Discover the benefits and obstacles of business expansion in tier 2 and tier 3 cities. These, up and coming locations provide cost advantages like reduced costs for property and workforce. Are becoming more connected, to development initiatives. Find out how to place your company in these expanding markets while handling their advantages and challenges.
What are tier 2 and tier 3 cities?
In the classification, by the government cities with populations between 50,000 and 100,000 fall under tier 2 cities while those with populations ranging from 20,000 to 50,000 are considered as tier 3 cities.
In a country as densely populated as India such cities are quite common. Their size alone does not always indicate their potential for growth.
Nevertheless certain tier 2 and tier 3 cities are emerging as promising business hubs. These cities often host clusters are situated in states that support business activities well and have good connectivity to major economic centers.
One of the advantages these cities possess over ones is their lower real estate costs, labor expenses and service charges. Many of these cities are making investments in infrastructure to foster activity and make a substantial contribution to their state’s GDP. For instance Lucknow in Uttar Pradesh has recently witnessed investments and economic growth. Furthermore India’s efforts to develop modal logistics networks are incorporating several lower tier cities like Ludhiana (Punjab) and Indore (Madhya Pradesh) into its infrastructure development plans.
The pandemic has also sped up the movement of people from areas to tier 2 and tier 3 cities seeking environments, more affordable housing options, as well, as enhanced educational and employment prospects.
Emerging as contenders, in the real estate market are cities such, as Kochi, Indore, Chandigarh, Lucknow, Amritsar, Jaipur and Ludhiana each boasting housing sectors.
Tier-wise classification of centers based on population
| Tier | Population |
| Tier 1 | 100,000 and above |
| Tier 2 | 50,000 to 99,999 |
| Tier 3 | 20,000 to 49,999 |
| Tier 4 | 10,000 to 19,999 |
| Tier 5 | 5000 to 9999 |
| Tier 6 | Less than 5000 |
Population-group wise classification of centers
| Rural center | Population up to 9999 |
| Semi-urban center | 10,000 to 99,999 |
| Urban center | 100,000 to 999,999 |
| Metropolitan center | 1,000,000 and above |
Classification of Indian cities based on house rent allowance (HRA) used by the Inland Revenue Service (IRS)
| HRA classification | City |
| X (Tier-1) | 8; Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata, Mumbai, and Pune |
| Y (Tier-2) | 79; Vijayawada, Warangal, Greater Vishakhapatnam, Guntur, Nellore, Guwahati, Chandigarh, S.A.S. Nagar, Mohali, Durg-Bhilai Nagar, Raipur, Rajkot, Jamnagar, Bhavnagar, Vadodara, Faridabad, Gurgaon/Gurugram, Srinagar, Jammu, Jamshedpur, Dhanbad, Ranchi, Bokaro Steel City, Belgaum, Hubli-Dharwad, Mangalore, Mysore, Gulbarga, Thiruvananthapuram, Thrissur, Malappuram, Kannur, Kollam, Gwalior, Bhopal, Jabalpur, Ujjain, Amravati, Aurangabad, Nashik, Bhiwandi, Solapur, Kolhapur, Vasai-Virar City, Malegaon, Nanded-Vaghela, Sangli, Cuttack, Bhubaneswar, Raurkela, Pondicherry/Puducherry, Amritsar, Jalandhar, Ludhiana, Bikaner, Jodhpur, Kota, Ajmer, Salem, Tiruppur, Tiruchirappalli, Madurai, Erode, Moradabad, Meerut, Aligarh, Agra, Bareilly, Allahabad, Gorakhpur, Varanasi, Saharanpur, Noida, Firozabad, Jhansi, Dehradun, Asansol, Siliguri, Durgapur |
| Z (Tier-3) | The remaining cities and towns in various States and Union Territories which are not covered by the classification as ‘X’ or ‘Y’ are classified as ‘Z’. |
When should businesses consider a tier 2 and tier 3 city?
If a company has time, money and resources to grow on its own setting up operations, in a city can be beneficial for accessing affordable property and labor.
This approach involves investing in creating infrastructure training workers in essential tasks and adjusting to a less developed business environment.
For companies already based in cities moving some operations to a smaller city could help cut operational expenses. This could mean shifting back end and support functions to an emerging city while keeping management functions in the city.
Moreover production activities could be moved to cities to take advantage of costs while strategic and leadership roles remain in the primary city.
If there is an industry hub to the company’s work in a city the company may find similar capabilities, at more cost effective rates.
Many small cities specialize in industries so it’s important for foreign companies to ensure their operations fit into the industrial landscape.
