NITI Aayog study focuses on economic potential of Tier 2 and 3 cities

Can India leverage the economic potential of its Tier 2 and 3 cities to grow to a $40-trillion economy by 2047? Suggestions from a Niti Aayog report

There is certainly no lack of ambition among the intellectuals inhabiting the corridors of the union government’s premier developmental think tank Niti Aayog. Having set a goal of becoming a $5-trillion economy by 2026 and $40-trillion economy by 2047, Niti Aayog, in collaboration with Asian Development Bank, has come up with a voluminous report on how the country can harness the economic potential of its Tier 2 and 3 cities by developing them as “engines of growth”.

This article summarises some of the report’s key findings and recommendations.

To begin with, the study states that India’s urban population is estimated to have increased from 109 million to 460 million between 1970 and 2018. India is already the second largest urban community in the world and is expected to add another 416 million people to its cities by 2050, taking the urban share of population to 50%.

Even though cities, at present, occupy only 3% of the country’s land area, they contribute 60% of the nation’s GDP. But this GDP contribution comes primarily from Delhi, Bengaluru, Mumbai, Chennai, Hyderabad, Kolkata and Pune.

Read more: Sustainable Development: Strategies for the long road ahead in Indian cities

As India transitions from a rural to an urban society, the report suggests how this share can be more evenly distributed by focusing on increasing the economic contribution of both big and small cities. “There is a need to not only nurture megacities and their hinterland as centres of economic growth, but also facilitate Tier 2 and 3 cities to take on the mantle in the future,” says the study.

The study, therefore, has selected 12 Tier 2 and 3 cities from seven states whose economic potential is to be improved by identifying growth bottlenecks, setting frameworks for growth and enabling good governance and planning. The cities selected are Vadodara, Navsari, Indore, Dewas, Warangal, Nalgonda, Vijayawada, Machilipatnam, Sonipat, Hisar, Gangtok and Guwahati.

The pilot cities

The selection was done in three steps. In the first step, five states were identified based on indicators of urban population, growth potential, economic output, business environment, sustainability and infrastructure.

Two more states, Assam and Andhra Pradesh, were later added to this list. The latter because it has a close relationship with Asian Development Bank’s East Coast Economic Corridor, which stresses the importance of integrated industrial and urban development.

The list was drawn up based on the analysis of the employment-industry structure of cities as captured by the concept of ‘Natural City’, which the study defines as: “These cities are defined using night-time lights data from satellite images and cover statutory towns with a population greater than 100,000 in the year 2000 along with neighbouring towns and villages that are contiguously illuminated.”

Read more: Opinion: Lessons from the corporate set-up that can improve Mumbai’s governance

In the second step, the study details the methodology for selection of districts. “The districts had reasonably high scores on an economic potential index (EPI) of 10, were part of the natural city, had reasonably high shares of formal and manufacturing employment, and did not specialize in mining.” 

In the final short list, cities with a population greater than three million were dropped as they were located close to mega cities. Priority was given to cities within high-potential districts and with a higher share of manufacturing employment.

General view of a street in Gangtok
In preparing the final short list of Tier 2-3 cities, priority was given to cities within high-potential districts and with a higher share of manufacturing employment. File pic of a Gangtok street, one of the shortlisted cities.

After selecting the cities, a brief profile was made on each of them based on the following indicators: Economic potential (such as key growth and investment sectors, Gross State Domestic Product (GSDP) composition and employment activities); the trajectory of spatial growth of economic activity, and the reasons that are enabling and/or restricting their economic growth

Identifying bottlenecks

Research included interactions with 130 stakeholders from both government and private entities to evaluate key issues constraining economic growth. “Discussions with regional, metropolitan, state and central governments were held to understand the broader economic–spatial relations, urban and peri-urban dynamics, and the granular set of factors driving economic growth in the states and cities examined”.

Several broad bottlenecks preventing cities from maximizing their respective economic potential were identified:

  1. Lack of common economic vision and planning across different institutions
  2. Challenges related to land supply and regulations
  3. Unintegrated planning of urban and industrial infrastructure
  4. Capacity constraints and inadequate institutional framework
  5. Policy and regulatory constraints
  6. Sub-optimal land use management, and
  7. Inadequate provisions of organized housing for workers.  

Solutions and strategies

Lessons ought to be drawn not just from well-performing large cities but also big cities, including global cities that are not contributing significantly to economic development. However, the report does not give any example of such a dense and large global city.

Some solutions for harnessing the economic potential of small cities that the study suggests:

  • Sensitizing state governments on the importance of developing appropriate policy frameworks at the state and city level;
  • Identifying key bottlenecks that constrain Indian cities from fully realizing their potential as engines of growth;
  • Developing implementable solutions to these bottlenecks, including workable structures of urban governance and mechanisms for coordinating spatial and economic planning.
  • Informing policy makers about the types of investments and activities that states and cities should prioritize from a growth and jobs perspective

The report recommends formulation of a comprehensive economic vision for the long-term, over 10-15 years. A vision that will include instituting a city economic council supported by representatives from leading industries, academicians and economy experts. Other steps to be considered are:

  • Developing partnerships with international cities, agencies and others for thematic development
  • Creating differentiated incentive policies to attract investments in smaller and underdeveloped cities
  • Drafting byelaws to make it easier for land accessibility and create direct benefit transfer schemes, such as rental housing vouchers, for economically weaker sections
  • Digitizing land records, and
  • Exploring relaxation of building byelaws that is acting as a constraint to supply of land.

Lessons from Karnataka and Tamil Nadu

Under ‘Policy and Promotions’ category, Mangalore SEZ (the others included were Baddi city, an industrial town in the southwestern Solan district of Himachal Pradesh, and Bayan Lepas SEZ, located in the southwest district of Penang Island, Malaysia) provided the case study to analyse differentiated incentive policies to attract investments.

Karnataka and Tamil Nadu too were referred to as case studies to understand how to overcome lack of integration with geo-referenced cadastral maps, which are a digital form of land records that show the demarcations of boundaries of different land parts based on area, length and direction and the lack of technical expertise and financial capacity to establish digital land record systems to create integrated digital technology platforms to improve efficiency in land transaction.


The harnessing of the economic potential of both small and big cities is a massive task, considering the complexity of land ownership and land use. Plus creating sustainable system to tackle the challenge of transitioning from land for agricultural use to urban use, which is a highly nuanced socio-economic issue.

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