population size. A tier 1 or metro city has more than 100,000 inhabitants, while a tier 2 city will have between 50,000 and 99,999 inhabitants. Meanwhile, the number of population in the 3rd level city is about 20,000 to 49,999 in 2011.

Better job prospects?

Population numbers aside, the urbanization of small cities in India in line with the nation’s vision to foster a geographically balanced economy offers fertile ground for employers seeking talent and employees seeking fulfilling careers.

“We definitely see cities outside the top metros doing better in terms of job growth,” said Sekhar Garisa, CEO of foundit.

“We thought that these cities showed higher growth due to a lower base. But in the last 18 months, we saw that the base impact did not last long due to changes in policies, organizational incentives and the willingness of candidates to work outside. metro in a tier 2 city.”

This happens because employees do not feel that their career advancement is compromised just because they work outside the metropolis, at least three out of 10 job openings in 2nd-tier cities today, not ten years ago, Garisa said.

There is, however, a catch. Salaries in tier 2 cities are usually 30% to 40% lower than those paid in big cities, Garisa said. After accounting for the difference in cost of living, the net compensation differential can be around 20% to 30% in tier 2 cities, Garisa said.

The differential is narrow, he says, because people outside the metro demand the same compensation because they know the market rate.

A more pressing concern today is job creation in industry and cities as the educated millennial generation faces challenges in getting jobs.

“India has been a service-led economy that hasn’t done very well in terms of creating the kind of jobs we need for the young demographic profile we have,” said TS Lombard’s Deveshwar.

His suggestion is that the urbanization of the city includes the creation of jobs that allow people to maintain a comfortable lifestyle and environment.

Infrastructure demand

The story of India’s urbanization is embroiled with concerns, starting with whether the city allows for the expected influx of people.

Millions of urban Indians will be joined by more. But the Ministry of Housing and Urban Affairs was allocated only 1.7% of the national budget announced on July 23.

“There is definitely urban overcrowding in India. The development of infrastructure has not been able to keep pace with the kind of growth in the population,” said Deveshwar.

Beyond investing in their own growth, bitter – but perhaps more curative – pill India needs foreign investment either by way of other multinational companies setting up shop in small towns, or investment in local projects.

The push comes as foreign investment into India has slowed over time — a “not very good” sign given that it is one of the world’s fastest-growing countries, Deveshwar said.

Agreed, Malcolm Dorson of Global X ETFs told Inside India that “more multinationals should take advantage of tier two and three cities, especially from a cost perspective, and build their own manufacturing centers and distribution centers in different parts of the country.”

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

“This, I think, will translate into foreign direct investment and also boost GDP,” added Dorson.

Apple is eyeing a bigger slice of India’s streaming, music market after the Airtel deal. Tech giant Apple has joined hands with India’s Bharti Airtel to offer free music and video streaming services to its premium subscribers. It follows stiff competition in India’s $28 billion media and entertainment sector, including Netflix, Amazon Prime Video, Disney+ Hotstar and billionaire Mukesh Ambani’s JioCinema.

India is walking a diplomatic tightrope with its friendship with Ukraine. Indian Prime Minister Narendra Modi’s visit to Ukraine last week is likely to be closely watched by New Delhi’s longtime ally, Russia. India is one of the few countries to have strong trade and diplomatic ties with Moscow and the West since Russia’s invasion of Ukraine in 2022 sparked global tensions, sanctions and hostility towards the Kremlin.

India wants to become a developed country by 2047 – but it needs to tackle gender inequality first. Modi has an ambitious goal of making the country a $5 trillion economy by the end of the decade, and a developed nation by 2047. However, economists say he will run into trouble if India cannot increase the number of women in the workforce.

Disney and Reliance win agreement for $8.5 billion merger. India’s Competition Commission approved the merger of Walt Disney Co and Reliance Industries’ Indian assets despite concerns over control of cricket broadcast rights. CCI said the deal is still subject to modifications submitted voluntarily by both companies.

Indian stocks rallied and generally outperformed their global peers this week. At Good 50 the index rose nearly 1.4% in the last five trading days. The index has risen 15.7% so far this year.

The 10-year Indian government bond yield was unchanged this week and stood at 6.864%.

Next week will see several market debuts with solar cell and solar module maker Premier Energies listing on Tuesday and Ecos India Mobility & Hospitality later in the day.

Global traders will also be monitoring unemployment data from the US