
India’s manufacturing sector has long been a driving force behind the country’s economic growth, accounting for 17% of the GDP and employing over 27 million workers. With the sector having hit a 16-year high in March 2024, the ambitious target of increasing its share to 25% of the total economic output by 2025 appears achievable. A key component of this plan involves a strategic shift in focus to Tier 2 and Tier 3 cities and towns. These areas offer unique advantages like lower operational costs and a vast reserve of untapped skilled and semi-skilled workforce. An in-depth analysis of their current state is required to leverage these advantages, so it becomes possible to identify prevailing challenges and bridge such gaps.
Do these towns truly hold the potential we think they do? If yes, how do we overcome challenges and extract the most from this opportunity?
The shift to tier 2 and 3 cities
For decades, India’s economic growth story has been synonymous with its bustling metropolises like Mumbai, Delhi, and Bangalore. These megacities have attracted talent, investment, and industry, transforming into economic powerhouses. However, a new wave is rising – the rise of Tier 2 and Tier 3 cities. Smaller cities in India are shedding their sleepy town labels and emerging as vibrant economic hubs, driven by growing middle-class populations, infrastructure improvements, and rising income levels. This shift, once concentrated in metropolitan areas, now presents a compelling opportunity for businesses to tap into a growing market and a diverse talent pool across the country. The rapid adoption of technology and widespread internet use has further accelerated this transformation, making these cities increasingly attractive for executive talent and investment.
Factors affecting the shift
- Family
The notion in the earlier days was that people would leave their native homes to go work in big metropolitan cities, away from their families. Those days are gone; today’s working professionals, especially millennials, prioritize flexibility, embracing remote work and hybrid models that allow them to balance their careers with their personal life. With a heightened emotional awareness of the importance of family ties, many now seek job opportunities that enable them to stay closer to their loved ones, valuing the ability to maintain strong family connections alongside professional success. This shift reflects a broader cultural change towards valuing work-life integration and the importance of personal well-being.
- Cost of living
Financial advantage plays a huge role in this decision — the cost of living in a tier 2 or tier 3 city is considerably lower than in a metropolitan. Those moving back in with their families can save on rent, which is a massive economic benefit for college graduates who are just starting out in their careers. For mature working professionals, tier 2 cities also pose attractive investment opportunities. According to a July 2024 PropEquity report, housing sales across the top 30 tier 2 cities have increased 11% annually. This is a clear indicator that the growing middle class in these cities has a higher income, which could be due to the establishment of various businesses, including MSMEs.

Initiatives by the Government of India in Tier 2 and 3 cities:
The Indian government has launched key initiatives to drive urban development across Tier 2 and 3 cities:
1. Smart Cities Mission: Transforming 100 cities, including Tier 2 and 3, into sustainable and citizen-friendly urban centers through improved infrastructure and smart solutions.
2. Atal Mission for Rejuvenation and Urban Transformation (AMRUT): Providing basic infrastructure and services in Tier 2, Tier 3, and Tier 4 cities, focusing on water supply, sanitation, urban transport, and green spaces.
3. Swachh Bharat Mission (Urban): Achieving cleanliness and sanitation in urban areas, eliminating open defecation, and promoting waste management and hygiene practices.
4. Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT): Strengthening urban infrastructure in Tier 3 and 4 cities, improving water supply, roads, drainage systems, and essential urban facilities.
Such investments and planning from the government are crucial, because they show belief. The belief is that these cities hold immense potential, particularly in the manufacturing and service sectors. Billions of dollars are being spent to uplift the infrastructure in these cities, making them attractive destinations for private investments and entrepreneurship, especially in the manufacturing sector.

Challenges
Despite the rising appeal of tier 2 and 3 cities in India as magnets for the manufacturing sector, the very aspects that are strengths in some of these emerging hubs remain stubborn weaknesses in others. Therefore, we must delve deeper into their challenges to understand the key focus areas.
- Infrastructure
This remains a significant challenge in smaller cities, where issues such as inadequate utilities and underdeveloped transportation networks persist. Without basic services of sanitation, clean drinking water, etc., it becomes difficult to attract skilled professionals or sustain industrial activities. Weak transportation networks in these regions make it challenging to connect with larger markets, access raw materials, or facilitate the smooth movement of goods and people.
Another critical issue is the lack of access to modern technology and innovation. Many smaller towns are not equipped with the cutting-edge technological infrastructure necessary to support industries that rely on advanced machinery, digital tools, or high-speed internet.
2. Skilled labor
To address the shortage of skilled labor in India’s interior regions, it is essential to introduce comprehensive vocational training programs tailored to local needs. These programs should focus on equipping individuals with practical skills that are directly relevant to the industries prevalent in these areas, such as agriculture, manufacturing, and crafts.
Building collaborative ecosystems involving the industry, government, and academia is vital to ensure the success of these efforts. Academic institutions can play a key role in developing curriculum and training programs that meet industry standards. Together, these stakeholders can create a sustainable model that empowers local communities, enhances employability, and drives economic growth in these regions.
On a final note
Fostering the industrial ecosystem in Tier 2 and 3 cities is essential for reducing urban-rural economic disparities and advancing balanced regional development. As these cities rise, they will enhance India’s global economic position, attracting foreign investments and contributing to the country’s ambition of becoming a $40 trillion economy by 2047. C-level leaders play a crucial role in this transformation, shaping not only their companies but also driving the growth of India’s emerging cities, paving the way for a more vibrant and prosperous economic landscape.
Written By
Archita Shalini
Under the tutelage of The HR Club
IMI- New Delhi





















