Unlocking the Potential of India’s Small Cities: Jobs, Innovation, and Sustainability

The transformation of small cities in emerging markets, particularly in India, is a subject of growing importance. These urban centres, often overshadowed by megacities, are increasingly recognised as vital engines of economic growth and innovation. Understanding their evolving role requires moving beyond traditional definitions and metrics, and adopting a more nuanced view of economic transformation. This analysis explores the dynamics shaping small cities, the complexities of measuring their progress, and the key factors driving their metamorphosis.

The Rising Importance of Secondary Cities

Secondary cities in India contribute substantially to the national economy. Together, Tier 2 and Tier 3 cities account for approximately 40-45% of India’s GDP. They host over half of the country’s Micro, Small, and Medium Enterprises (MSMEs), which provide employment to more than 110 million people and contribute significantly to industrial output and exports. These cities help reduce regional disparities by offering economic opportunities outside congested megacities, thereby easing pressure on infrastructure and lowering living costs.

Moreover, these smaller cities are becoming hubs of innovation and entrepreneurship. Around 50-58% of India’s startups and new MSME registrations originate from non-metro areas. They often specialise in sectors ranging from traditional textiles and handicrafts to IT services, engineering, and agritech. This shift is not merely a spillover from larger cities but reflects proactive, endogenous growth driven by local factors, government support, and unique industrial clusters. These cities are increasingly seen as primary growth poles shaping India’s future development.

Beyond Growth: Understanding True Economic Transformation

Economic transformation in small cities must be understood holistically. Simply measuring GDP growth does not capture the full picture. True transformation involves structural shifts in the economy, moving resources from low-productivity sectors like agriculture to higher-productivity activities such as advanced manufacturing and knowledge-based services.

In India’s Tier 2 and 3 cities, this transformation is evident in the diversification of industries. For example, Coimbatore is known for engineering and automotive components, Jaipur for handicrafts and tourism, and Nashik for agritech. However, job quality remains a critical concern. It is essential to assess whether new jobs offer formal employment, living wages, skill development, and security. Metrics such as labour force participation rates, especially for women, unemployment rates, and real wage growth provide deeper insights into employment quality.

Innovation capacity is another vital dimension. This includes the adoption of new technologies, investment in research and development, patent activity, and the presence of innovation hubs. Government initiatives aimed at supporting MSMEs and startups play a crucial role in enhancing this capacity.

Inclusivity is equally important. Economic benefits must reach marginalised groups such as women, lower castes, and migrants to reduce inequality and promote balanced development. Indicators like gender-disaggregated labour participation, access to basic services, and digital inclusion are key to measuring inclusivity.

Environmental sustainability cannot be overlooked. Economic growth should not come at the expense of environmental health. Resource efficiency, pollution control, green infrastructure, and climate resilience are essential components of sustainable transformation. Cities like Tiruppur illustrate the risks of neglecting sustainability, having faced severe environmental challenges from industrial growth.

These dimensions are interconnected. For example, digitalisation can boost productivity and innovation but may also widen inequality if access is uneven. Similarly, industrial growth can create jobs but may cause environmental harm if not managed carefully. A comprehensive understanding of transformation requires analysing these synergies and trade-offs within the specific context of small cities.

Why Now? Key Drivers Fuelling Growth

The rise of Tier 2 and Tier 3 cities is propelled by a confluence of factors. 'Push' factors from Tier 1 cities include market saturation, intense competition, the high cost of operations and living, traffic congestion, pollution, and strain on infrastructure. Simultaneously, 'pull' factors attract businesses and talent to smaller cities. The significant cost advantages in real estate, labour, and utilities are major draws. Access to a large, often untapped, pool of skilled and semi-skilled labour, frequently sourced from local educational institutions, is another critical advantage. The expanding middle class in these cities presents substantial market opportunities. A perceived better quality of life, with less congestion and pollution, also attracts professionals and families.

Crucially, the digital revolution acts as a powerful catalyst. The expansion of digital infrastructure, coupled with the proliferation of 4G networks and affordable smartphones (often termed the 'Jio effect'), has dramatically increased internet penetration. Tier 2, Tier 3, and rural areas combined now account for approximately 72% of India's internet users. The widespread adoption of the Unified Payments Interface (UPI), with usage rates exceeding 75% even in some Tier 3 towns, has further facilitated digital commerce and economic activity. This combination of improved access, affordability, and functional digital payment systems creates a potent environment for business growth and transformation.

Government policy provides further impetus. National flagship programmes like Startup India, Digital India, Make in India, and the Smart Cities Mission offer financial support, infrastructure development, regulatory easing, and incentives that benefit businesses in smaller cities. Schemes like the One District One Product (ODOP) initiative specifically target local specialisations. Additionally, proactive state and local governments are implementing their own policies to attract investment and foster entrepreneurship, such as Rajasthan's iStart programme or Uttar Pradesh's GCC policy. This multi-level policy support creates a more conducive environment for economic activity to flourish outside the traditional metro centres. The result is a 'democratisation of entrepreneurship', where digital tools and lower entry barriers empower individuals and businesses in smaller cities to participate more fully in the national economy.

Measuring Transformation: A Multi-Dimensional Framework

Relying solely on GDP to measure progress is inadequate. GDP focuses on the monetary value of production but ignores factors such as income distribution, environmental depletion, unpaid work, and quality of life. International bodies like the UN and OECD advocate for moving beyond GDP to a dashboard of indicators that capture economic, social, and environmental dimensions.

For small cities in emerging markets, a multi-dimensional framework is essential. This framework should include:

• Economic Dynamism and Structure: Tracking changes in sectoral composition, MSME growth, startup activity, export diversification, and integration into global value chains.

• Job Quality and Human Capital: Measuring employment rates, real wage growth, formal versus informal employment, labour force participation by gender, skill levels, vocational training, and employee satisfaction.

• Innovation Capacity: Assessing R&D expenditure, patent registrations, presence of incubators and accelerators, and technology adoption.

• Inclusivity: Evaluating income inequality, access to essential services, gender gaps, and digital literacy.

• Sustainability and Resilience: Monitoring air and water quality, green space, waste management, renewable energy use, water efficiency, and climate resilience measures.

• Wealth-Based Indicators: Considering stocks of produced capital (infrastructure), human capital (education, health), and natural capital (forests, water). This approach helps assess whether current growth is sustainable and builds assets for the future.

This comprehensive approach provides a nuanced view of whether small cities are truly transforming in a way that supports long-term prosperity and well-being, rather than just short-term economic output.

Catalysts of Small City Transformation: Niche Specialisation and Digitalisation

Two key drivers are niche specialisation and digitalisation. Small cities often develop specialised industrial or service sectors that leverage local strengths. For example, Coimbatore’s expertise in engineering and textiles, Jaipur’s handicrafts, and Nashik’s agritech represent unique economic identities that differentiate these cities and enhance competitiveness.

Digitalisation is accelerating transformation by improving productivity, enabling innovation, and expanding market access. The growth of digitally literate youth and the spread of internet connectivity empower local businesses and entrepreneurs. Digital platforms facilitate new business models and services, contributing to economic diversification.

Government policies supporting niche sectors and digital infrastructure are crucial. They help build ecosystems that foster innovation and entrepreneurship, attracting investment and talent. These factors together create a virtuous cycle of growth, innovation, and inclusivity in small cities.

3 Case Studies of Emerging Cities in India

Coimbatore: The Engineering and Textile Powerhouse

Coimbatore, often called the "Manchester of South India," has carved a strong identity through its dual specialisation in textiles and engineering. The city’s textile industry, rooted in generations of craftsmanship, has evolved into a modern sector producing high-quality fabrics and garments for domestic and export markets. Alongside textiles, Coimbatore boasts a thriving engineering cluster, particularly in automotive components and precision tools. This unique blend of traditional and advanced manufacturing has made Coimbatore a vital hub for MSMEs and startups alike. Its skilled workforce, robust supply chains, and growing IT infrastructure support innovation, helping the city maintain competitiveness amid global shifts.

The city’s niche specialisation has also fostered inclusive growth by creating diverse employment opportunities, from factory floors to design studios. Coimbatore’s focus on quality and innovation attracts investments and nurtures entrepreneurship, reinforcing its role as a regional economic engine. Despite challenges like environmental concerns linked to industrialisation, initiatives promoting sustainable practices are gaining ground, aiming to balance growth with ecological health. Coimbatore exemplifies how a small city can leverage its historical strengths while embracing modernisation to drive economic transformation.

Jaipur: Handicrafts and Tourism as Economic Pillars

Jaipur, the capital of Rajasthan, is renowned for its rich heritage in handicrafts and vibrant tourism industry. The city’s artisans produce exquisite jewellery, textiles, pottery, and blue pottery, sustaining centuries-old traditions while catering to modern tastes. This handicraft cluster not only preserves cultural identity but also drives significant economic activity, providing livelihoods to thousands. Jaipur’s tourism sector complements this by attracting millions of visitors annually, drawn to its historic forts, palaces, and festivals.

The city’s niche specialisation in handicrafts and tourism creates a unique economic ecosystem where culture and commerce intertwine. Efforts to modernise marketing and distribution channels, including e-commerce platforms, have expanded market access for artisans beyond local boundaries. Jaipur also invests in infrastructure improvements to support tourism growth sustainably. This dual focus on heritage industries and visitor economy has helped Jaipur maintain steady economic growth, while promoting inclusive development by integrating rural artisans and small businesses into the urban economy.

Nashik: Agritech and Wine Production

Nashik, located in Maharashtra, has emerged as a prominent centre for agritech innovation and wine production. Traditionally an agricultural hub, Nashik has leveraged its favourable climate and fertile land to develop a thriving viticulture industry, earning the nickname “Wine Capital of India.” The city hosts numerous vineyards and wineries, contributing to exports and tourism. Alongside this, Nashik is becoming a hotspot for agritech startups focusing on improving crop yields, supply chain efficiency, and sustainable farming practices.

This combination of traditional agriculture with cutting-edge technology exemplifies Nashik’s niche specialisation. The agritech sector addresses local farmers’ needs while creating new business opportunities, enhancing productivity and income. Nashik’s wine industry adds value through branding and quality improvements, attracting domestic and international markets. Together, these sectors foster economic diversification and resilience. Nashik’s experience demonstrates how small cities can blend heritage industries with innovation to build competitive advantages and inclusive growth pathways.

Ludhiana: The Textile Giant

Ludhiana in Punjab is a powerhouse for both textile production and DIY tool manufacturing. Known for its woollen garments and hosiery, the city has a vast network of small and medium enterprises that supply products across India and abroad. Simultaneously, Ludhiana has developed a strong presence in manufacturing hand tools and machine parts, serving diverse industries. This dual specialisation benefits from skilled labour, accessible raw materials, and a supportive industrial ecosystem.

Ludhiana’s economic strength lies in its ability to combine traditional textile craftsmanship with modern manufacturing techniques in tools and machinery. The city fosters innovation through local clusters and benefits from government initiatives aimed at MSME growth. Its industries provide employment to a broad spectrum of workers, supporting livelihoods and regional development. Ludhiana’s niche sectors illustrate how small cities can sustain growth by diversifying industrial bases while maintaining strong local identities.

These mini case studies highlight how Indian small cities are leveraging their unique strengths to specialise in niche sectors. Their success stories reflect a blend of tradition, innovation, and strategic focus, positioning them as vital contributors to India’s broader economic transformation.

Small Cities, Big Questions: Are We Ready for the Next Chapter?

India’s small cities are clearly demonstrating that transformation is not the exclusive domain of megacities. Their ability to carve out economic niches, foster innovation, and create jobs is reshaping the country’s development map. These urban centres are balancing tradition with modernity, leveraging their unique strengths while steadily embracing digitalisation and new business models. The stories of Coimbatore, Jaipur, Nashik, and others show how local specialisation, when supported by smart policy and investment, can drive inclusive and sustainable growth.

Yet, as these cities deepen their expertise in specific industries, it is crucial for local governments and businesses to consider the risks of over-reliance on a single sector. Economic shocks, changing consumer preferences, or technological disruptions can threaten the stability of cities that depend too heavily on one niche. To build resilience, small cities should look to diversify into related industries, especially by harnessing digital tools and platforms. For instance, a city renowned for textiles might expand into technical textiles, fashion design, or e-commerce for crafts. Digitalisation can help local businesses reach broader markets, adopt more efficient processes, and develop new services that complement their core strengths. This approach not only reduces vulnerability to sector-specific downturns but also creates new pathways for employment and innovation.

The future success of India’s small cities will depend on their ability to blend specialisation with strategic diversification. By building on their existing foundations and embracing digital transformation, these urban centres can continue to drive balanced, inclusive, and sustainable development. Their journey offers valuable lessons for other emerging markets seeking to unlock the full potential of their smaller cities.