Will India be able to become the world’s third largest economy, overtaking Japan and Germany, by 2027? Will the impetus be on Tier 2 and 3 cities to push forward this growth story?
The leap from the 8th largest to the 5th largest economy over 10 years saw India’s Gross Domestic Product (GDP) grow by 7 per cent CAGR in USD terms to USD 3.6 trillion. It is estimated to be USD 5.2 trillion, crossing the USD 5 trillion benchmark within the next four years.
India’s market capitalisation may touch USD 10 trillion by 2030, according to global brokerage house Jefferies.
Unlocking Growth
India is projected to grow at 6 per cent over the next 5 years. The International Monetary Fund (IMF) has reaffirmed its growth forecast for India at 7 per cent for the current fiscal year ending March 31, 2025. The projected growth rate for 2026-27 is set at 6.5 per cent, surpassing the growth projections for both advanced and emerging economies.
However, the key to India’s growth story is creating more jobs, which is crucial for its economic resilience and social stability. With more people having jobs, there will be a rise in demand for goods and services, which in turn will lead to expansion of businesses and creation of more employment opportunities.
According to the World Bank, every 1 per cent rise in employment leads to a 0.6 per cent increase in GDP growth.
There was almost a general consensus that the unprecedented growth in GDP in India in the post 1990 period was not accompanied by commensurate growth in employment. The State of Working India 2023 (SWI) Report also highlighted that the correlation between economic growth and employment generation had weakened over time. While it was termed as “jobless growth”, the government attempted to negate it by claiming 36 per cent (170 million jobs) increase in employment between 2016-17 and 2022-23 vis a vis growth of GDP at an average rate of over 6.5 per cent.
According to a Goldman Sachs report, India will have to create around 10 million jobs annually to sustain a 6.5 per cent Gross Value Added (GVA) growth between FY25 and FY30, up from an average of 8.5 million from FY00 to FY23. Instead of increasing employment levels per se, the emphasis, however, should be on increasing high-quality productive employment and improving the productivity of the working poor through skill development efforts.
India has already overtaken China in terms of total population and is also expected to top the list in terms of the share of the working-age population by 2030. In the meantime, there has been an ascent of tier 2 and 3 cities keeping pace with its aspiration of becoming a USD 5 trillion economy by 2026 and USD 40 trillion by 2047 when India marks 100 years since its independence.
This transitions from being a largely rural to an urban society, harnessing tier 2 and 3 cities as centres of economic growth along with metros and their hinterlands, stems from the fact that cities in India occupy just 3.0 per cent of the nation’s land, but their contribution to GDP is a massive 60 per cent.
If PHD Chamber of Commerce and Industry (PHDCCI) is to be believed India holds the potential to create more than 10 crore new jobs by 2030. The stress, however, should be on creating new non-farm jobs during this time frame, according to a report published by the McKinsey Global Institute in 2020, titled “India’s turning point: An economic agenda to spur growth and jobs”.
Cities as Engines of Growth
Untapped Talent
Sectors like telecom, consumer electronics, retail and banking are looking beyond metros to hire from an untapped but strong pool of skilled professionals churned out by educational institutions and training centres in Tier-2 and Tier-3 cities, witnessing consistent infrastructure development and changing consumer behaviour.
According to Randstad India, a talent management firm, 54 per cent of employers are expanding their focus to these cities with a diverse talent pool, enabling a more distributed workforce model. It further claims that Tier-2 and 3 cities such as Thiruvananthapuram, Kochi, Coimbatore, Jaipur, Mohali, Vadodara, Chandigarh, and Indore contribute around 12-15 per cent of the country’s tech talent.
Beyond Metros
This shift in the hiring trends is further fuelled by rising operational costs and high attrition in metros, improved digital infrastructure with rapid 5G rollout and enterprises prioritising digitalization of operations. There has been a 30 per cent annual growth in internet penetration in Tier 2/3 cities, according to a report by NASSCOM.
Due to low operational costs, industrial growth has also moved beyond metropolitan areas.
Recruiting firm Xpheno data shows that active Tier 2/3 white-collar job openings on popular job boards and portals have also grown by 41 per cent year on year with executives opting for a better work-life balance in smaller cities. This manoeuvre is also attributed to escalating living costs and mounting infrastructural challenges in metros. The result: Growth rates ranging from 3x to 8x in cities like Bhubaneswar, Dehradun, Solapur and Mysuru with infrastructure, data annotation for AI, and business services emerging as significant contributors to job creation.
The focus is on taking offices closer to talent pools across India instead of transporting those from smaller cities to metros with government initiatives like AMRUT-Atal Mission for Rejuvenation and Urban Transformation, Smart Cities Mission and Digital India boosting their appeal to businesses and professionals.
The search for specialized talent in tech and business is also being met as IITs and IIMs in cities such as Roorkee, Indore, and Kozhikode ensure a consistent supply of skilled graduates.
New Operating Model
The skyrocketing costs in metros and exorbitant rents are also proving to be a dampener for businesses. Perhaps which is why Tier 2/3 cities are witnessing a surge in the FMCG sector with the non-metro consumers switching to branded and quality products due to increased global awareness. This upswing driven by consumer demand is likely to see 25 million sqft of retail developments backed by availability of land in the next 5 years, according to JLL India.
Moving to smaller cities allows companies to reduce real estate costs and invest more in people and R&D, thereby boosting the local economy by creating new employment opportunities, fostering entrepreneurship, and attracting investments. They are also investing in training and upskilling programmes to bridge the skills gap.
The success of e-commerce giants like Amazon and Flipkart has also propelled hiring amid need for logistics hubs in non-metro regions. A BCG report revealed that 50% of online shoppers are located in small cities and the number is anticipated to reach 60% by 2030.
On Hiring Sprint
Fast-expanding Banking, Financial Services, and Insurance (BFSI) sector saw a substantial increase of 24 per cent in entry to junior-level positions in 2024 compared to a year ago. This expansion was predominantly driven by an increase of 23 per cent and 37 per cent in Tier 2/3 segments respectively from a modest 9 per cent and 2 per cent in FY23. The surge in courtesy India’s growing middle class and an increase in the demand for financial products like housing loans, personal loans, and credit cards, despite continuing high attrition in the financial services industry.
Small Towns, Big Opportunities
There’s no two ways that these smaller towns are increasingly capturing the attention of both businesses and residents. They are poised to become not just economic powerhouses but also vibrant hubs of innovation, entrepreneurship, and a skilled workforce, vital for India’s journey toward becoming a developed country. Rapid expansion of job opportunities, while focusing on infrastructure, industries, education, and sustainability, is a primary driver of progress in Tier 2/3 cities dotted with IT parks, industrial zones, and special economic zones. And this is in keeping in pace with the country’s vision for equitable economic opportunities and new infrastructural developments.
