India's urban population is expected to increase by 416 million by 2050.1 As the country shifts from a mainly rural to an urban demographic, leveraging the economic potential of tier 2 and 3 cities will be crucial.
In recent years, these cities have seen a rise in economic activities, including investments and job creation. To help them develop and evolve into thriving economic centres, government and trade initiatives must provide necessary support.
 
What are tier 2 and 3 cities in India and what role do they play in India's economic growth?
Indian cities are classified into different tiers based on their population sizes.2 Tier 2 cities have a population of one to five million and offer a lower cost of living compared to tier 1 cities. Examples of tier 2 cities include Visakhapatnam, Kochi and Raipur. Meanwhile, tier 3 cities have a population ranging from 0.1 to 1 million; examples include Nagpur, Indore, Patna Bhopal among others.
Tier 2 and 3 cities are emerging as major drivers in the nation's economic growth by fostering MSMEs, creating employment opportunities and stimulating regional development. Here is a more detailed look at their contributions:
 
a) Growth of MSMEs
Tier 2 and 3 cities are home to a sizeable fraction of India's MSMEs, accounting for 51% of the nation's registered MSMEs3. The allure of lower operating costs, expanding consumer demand and robust government support draws in both entrepreneurs and investors. Improving infrastructure and connectivity will further enhance the growth of MSMEs and optimise supply chains across the nation.
 
b) Regional development
Economic activity in tier 2 and 3 cities both necessitates and leads to accelerated enhancement of infrastructure, healthcare and technical education. It boosts the local economy of the region and create employment opportunities across industries such as manufacturing, IT and operational services. The number of female job applications alone has increased exponentially between 2021 and 2024 in these cities for a variety of roles, including sales and business development, field sales and delivery and logistics.4
 
c) Inclusive and sustainable growth
The rapid expansion of these cities offers opportunities to create and promote energy-efficient and sustainable industries. Adopt eco-friendly operational procedures, such as efficient processes for recycling, collecting and segregating industrial waste. Ensuring that the nation's overall economic growth is sustainable and resilient.
 
What government initiatives are driving investment in these cities?
Several initiatives are supporting investments and growth in these cities aimed at enhancing infrastructure, efficient logistics and digital adoption. Here are some notable government schemes and policies aimed at promoting the growth and development of these cities.
 
a) Smart Cities Mission
Launched in June 2015, the Smart Cities Mission5 aims to boost economic growth in 100 selected non-metropolitan cities by enhancing infrastructure and building environmentally sustainable institutions. By December 2024, the mission had successfully accomplished 7,380 of its approved 8,075 projects with a total investment of ₹1,47,704 crore.6
 
b) Atal Mission for Rejuvenation and Urban Transformation (AMRUT)
The Atal Mission for Rejuvenation and Urban Transformation (AMRUT) initiative was first launched in June 2015 and later superseded by AMRUT 2.0 in October 20217, under the Ministry of Housing and Urban Affairs. It aims to provide 500 cities with water security by revitalising water sources, creating parks and green areas and using technology for robust sewage management. With a total outlay of ₹2,99,000 crore for five years, 8,998 projects worth ₹1,89,458 crore have already been undertaken by AMRUT 2.0, as of November 2024.
 
c) Pradhan Mantri Mudra Yojana (PMMY)
The Pradhan Mantri MUDRA Yojana (PMMY), launched in April 2015, offers collateral-free loans to small and micro businesses. Initially, the programme provided loans of up to ₹10 lakh, but the ceiling for these loans was raised to ₹20 lakh in the Union Budget 2024-25.8 These loans are offered through banks, NBFCs, MFIs and other financial institutions, with the new limit taking effect in October 2024.
 
d) UDAN (Ude Desh ka Aam Naagrik) Scheme
Launched by the Ministry of Civil Aviation (MoCA), the Ude Desh ka Aam Naagrik (UDAN) Scheme9 aims to support logistics and facilitate regional air travel to and from tier 2 and 3 cities with the rest of the nation. The scheme has connected 88 cities and operationalised 618 routes so far. In Union Budget 2025-26, it was announced that the scheme will be extended to 120 new destinations and carry over four crore passengers in the next 10 years.10
 
What are the advantages of investing in these cities compared to tier 1?
These cities offer distinct advantages to the savvy investor. Not least of which are higher returns on investments, lower operational costs, cheaper real estate and a large talent pool that prefers the healthier lifestyle of these cities over that of metro cities. Investments in the digital infrastructure of these cities will further enhance their appeal for remote workers and industries like IT services.
With the growth of industrial clusters, several of these cities are emerging as important corporate destinations. Government programmes to promote infrastructure and employment are frequently targeted at tier 2 and 3 cities, offering investors opportunities that tier 1 cities can't capitalise on.