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TheNFAPost Podcast

Bengaluru, NFAPost: India today is at the cusp of witnessing a new era of growth frontier – cities that are emerging from the towering presence of the bigger metros, led by the growing aspirations of the citizens of the Bharat, where majority of the Indian population lives.

Till recently, increasing urbanisation and the overall economic and infrastructural soundness had led the economic growth in India to be concentrated in a few major cities of the country such as Mumbai, Delhi, Chennai, Bengaluru, Hyderabad and Kolkata.

Smaller cities had to struggle to garner their strengths and create similar relevance and attraction as held by the metro cities. Instead, they saw vast migration of their populace to the bigger cities, allured by their level of urbanisation and employment opportunities.

However, there is always a cost required to maintain balance, as increasing influx brings with it the woes of a stressed infrastructure, expensive real estate, traffic bottlenecks and living conditions less than favourable.

With India’s 5 trillion-dollar economy dream, the way cities perform now and in the near future will matter more than ever. India’s population is expected to grow by 25% (compared to 2011) to 1.52 billion by 2036, according to the National Commission on Population under the Ministry of Health and Family Welfare.

As the country continues to grow, factors such as rising disposable income and better infrastructure are also likely to lead to higher consumption and purchasing power in the smaller cities, thereby leading to faster growth. Thus, it is pertinent to pay equal emphasis, if not more, to the nonmetros and smaller cities of the country – the Bharat side of growing India.

Factors diverting the focus away from the metros

Strained infrastructure in the metro cities
One of the key challenges facing India today is managing infrastructure development and planning for sustainable urban

As per Census of India (2011), around 31% of the total urban population in India is concentrated in the maj
eight cities of Mumbai, NCR, Bengaluru, Chennai, Hyderabad, Pune, Kolkata and Ahmedabad. Over the years, excessive
focus on these cities have led them to exceed their intrinsic carrying capacities, an instance witnessed no bigger than that by the city of Chennai, which was forced to declare a ‘Day Zero’ on 19th June 2019 – the day when almost no water was left, as all the four main reservoirs supplying water to the city had run dry.

As a matter of fact, most of the major cities presently are under severe infrastructure stress owing to rapid urbanisation and unplanned expansion of the city to accommodate the influx of working population.

Factors such as rampant construction activity, detrimental environmental conditions, declining infrastructure budgets, inadequate resource management, increasing traffic snarls and real estate costs have taken the sheen away from these major cities.

Rapid rate of urbanisation and government push towards infrastructure development in the nonmetros
In sharp contrast to the constricted infrastructure situation in metro cities, the government of India has launched various
programmes to promote economic growth and infrastructure development in smaller cities, enhancing regional connectivity. Government policies and schemes such as the Jawaharlal Nehru National Urban Renewal Mission launched
in 2005, Atal Mission For Rejuvenation launched in 2015, regional connectivity scheme UDAN (Ude Desh ka Aam Naagrik) in 2016 and the Nextgen Airports for Bharat (NABH) Nirman launched in 2018, are some of the projects aimed towards augmenting the growth of smaller cities of the country.

In addition, the Smart Cities project was launched in 2015 with a view to accelerating the process of urbanisation by developing satellite towns of larger cities and modernising existing mid-sized cities. Thus, such government-supported projects would facilitate more economic activities, investment and employment opportunities in the non-metros, increasing the urbanisation rate and attractiveness of these smaller cities.

As per National Commission on Population estimates, India’s urban population will increase from 377 million in 2011 to
594 million in 2036 – a growth of 57%. Consequently, the share of Indians living in urban India will grow to 39% by 2036, the increment primarily led by states such as Tamil Nadu, Kerala, Maharashtra, Telangana and Gujarat which will have more than 50% people living in urban areas.

Ecommerce growth and increasing digital adaptation

With over 600 million internet users, India has the second-largest internet user base in the world today. The growing number of internet users in smaller non-metro cities has today blurred the lines between the aspirations of rural and small-town consumers and people living in larger cities. The Bharat consumers are receiving keen interest from both brands and start-ups alike.

While they still prefer cash payments, they would eventually move to digital wallets and therein lies another opportunity for corporates. Fintech giant Paytm Money said that 60% of its users belong to smaller towns and cities, most of who were using digital financial services for the first time. This share will only grow in the coming months.

A report by RedSeer states that the growth in the number of online shoppers in Tier-II and Tier-III cities and rural areas is expected to outpace those of urban areas. According to the report, close to 70% of the e-tailing gross merchandise value would be coming from Tier-II and rural areas by 2023, which currently stands at 40%.

This rise can be attributed to evolving user preferences in these smaller cities, who are open to exploring the options provided by online shopping. Today, the consumer from a smaller town is looking not just for consumables at a bargain, but are willing to pay for the price of comfort as well.

Cashing in on this shift in consumer behaviour are online food delivery platforms such as Zomato, whose business growth has tripled over a period of one year, with smaller cities now contributing 40% to their business.

Favourable real estate costs and availability of land

While the larger metro cities have become a quagmire of unaffordable real estate costs and scarce land, the smaller cities, in contrast, are fast emerging as viable options. With residential projects in these cities offering a range of amenities at relatively lower rates than the major cities, people are more than happy to invest or settle here, their decisions aided by increasing employment and entrepreneurial opportunities.

Property investments in hometowns, be it land or in apartments, are also considered as smart after-retirement-option by millennials. Besides, demand for commercial real estate in smaller cities such as Jaipur, Chandigarh, Indore, Chandigarh, Coimbatore and Kochi, have shown commendable growth as well.

Cheaper office rentals, increased employment opportunities in the corporate sector and government support are some of
the factors driving the commercial markets of these cities.

Investors interest picking up

Investors today are fairly optimistic on the growth potential held by non-metros and other smaller cities, diminishing
affordability in the larger cities being the major point of contention. With the metro cities facing strained infrastructure, the non-metros have abundant opportunity for greenfield, progressive infrastructure development to boost employment – that would eventually lead to adequate capital and rental value appreciation. When fully implemented, the government initiatives announced and currently underway will have a significant impact on the cities’ real estate market.

The COVID-19 pandemic has exposed just how susceptible the metro cities are to such events, given they are bursting at their seams owing to heavy population influx. This disruption has shifted the focus of future growth to the smaller cities – would these cities provide more security than the larger ones?

Here are a few shifts in trend observed and future perspectives drawn

With the Covid-19 outbreak continuing unabated and the concept of work from home adopted for a longer period
than anticipated, many professionals have moved out of the metro cities – essentially their workplaces, relinquishing the high rents and other living costs for a relatively cheaper and simpler life back home.

Some are moving in for a short period of 1-3 months, while others for a longer period – many companies having allowed
extended and even permanent WFH options for their employees. The WFH culture has acted as a catalyst towards a sort of reverse migration towards the less populated and cheaper suburbs or smaller cities, often their hometowns, as property rates are lower there and allows them to buy larger homes with space for office set-ups.

Recently, the government’s move to relax guidelines in order to enable IT and BPO companies to adopt a permanent Work From Home/Work From Anywhere culture, could potentially create innumerable jobs in smaller cities of the country. Meanwhile, this trend of relocating to the suburbs has been observed across the globe and not just with the large cities in India.

Reportedly, almost one-third of Americans are considering moving to areas with lower population density, and in some regions, they are already relocating. During the second quarter of the year, most people were looking to leave New York and San Francisco for the lesser populated suburbs.

Manufacturing growth to rebound strongly

COVID-19 gives further push India is on the verge of a new wave of manufacturing growth as companies actively consider embracing technological advancements in their set-ups. The sector had received a strong impetus by way of the ‘Make in India’ programme launched in 2015. This has been augmented by the government’s further push towards making India an attractive manufacturing destination for global and domestic companies through its initiative ‘Atmanirbhar Bharat’, that was launched during the COVID-19 pandemic.

While industrial activity had taken a severe hit during the stringent lockdowns, it has gradually begun to improve after the easing of the lockdown restrictions. The fact that several multinational companies are contemplating on moving out of China, provides for an opportune period for the country’s manufacturing sector. Major industrial regions located across smaller cities in the country that hold potential to create strong manufacturing hubs include Hooghly, Vishakhapatnam-Guntur stretch, Chitradurga-Davanagere, Hubballi-Dharwad, Tumakuru, KollamThiruvananthapuram stretch, Manesar-Bhiwadi-Neemrana stretch, Chotanagpur, amongst others.

Ecommerce growth to accelerate

The COVID-19 crisis has led the country’s e-commerce market to emerge stronger, buoyed by online shoppers who preferred e-tailers for safety and convenience. According to estimates from Boston headquartered management consultancy Bain and online retail giant Flipkart, online shoppers in India are expected to reach a figure of nearly 300-350 million, growing at 30% CAGR over the next five years. Interestingly, online shoppers in Tier-II and other smaller cities comprised more than half of all shoppers and accounted for three out of every five orders for leading e-retail platforms.

The surge in online shopping was observed primarily during COVID-19-induced lockdown, leading several brands to set up their standalone websites in order to cater to the demand. The e-commerce industry in India registered a 17%
increase in order volume as of June 2020, when compared to the prelockdown period, stated the annual report by Unicommerce, an e-commerce software platform.

While in the past metro cities were responsible for higher growth than the rest of India in order of volume, this trend switched post-COVID-19, leading e-commerce companies to focus more on non-metro cities. Currently, Tier-II and other smaller cities contribute towards around 66% of the total online consumer demand in India and this share is expected
to increase in the near future.

Warehousing & logistics the new engines of growth

Warehousing clusters are expanding insistently in Tier-II and other smaller cities. While majority of these emerging clusters have been reinforced by the industrial and freight corridors being developed in India, the growth in e-commerce sector led by COVID-19 outbreak would translate into increased demand for warehousing as well.

The push for ‘Make in India’ and ‘Atmanirbhar Bharat’ is also one of the factors encouraging the growth of the warehousing sector. Thus, there lies substantial opportunity for development of Grade A warehousing as well as small and multi-location warehouses in the non-metro cities amidst this rising demand.

Several warehousing clusters are coming up in smaller cities such as Ludhiana, Ambala, Lucknow, Siliguri, Guwahati, Bhubaneshwar, Jaipur, Vishakhapatnam, Vijaywada, Coimbatore, Kochi, Nagpur, Indore and Dholera, amongst others. These cities are now in greater focus owing to their emergence as warehousing hotspots for major e-commerce players post the COVID-19 outbreak. One such large deal that substantiates this is Amazon’s largest e-commerce fulfilment centre established in Lucknow. Signed in May 2020 amidst the pandemic upheaval, this transaction of 0.61 million sqft is also one of the largest spaces taken by an e-commerce player across India.

Work From Home and Residential demand

Indian residential market is standing at the threshold of a new phase of development post the COVID-19 crisis – one of them being the possibility of a reverse migration-led housing demand. Presently, nearly 70% of the housing market is accounted for by the top seven cities of the country, with the remaining 30% accounted for by Tier-II and other smaller cities.

The share of the smaller cities stands to increase considerably in the forthcoming period owing to the pandemic- induced impact on jobs in the metros. Considering that the stay duration of majority of the people returning to their hometowns would mostly be temporary in nature, primary demand may tilt towards rental housing while buying demand is expected
to emanate from local investors interested in meeting the rental demand. Of late, with WFH becoming permanent in some IT/ITeS companies and the government relaxing WFH rules, residential demand is expected to be favourably impacted.

With IT majors in Bengaluru implementing prolonged WFH policies induced by the pandemic, many companies, mainly
those engaged in back-end operations, are considering setting up offices in the neighbouring city of Mysuru. Mysuru,
besides its strategic location advantage, also enjoys good air and road connectivity, thus coming up on the radar of these companies.

The city is known for its 350-acre Infosys campus that is used as a training centre for the company’s new recruits, making it the world’s largest corporate university. The city already hosts STPI-Mysuru that was established in 1998
and it has been instrumental in nurturing the growth of software Industry in the region.

Mysuru has a strong talent pool that has attracted many firms to explore office spaces in the city, with some even going ahead and shifting operations. Besides hiring relatively cheaper manpower, these companies also aim towards saving on operating costs, especially property rents.

The weighted average rental values for office space in Bengaluru hovers around INR 75-80/sqft per month, while the weighted average rents in Mysuru is pegged at approximately INR 40-55/sqft per month. Although the firms evincing interest in Mysuru are mostly smaller units, several important players in the BPO and KPO industry that have operations in Bengaluru are also looking at larger commercial spaces in the city. Currently, Mysuru has the presence of IT/ITeS firms that are handling back-end operations for US-based clients, such as those engaged in processing health insurance claims and billing.

Meanwhile, other cities in Karnataka such as Mangaluru and Belagavi hold immense potential to develop as office markets, as well. Recently, TCS announced investment of INR 500 crores in Dakshina Kannada district, portending the creation of 4,000 jobs in the region. These developments bode well for the smaller cities of Karnataka.

Will the non-metros support employment?

Despite the several factors that advocate the impending shift towards the non-metros and other smaller cities, the main concern still remains whether these cities would be able to sustain its residents through the generation of enough employment. Here are a few recent observations:

Job market shows positivity
It has been noted that factors such as lower hiring cost and adoption of WFH for a prolonged period have led to a fair number of jobs as well as newer job profiles to come up in smaller cities. With the phased lifting of the lockdown leading to gradual resumption of economic activities, hiring grew 24% in September as compared to the previous month,
driven largely by pharmaceuticals and education sectors, according to a report.

Companies such as Dabur which has significant presence outside large cities has been hiring for sales functions and
select profiles for manufacturing units in these smaller non-metro cities. As mentioned previously, the push towards ‘Atmanirbhar Bharat’ is expected to play an important role in augmenting employment in these cities.

According to the Naukri JobSpeak Index for September 2020, Tier-II cities like Ahmedabad, Chandigarh and Jaipur saw a
significant improvement in hiring activities, to the tune of 34%, 39% and 36% respectively. Chandigarh, in particular, has seen good hiring prospects owing to the region’s proximity to Punjab, Haryana and Himachal Pradesh, the companies tapping into their manpower for employment.

Advent of IT/ITeS sector creating demand for office space

A number of non-metros and smaller cities have come up on the IT/ITeS sector radar, the companies attracted by these cities’ talent pool and infrastructure development. Historically, it has been observed that cities in proximity to a large metro stands to gain from the spill-over demand, a prime example being the growth of Pune – the city that developed primarily from being an automobile hub to become one of the top IT/ITeS hotspots.

One of the key factors behind this development was the high rentals prevalent in the Mumbai office market, that led the IT/ITeS sector to explore the Pune market. Presently, there is fair amount of IT/ITeS sector presence in smaller cities such as Visakhapatnam, Indore, Mysuru, Kochi, Chandigarh and Coimbatore – most of these lying in proximity to larger metros.

In the southern region, Kochi is fast emerging as a preferred IT destination due to the government initiatives to develop Special Economic Zones in the city. At present, the city has a total commercial office stock of over 10 million sqft, with projects such as L&T Tech Park, Leela Soft (Info Park) and World Trade Centre located here.

Meanwhile, in the north, Chandigarh office market is waiting to rise, given the steps taken by the government such as the establishment of a knowledge city in Mohali to supplement adequate manpower for the IT/ITeS sector. the top IT/ITeS hotspots. One of the key factors behind this market, that led the IT/ITeS sector to explore the Pune market.
the top IT/ITeS hotspots.

Mix of white collared and blue collared employees

Another important facet that would support reverse migration towards the non-metros and other maller cities would be the development of a dynamic employment hub comprised of both white-collared and blue-collared employees. Typically, satellite region of a metro city mostly housed industrial units, where blue-collared employees formed a major part.

With WFH leading to employees returning to their native places and corporates exploring these smaller cities for setting up their offices, there is the possibility of an influx of white-collared jobs, which, in the long term, would create a strong
ecosystem for economic growth in the region. Thus, areas such as Kolar and Tumakuru, which are typically industrial towns, would stand to benefit from their proximity to Bengaluru, as a large number of employees engaged in the IT/ITeS sector hail from these towns.

A similar case can be drawn up for Coimbatore as well, the city being a key industrial region located in proximity to the metro city Chennai, and also housing an IT park with a number of well known companies.

A growing start-up culture

A major observation lending confidence to the non-metros and other smaller cities of the country is the level of innovation that is taking place there. As per the Economic Survey of 2018-19, of the over 16,500 recognised start-ups (as of March 1, 2019), nearly half were from Tier-II and Tier-III cities.

These cities are bustling with talent and exhibit great prospects due to factors such as ready availability of land and skilled labour. The start-up ecosystems in these cities are gradually strengthening with support from various parties, right from the government to funds. Some of the intrinsic advantages of being located in a smaller non-metro city include lower cost of setting up a business and relatively cheaper manpower and real estate costs.

Of late, the advent of co-working space operators in non-metros such as Indore, Ahmedabad, Rajkot, Udaipur, Jaipur, Kota, Surat and other smaller cities has made it easier for start-ups to work without a hefty initial investment. Besides, in the past few years, the government has emphasized strongly on funding incubators and encouraging innovation.

Programmes like Start-up Chhattisgarh and Kerala Start-up Mission have set the ball in motion for entrepreneurs in these smaller cities. Noteworthily, Microsoft, the world’s biggest software maker, is striving to empower the start-up ecosystem in Tier-II cities across the country as well. As part of the ‘Highway to a Hundred Unicorns’ initiative, the firm has selected 54 start-ups from these smaller cities, encompassing Gujarat, Maharashtra, Rajasthan, Kerala and Telangana.

Southern start-ups gaining pace

Kerala non-metros leading
Holding on to the Reverse Migration Kerala is on its way to become one of the start-up hotspots in India. Although the scenario is still in the initial stages, it is heartening to note that innovators from the non-metro cities in the southern state are coming up with start-ups in various arenas – right from robotics and machine learning to sectors such as foodtech, medtech and fintech.

This has brought the state enough attention from investors who are keen to observe their growth trajectory. The latest Economist Intelligence Unit survey lists three Indian cities among the world’s fastest-growing urban zones – Malappuram (No.1), Kozhikode (No.4) and Kollam (No.10), all three of them in Kerala. Interestingly, none of these cities are in the 100 Smart Cities’ list, but their growth pattern is that of future smart cities.

Much of the impetus provided to the start-up environment is provided by the Kerala government. It has done commendable work to uplift the young innovators hailing from these smaller cities, such as setting up the Kerala Start-up Mission (KSUM) in 2015 as well as an Integrated Start-up Complex.

Later, in 2018, the state government also aided in promoting the first edition of Huddle Kerala, touted to be Asia’s largest start-ups ecosystem congregation and held in association with the Internet and Mobile Association of India. The start-up ecosystem report 2018 by KSUM registered the number of start-ups in the state at 1,500, which is the number recorded with the Department of Promotion of Industry and Internal Trade.

Thus, with the state backing the entrepreneurs and their start-up endeavours, nurturing them since the initial stages and providing the right infrastructure and environment, it would not be surprising to note the state’s fast-paced
growth in terms of start-ups in the forthcoming years. This development, in time, would garner substantial investor attention, who are currently investing in small measures and gauging the next big breakthrough from these non-metro innovators.

Key challenges

While the aforementioned factors advocate the growth of the non-metros and other smaller cities, the path to achieving this is strewn with a number of real world challenges, all of which act as major incumbents to reverse migration.

One of the key challenges obstructing the required pace of growth in the non-metros and other smaller cities is the level
of infrastructure development. If there were lessons to be learnt from the current dismal state of the metros, it would
have been to understand that infrastructure development should be carried out keeping in mind the present gap in
carrying capacity and the forecasted rise in demand later.

A holistic approach is the key to such development, that gets overlooked in many cases. Besides such impediments, there is a lack of necessary participation of private players, citizens, NGOs and environmental bodies in planning as well as execution.

There is also the paucity of a modern and flexible planning framework as most urban government bodies still
follow archaic, conventional methods and techniques.

Integration of technology is the need of the hour, given the age we live in. Sadly, of the much anticipated projects
announced, the Smart Cities project has not progressed as expected. As of now, only 2% of the INR 9943 crore released
under the Smart Cities Mission has been applied and only 5% of the proposed projects are completed. Much of the
challenges have been attributed to issues such as land acquisition, buy-in from reluctant stakeholders, and the
absence of political will.

Policy reviews and good governance

It has been observed that in the zeal to adhere to government policies that advocate development of a project effectively, numerous government bodies are created at various levels, the multiplicity of which eventually results in delays and unproductive implementation of proposed plans.

It is, thus, advisable to deliberate over such policies before implementation. More importantly, in order to accelerate the
growth potential of a city, the necessity of good city governance is of supreme significance. This includes factors such as political accord and stability, vision for the future keeping in mind the objective of the city plan, commercial inclination and rate of responsiveness as well as adequate fiscal capacity. Going forward, these forward-looking governance policies could help position the cities’ growth trajectory, their assets capacity of being commercialised as well as the scale propensity in the near future.

It is now evident that despite all efforts of infrastructure improvements in the major metro cities of the country, these cities in the next few years would begin to flag under severe stress, if not already, the constraints brought forth primarily by heavy population influx.

On the other hand, the pace of urbanisation has been rapid in the country, given the significant extent of internet users, leading to aspirations from the smaller cities to match with those of the metro cities. Various government projects are underway to get these imminent non-metro cities modernised and technologically equipped.

Employment opportunities have improved and new avenues have been opened up with more job profiles created. While it is still some way off to see people return/migrate to these smaller cities from the metros in vast numbers, the ball has been set in motion, quite unexpectedly, with the COVID-19 outbreak. The disruption has led to some amount of reverse migration, across all social strata, and it is inferred that while most would return to the metros with the job situation
improving, some would find their calling in their hometowns.

The government’s decision to relax guidelines in order to enable IT and BPO companies to adopt a permanent work from home/work from anywhere culture, would lead to increased job creation in the smaller towns and cities of the country. Factors such as affordability, improved road and air connectivity, expansive homes, walk-to-work options with the growth of local industries and other conducive factors would contribute towards strengthening the attractiveness quotient of these regions.

The COVID-19 pandemic has also led to interested parties realising the potential held by these smaller cities, their aspirations and propensity to spend evident through increased e-tail demand, as well as their willingness to adapt to
technological advancements. Real estate developers and warehousing and logistics players were already eyeing these non-metros, and now with the COVID-19 crisis leading people to return to these smaller cities, they have recognised
immense opportunity to cash in on the development. Development plans and factors such as the government’s ambitious ‘Housing for All by 2022’ programme and the Smart Cities’ mission will abet their decision to enter these non-metros.

While there are challenges galore, with the implementation of good city governance policies and development plans, it is
not an unachievable task to see these cities scale newer heights. Thus, given all these shifts in behavioural trends, it will be interesting to see how these smaller cities perform in the near future and if reverse migration would indeed be a
permanent social transformation.

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