India’s Tier II and Tier III cities – are you missing the bus?

In March 1994, the Indian domestic aviation sector was opened up, allowing for scheduled services by the private sector.   One major caveat was introduced.   Private airlines would only be able to ply between India’s lucrative major cities provided a certain number of flights in their portfolio covered the, less lucrative, smaller cities as well.  Grudgingly, operators complied.

Fast forward to 2010.  Much mention is being given to urbanisation in India. How there are currently 42 cities with populations of more than 1 million, compared to Europe’s 35.  How the annual income of households in cities is expected to rise from about US$700 billion today and double every five years and reach almost US$4 trillion in 20 years. The late Prof C K Prahalad, one of India’s most eminent management gurus, was renowned for his clarion call on the need for India to create 500 more cities by 2022 to absorb the shift in migratory patterns and developmental needs in terms of jobs, access to markets and infrastructure.  

Which are the sectors which have been, or currently are, making big bets and driving growth in the Tier II and Tier III cities? Below is a snapshot analysis.

1.  Infrastructure: It is estimated that India needs to invest US$1.2 trillion in urban infrastructure capital over the next 20 years.  According to the McKinsey Global Institute (MGI), India’s tier II cities will need $200 per capita per annum expenditure on urban infrastructure over the next 20 years, compared to the national average requirement of $134 per capita per annum. In terms of connectivity, the Government of India has embarked on an ambitious National Highway Development Programme.  It aims to develop more than 50,000 km of national highways in seven phases.  The map of projects completed under the NHDP in the last 10 years can be seen here.

2. Travel and Tourism: In many ways, a bellwether of economic development, this sector has traditionally been a significant growth engine for India’s smaller cities. Be it for business or leisure, the travel and tourism industry has served to provide critical basic infrastructure, creating a demand-pull for greater connectivity.  With prohibitively high costs of real-estate in the Tier I cities, more and more high-end hotel chains, such as the Marriott, are extending their attention and presence to the needs of the Tier II and Tier III cities.  Interestingly, reverse flows are also being explored.  The Singapore Tourism Board has recognised the untapped potential of these markets and launched a campaign to woo tourists from these Tier II cities to the city-state.

3.  Real estate: The availability of land at affordable prices in these cities, backed by the demand for organised realty, is proving to be pivotal to the success of real estate in Tier II and Tier III cities. According to Ernst and Young (E&Y), several Indian cities with a population of 0.5-1-million will emerge as the most promising market for residential and retail developments, within the next 3-5 years.

4.  Retail:  Of the 80 million households that constitute the Indian middle class, only 25 million are in Tier I cities. Close to 55 million belong to the smaller towns.  According to a study of 100 cities’ consumption spending by Indicus Analytics, only 30% is accounted for by Tier I cities.  With the growth of organised retail, franchising is also booming in untapped Tier II and Tier III cities, showing a phenomenal 40-45% growth in the $16 billion Indian franchising industry. Some of the world’s multinationals have cottoned on to this potential. Earlier last month, Canon India said that it would be aggressively looking at Tier II and Tier III cities, which are expected to generate 70 per cent of its business (currently US$267 mn) by 2015. According to Mercedes-Benz, there is a possibility of 15-20 per cent sales coming from tier-II and III towns. Mercedes already sells more cars in Ludhiana than in Mumbai. Bose Corporation, Adidas, Bacardi, Daikin, Panasonic are some other well-known names placing big bets on these smaller cities.

5.  Education: Anyone familiar with India’s engineering powerhouses, the Indian Institutes of Technology (IITs), should probably be familiar with the city of Kota, the national hub for student coaching.  Today, coaching is the lifeblood of the Kota economy and contributes more than $100 million, from insignificant sums two decades ago.  This is just one example. The reality is that 600 million Indians are under 25 years of age. By 2015, more than 550 million will be teenagers. The total labour pool that will require advanced training in vocational, managerial, IT and other skilled and semi-skilled professions is expected to exceed 30 million individuals per year through 2020.   

6.  IT and Business Process Outsourcing: According to a recent study, India's business process outsourcing industry has the potential to rise nearly five times to US$50 billion in revenues by 2012, provided it successfully taps talent in smaller cities and town, a global consulting firm said.

As per the MGI study, India will have 68 cities with a population of more than 1 million, 13 cities with more than 4 million people, and 6 mega-cities with populations of 10 million or more, by 2030.  

Are you positioned to garner a slice of the pie?

10 reasons why India is heading for a second ICT revolution

One of my recent blogposts generated a significant number of comments on an EIU discussion forum.  A few of the commentators alluded to some of the speed breakers littering India’s highway to growth.   These included issues of governance, public debt, the need for ensuring trickle-down growth and development, agricultural reforms, efficient allocation of resources and greater financial inclusion.  While there is no one magic wand that can address these issues satisfactorily, certain notable developments in the information and communication technology (ICT) and ICT-enabled space, taken together, have the potential to come close.   

1.   Recent auctions of wireless broadband licenses and 3G spectrum. Acknowledged as among the biggest such auctions globally in recent years, revenue from the two auctions totalled `1.06 trillion (approximately US$ 23 billion), about three times the Indian Government’s initial estimates. As per recent reports, over 250,000 villages would be connected to wireless broadband and 3G mobile services by 2012 enabling them to access the slew of value-added services including e-commerce, tele-medicine and social networking.

The auction was also a welcome windfall for the deficit-strapped government, with some analysts saying the spectrum bonanza could cut the country's deficit to 4.5 percent of its gross domestic product (GDP) from a projected 5.5 percent for the 2010/2011 fiscal year.

2.   The Unique Identification (UID) project.  Launched in June 2009, the UID is an ambitious project designed to link a resident Indian’s multiple IDs (passport, driving license, PAN card, bank accounts, address, voter ID etc) to a common database. It is believed that unique national IDs will help address the rigging in state elections, widespread embezzlement that affects subsidies, poverty alleviation programmes, etc.  Addressing illegal immigration into India and terrorist threats is another goal of the programme.

3.   Mobile banking. According to a recent report by TowerGroup Research, mobile banking in India will grow from 10 million active users in 2009 to over 53 million active users by 2013.  Signalling the potential of this channel, the Reserve Bank of India (RBI) has relaxed mobile banking policies and increased the mobile payment limit to `50,000/- from `5,000/-.  At a recent conference on m-Governance organised by the Internet and Mobile Association of India (IAMAI), one of the speakers highlighted that, due to digital payments, cash circulation had gone up by 7%, against the usual 2%, quoting an RBI report.

4.   Agrarian transformation through models such as e-Choupal.  e-Choupal, an initiative of ITC Limited, involves the installation of computers with Internet access in rural areas of India to offer farmers up-to-date marketing and agricultural information for procurement of agricultural and aquaculture products. It was conceived to tackle the challenges posed by fragmented farms, weak infrastructure and the involvement of numerous intermediaries.

5.   The Spoken Web – Developed by IBM’s India Research Lab, this is a voice-enabled web-browser.  It is currently undergoing a second pilot in Gujarat, after one in Andhra Pradesh.  The opportunities for connecting the disenfranchised 35% of India’s population which is illiterate are mind-boggling.

6.   E-Governance. While deployment has been slow, some significant initiatives have been made, especially in states such as Andhra Pradesh. At national level, customs and excise and passport services have seen considerable use. For a status report, click here.

7.   E-learning. With more than 500 million people required to be educated/skilled over the next 12 years, the Government  of India is putting significant thrust to this mode of delivery.

8.   E-healthcare :  With a shortage of 600,000 doctors and 1,000,000 nurses, e-healthcare solutions are gradually being seen as significant drops in a very large ocean.

9.   Smart Grids – In May this year, India’s Ministry of Power launched the India Smart Grid Task Force and the India Smart Grid Forum with a view to turbo-charge the strategic deployment of smart grids in the country.

10. Adoption of smartphones.  According to Frost and Sullivan, smartphones will account for 54% of the Asia-Pacific mobile market in five years, up sharply from five percent in 2009.  In a market where the mobile handset is often considered a reflection of social standing, the smartphone is driving ARPU (average revenue per user) in India.  Introduction of low-cost, sub-US$110 smartphones is fuelling this growth.

The catapult that the mobile revolution created for the Indian economy in the late 1990s is well documented and widely acknowledged.  All of this makes me wonder whether ICT will now stand for India’s Cohesive Transformation?