India’s Tier 2 & 3 Cities as Emerging Investment and Growth Hubs

India’s supply chain system is quietly undergoing a significant transformation. Instead of focusing only on metro cities, new growth is emerging in Tier 2 and 3 cities. Thanks to better infrastructure buildouts, supportive policy, and shifting consumer patterns, these small cities are reshaping how goods are stored, moved, and delivered. They are no longer just satellites of the big cities—they are becoming important urban centers themselves.

What are tier 2 and 3 cities in India, and what do they contribute to India's economic growth?

Indian cities are grouped into different tiers based on their population sizes. Tier 2 cities have between 1 million and 5 million people and usually have a lower cost of living compared to tier 1 cities. Visakhapatnam, Raipur, and Kochi are examples of tier 2 cities. Tier 3 cities have a smaller population between 0.1 to 1 million people; some examples of cities are Nagpur, Patna , Indore, Bhopal, and many others.

Tier 2 and 3 cities are becoming key drivers to the country's economic growth by supporting MSMEs, creating jobs, and promoting regional development. Let’s see the detailed analysis -

MSME Growth

Tier 2 and 3 cities host a significant fraction of India's MSMEs, making up for 51% of the country's registered MSMEs3. Attractive factors such as lower operating costs, growing consumer demand and strong government support draws in both entrepreneurs and investors to these regions. Improving infrastructure and connectivity will further enhance the growth of MSMEs and optimise supply chains across the nation.

Regional development

The expansion of economic growth in tier 2 and 3 cities goes hand in hand with improvements in infrastructure, healthcare, and technical education. This growth strengthens the local economy and generates employment opportunities across sectors such as manufacturing, IT, and operational services. Between 2021 and 2024, female job applications in these cities have risen sharply across various roles, like delivery, field sales, business development, and logistics.

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Inclusive and Sustainable Growth

The fast growth of these cities presents a chance to create and develop, and support energy-efficient and sustainable industries. Implementing eco-friendly practices like efficient recycling, waste collection, and segregating industrial waste. It helps the country's overall economic growth remain both sustainable and resilient.

Read More - Government Schemes /Programmes for Empowerment of Women

 How government initiatives are driving investment in these cities?

Various government programs are supporting investments and development in Tier 2 and Tier 3 cities by focusing on better infrastructure, efficient logistics and digital adoption. The following are some important government schemes and policies designed to support the growth and progress of these cities. 

Smart Cities Mission

Initiated in June 2015, the Smart Cities Mission aims to accelerate economic growth in 100 chosen non-metropolitan cities by improving infrastructure and promoting environmentally sustainable institutions of December 2024, 7,380 of the 8,075 approved projects under the mission had been completed, with a total investment of ₹1,47,704 crore.

Atal Mission for Rejuvenation and Urban Transformation (AMRUT)

Launched in 2015, and later updated as AMRUT 2.0 in 2017, under the Ministry of Housing and Urban Affairs. Its mission is to provide 500 cities by revitalising water sources, creating parks and green spaces, and implementing advanced robust sewage management. By November 2024, AMRUT 2.0 had rolled out 8,998 projects, valued at ₹1,89,458 crore, out of its total 5 year budget ₹2,99,000 crore.

 Pradhan Mantri Mudra Yojana (PMMY)

launched in April 2015, Pradhan Mantri MUDRA Yojana (PMMY), provides collateral-free financing to micro and small businesses. Originally, the programme offered at ₹10 lakh, and the maximum loan amount was raised to ₹20 lakh in the Union Budget 2024-25, with the revised limit effective from October 2024. 

UDAN (Ude Desh ka Aam Naagrik) Scheme

The Ministry of Civil Aviation (MoCA), launched the UDAN Scheme, with the mission to improve logistics and enhance regional air connectivity between tier 2 and 3 cities and the rest of the country. So far, it has connected 88 cities and made 618 routes so far. In the Union Budget 2025-26, plans were announced to expand the scheme to 120 new additional destinations, aiming to serve over four crore passengers in the next decade.

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Advantages of investing in these cities compared to tier 1?

For investors, Tier 2 and Tier 3 cities bring unique advantages for investors, such as the possibility for higher returns, affordable costs, cheaper price and sizable workforce that often prefers these cities for their healthier, less crowded living conditions.

With the rise of industrial hubs, many Tier 2 and Tier 3 cities are becoming important business destinations. Government initiatives aimed to promote infrastructure and generating jobs frequently focus on these cities, offering investors opportunities that tier 1 may not be able to match.

How is the UIDF improving their infrastructure in small cities? 

The Urban Infrastructure Development Fund (UIDF), supports the growth of smaller cities by providing affordable, long-term financing projects; it enhances essential services such as waste management, sanitation and water delivery. Managed by the National Housing Bank, the fund assists state government and Union Territories in developing urban infrastructure through public/state agencies, municipal bodies, and urban local bodies. Launched in November 2024, the initiative has an annual allocation of ₹10,000 crore.

Ahmedabad

Ahmedabad, its biggest city, is a hub for industries such as petrochemical, chemical manufacturing, shipbuilding, food processing, agribusiness, textiles, gems and jewellery and pharmaceuticals. Offering promising investment prospects across multiple sectors, the city hosts several of India's best companies, demonstrating its strong credentials as a prime investment destination.

Nagpur

Well-connected to Mumbai, Nagpur serves as an ideal gateway point for imports and exports, thanks to its ideally situated on the nation's western coast. It offers a supportive business geographic and business ecosystem with world-leading financial institutions, making it an excellent launch for expansion across the rest of India.

Mysuru

With its growing IT industry, rising population and strong cultural legacy, Mysuru provides a wide range of investment options, especially in real estate. The city hosts Public sector enterprises in areas such as software development, precision engineering, telecommunications, heavy industries, aviation and healthcare and pharmaceuticals. It is also emerging as a significant player in the manufacturing of heavy electrical equipment, machine tools and automotive machinery.

How are these cities benefiting from the Digital India initiative?

Since its launch in 2014, by the Ministry of Electronics and Information Technology, the Digital India Initiative has worked to close the digital gap between urban and rural locations, including tier 2 and 3 cities as villages. Under this programme, numerous technology-driven projects and innovation schemes have been introduced to develop this initiative with the aim of building and supporting digital infrastructure across the country.

By March 2024, the total number of internet subscribers had grown by 28.54% reaching 1,199.28 million. Government support through the Digital India programme has supported investments in digital infrastructure across tier 2 and 3 cities, including digital payment systems, high-speed internet and e-governance services. In addition to enhancing connectivity, these initiatives have promoted innovation, digital entrepreneurship and e-governance . The digital advancement of smaller cities Tier-2, Tier-3, Tier-4 cities, has also greatly boon for the e-commerce and retail sector, with these cities accounting for the highest share of online orders in India.

How industrial corridors contribute to the growth of the non-metropolitan cities' ? 

Industrial corridors not only improve their connectivity and provide infrastructure but also play an important role in generating employment opportunities and reducing regional economic growth gap. They generate jobs directly, within industrial and indirectly in related industries and service sectors. Additionally, these corridors strengthen a sustainable and supply chain by allowing smoother movement of services and goods to move more freely.

Industrial corridors present attractive opportunities for investors, as they include designated areas of land for or undergoing infrastructural and economic development. By focusing on improved port, railroads and roadways, these corridors increase market accessibility and lower logistical costs, key benefits for potential investments.

How Government initiatives Are Driving growth in smaller cities' real estate markets? 

Focused on improving infrastructure and affordable housing in several government initiatives have fueled the expansion of the real estate sector in tier 2 and 3 cities. These efforts enhance connectivity and residential development, making these cities attractive to skilled professionals and investors alike. Key government-led initiatives are:

Real Estate Regulatory Authority (RERA)

Enforced under the Real Estate (Regulation and Development) Act, 2016, by the Ministry of Housing and Urban Affairs, RERA requires all real estate projects to be registered with the relevant State or Union Territory's (UT) Regulatory Authority. The act is designed to protect both the homebuyers' interests and ensure accountability within the industry, RERA also has the authority to oversee any pending projects development under the project, securing investments and protecting investors. 

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) enable individuals with smaller capital to earn returns from real estate assets without directly buying, managing or purchasing properties. To promote REITs and maximise the value generated from real estate investors, the government has introduced various incentives and policy reforms. REITs that distribute at least 90% of their taxable income qualify for tax-free dividend income. Moreover, long-term capital gains, on investments held for more than a year, are taxed to a lower tax rate than their short-term capital gains.

How can these cities sustain growth and attract more investment?

To keep drawing investors, these cities should continue to focus on strengthening infrastructure, promoting renewable energy sources, diversifying their economies base and adopting inclusive policies. Opportunities range from enhancing public transportation networks to building scalable healthcare systems. However, maintaining long-term investors to explore. But to make sure long-term investor interest will depend on a stable policy environment and incentives are key.

India's grow as a global economic leader depends on the development and growth of tier 2 and 3 cities.With their expanding infrastructure, thriving industries, education and focus on sustainability, these cities are emerging as major players on both the national and international levels.