New destination: Tier II, III cities

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Favourable demographics and higher quality of life are making smaller places more attractive

Rajat Wahi in an interview with Ritwik Mukherjee talks about the growth and prospects of thesmaller cities in India which have generated a considerable amount of interest among companies and developers. Excerpts:

Would tier II and III cities eventually come up as more developed and preferred places to live in?

With increased competition and cost of operations in the metros and tier I cities, a number of tier II and III cities may offer better growth prospects for players across sectors, driven by factors such as favourable demographics, infrastructure growth and higher disposable income driven by both strong economic growth and government support thr­ough various employment schemes.

This has lead to an increased focus of consumer goods companies and real estate developers on tier II and III towns, increasing the per capita consumption across categories in these towns. As a result, these towns are seeing rising influx of capital and talent, and this is likely to continue over the coming decade. Factors such as high cost of living, overcrowding, declining quality of life, increased crime, and escalating property prices in tier I cities will further push people to chose tier II and III towns over tier I cities to live in.

While tier II and III towns have always offered a higher quality of life, the challenge has always been around available opportunities to attract people, and as these opportunities increase, more and more people will opt to live there. Tier II and III towns will face the challenge of infrastructure to keep pace with the growth, so that they don’t face the same challenges as tier I cities around overcrowding, higher cost of living, crime, etc. This is where planning will be critical for their survival and for their ability to attract and absorb the influx of people.

What would happen to tier I cities and metros?

Metros and tier I cities will continue to remain the large and key consumption hubs in the near-to-medium term.

While the peripheral regions around these consumption hubs are likely to witness or are already witnessing increased investment activity driven by increased demand and consumption, the tier I cities will continue to be large centres, as we have witnessed in developed markets like the UK and France, where London and Paris continue to account for majority consumption across all sectors and are the major contributors to the economies of both countries.

The rapid expansion of the periphery cities (such as Gurgaon and Noida) is likely to continue, as they become the ‘feeder’ cities to the hubs, and they are likely to envelop nearby smaller towns as well — this will result in ‘corridors’ of consumption — with metros and tier I forming the nucleus or the hub. In some respects this will take the pressure from the metros and tier I cities and will spread the prosperity to the periphery towns and cities.

Would it lead to a reverse migration kind of situation?

With increasing career opportunities and better infrastructure facilities, tier II and III towns will continue to lure more and more people to stay back in these cities and take up jobs near their homes, rather than move to metros and tier I cities, where there is a clear trade-off between prosperity and quality of life.

To some extent, the tier II and III towns will also attract people to move there from tier I cities as the opportunities continue to grow in tier II & III towns. This will not lead to a major ‘reverse’ migration. Tier I cities are likely to continue to be the largest employment and habitation centres for the medium term, while tier II and III towns will continue to attract people to stay back (i.e. stop the migration to metros) and will also absorb the migration from the rural/agricultural sector, which is expected to account for more than 200 million people in the coming decade.

There always was a gap between tier I and tier II, tier III cities. Would this gap widen with time?

Growing focus of various companies on the tier II and III towns also clearly indicates a shift and narrowing gap between tier I and tier II and III cities in years to come, as growth is likely to be higher than in tier I cities — and this is already being seen today. Most consumer goods and durable companies are seeing far higher growth in rural and tier II & III towns than in metros, and for many companies, this accounts for anywhere from 30 per cent to 50 per cent of their total sales. Proximity to metros and tier I cities will play a big role in driving this for many towns. For example, Baddi in Himachal Pradesh has leveraged its close proximity to Chandigarh and Panchkula. Other examples include smaller town clusters near and around Delhi. So, while the gap is likely to close in terms of prosperity, disposable income, growth rate, quality of life, etc, tier I cities are likely to continue to be the hubs for consumption and prosperity in years to come, collectively accounting for a majority of the GDP.

So, how would one strike a balance?

Factors such as infrastructure growth, market potential, less competition, and government policies will spur demand and is likely to make certain tier II and III towns more favourable investment destinations. This is already happening across Punjab and Maharashtra. A lot will depend on how the infrastructure develops and whether it keeps pace with progress in many tier II and III towns, as that will either drive faster development and more employment opportunities, or create bottlenecks and chaos, spiralling these tier II and III towns into urban decay and all the ills that come with it.

Growth of tier II & III towns is critical for ensuring a ‘smooth’ transition of India from an agricultural economy to a service and industrial giant, and their ability to absorb, attract and retain the working population, especially the large rural population that is likely to migrate out of agriculture in the coming decade. Their growth will take the pressure off the metros and tier I cities, and ensure that these cities continue to grow slowly and infrastructure is able to keep pace.


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