Kanika Datta - BS Column
Both Indian executives and foreigners who have spent even a couple of years in India are struck by the boom in small-town India. We know how Mercedes' biggest market in India famously comes from the prosperous smaller towns of Punjab. But it is true that most purveyors of a range of goods and services, from televisions and washing machines to insurance and other financial services, have been increasingly looking at ways to tailor their offerings to consumers in these urban agglomerations known as Tier I and Tier II towns in marketing jargon.
This is not solely because markets in the big cities have become saturated — far from it, in fact — or more competitive. Statistics, both national and from quasi-private research organisations, have demonstrated rapidly growing incomes in these towns — Coimbatore and Nagpur, for instance, boast some of the fastest growth in upper-end incomes.
Even a cursory look at the transformation in India's smaller towns corroborates what businessmen and corporations have long understood. Testimony to this lies in the ubiquitous glass and concrete shopping malls, which appear to have become a global urban architectural uniform, that have sprung up in awkward proximity to paddy and wheat fields around former small towns and the high visibility of multinational brand names scrawled on walls and billboards. The self-conscious urban glitz that these towns —from Nagpur and Mysore to Dehra Dun and Bhubaneswar — have acquired roughly approximates the boom in incomes and opportunities that economic growth has created.
But in India, unlike China, this boom in what economists call "lower order cities" is a bottom-up transformation rather than a top-down one. This may or may not be a bad thing — most of Europe's oldest and most beautiful cities were products of the industrial revolution of the eighteenth and nineteenth centuries. But both in contemporary China and industrial revolution-era Europe, the urban boom was led by manufacturing. The famous covered "cloth halls" of Leeds that attracted gently-bred ladies were the by-product of a prosperous textile manufacturing industry. Guangzhou, yesterday's paddy fields, has metamorphosed into a (relatively) sophisticated urban conglomerate after the area became a factory to the world.
Not so in India. The income boom in lower-order cities is largely driven by the income from the steadily increasing numbers of people entering the rapidly growing and people-hungry services sector — whether it is IT, IT-enabled services, hotels, airlines, financial services and so on. Big-city India has pretty much maxed out the seemingly insatiable market for talent, so it is to small-town India that industries have turned as a supply base. Thus, you see alluring ads in Siliguri and Darjeeling where a westernised and English-speaking populace is considered an invaluable recruitment reservoir for the airlines and hotels businesses. Other cities serve India Inc's voracious requirement for chartered accountants, IT engineers and administrative and back office services. Even the fashion industry has played a role in transforming youthful aspirations in small-town India —– many of its well-known models come from here than from the big cities.
However, although the supply for emerging India's talent has expanded to small town India, the market for it remains in the big cities. Most of these people relocate to the bigger cities and it is mostly repatriated income that is fuelling consumption in small towns. An airline steward, to provide a simplistic example, will instinctively look to build or buy a house in his native town, which sets off a chain of consumption in construction materials, security services and so on.
This asymmetry in the services labour market — ironically, it is no different from the overall labour market — has consequences for India. Rising congestion and escalating costs are increasingly compelling businessmen to eye India's lower-order cities as production bases as well. This was the striking point recently made by the head of one of India's largest companies who is looking to expand his company's ambit outside of Delhi, Bangalore and so on.
Given that IT technology does not tie a company to a location, the opportunity and advantages of expanding operations to Tier I and II cities are enormous. The problem, this CEO said, was the abysmal state of small-town India. Few senior executives are willing to be relocated because of the lack of good education for their children, limited entertainment choices and even worse civic infrastructure than the big cities.
These are valid concerns. Given that good civic infrastructure dictate quality of life, both central and governments need to take them seriously if they truly want to expand the depth and breadth of economic reform. After all, if there is a strong evidence of "inclusive growth", this is it. Small town India has prospered because India's economic growth has accelerated, not because the government has handed out subsidies to the poor. As China, which is urbanising at a faster rate than India has shown, public investment in urbanisation can create a widening and virtuous circle of growth and prosperity than waiving an agricultural loan ever can.