India’s ‘middle cities’ to overtake metros in driving consumption

Large metros where people have converged over the years have been driving the economy as well as consumption so far. But Tier-II cities or “middle cities” could soon take up the baton, according to a report by Ambit Capital.

The report contends that with product penetration maxing out and infrastructural constraints becoming binding, the top-8 cities’ lead could wane. On the other hand, ‘middle cities’ look well-placed to drive the next leg of consumption growth.

“Incomes in middle cities are likely to be growing faster than that of the top-8, and in absolute terms incomes could be two times that of other smaller cities,” said the report titled ‘The rise of India’s Middle Cities’.

The top 8 cities are Delhi, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad, Ahmedabad and Pune while 15 ‘middle cities’ include Nasik, Guwahati, Indore, Chandigarh, Lucknow, Nagpur, Raipur, Patna and Bhubaneshwar.

Air passenger traffic

The middle cities are faring better than others in terms of various economic indicators and activities. They are showing higher growth in many high-speed indicators. For instance, air passenger traffic growth in Top-8 cities and in the rest of India’s cities was 13 per cent and 18 per cent per annum respectively over calendar years 2015-19. The growth was, however, higher at 21 per cent in ‘middle cities’’. Significantly, cities in the East – Ranchi, Patna, Bagdogra, Siliguri and Guwahati — have been topping the charts in terms of growth in air passenger traffic.

Middle cities also continued to maintain higher inflation levels, indicating that demand exceeded supply in these geographies.

“Other high frequency indicators such as jobs data, inflation data and housing price data suggest that middle cities as a cluster are growing faster than the rest of urban India,” the report said.

Human development indicators too reveal that these cities have more women, have a more job-market-ready youth and a marginally younger population.

“Our modelling suggests that income per person in India’s middle cities is likely to be about $6,000 which is nearly two times that of incomes in other smaller cities and 30-40 per cent lesser than that of top-8 cities,” the report said, adding that all these factors clearly augur well for prospects of consumption growth.

Four product categories — consumer discretionary spends, consumer durables, premium bikes and cars costing less than ₹8 lakh —are best placed to benefit from this trend.

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