With a surge in entrepreneurial ventures and investor confidence, smaller cities are emerging as vital innovation hubs. 

Over 51% of India’s 63 million registered small enterprises are located in Tier 2 and Tier 3 cities. This highlights the immense economic potential these regions hold. Furthermore, approximately 44% of investors are now focused on Tier 2 and Tier 3 regions, which have seen a 35% rise in business activity. This growth can be attributed to the host of advantages for aspiring business owners in smaller towns such as:

• Lower Operational Costs: Smaller cities offer significantly reduced costs for land, labor, and utilities, enabling businesses to operate more efficiently and optimally utilize their resources.
• Availability of Land and Space: These regions often provide adequate land supply at affordable rates, ideal for setting up manufacturing units, warehouses, or offices.
• Emerging Markets: With rising disposable incomes and evolving consumer preferences in smaller cities, these regions present an untapped market with potential for growth across industries.
• Local Partnerships: A sense of community and trust translates into loyal customer bases and stronger local partnerships.
• Reduced Competition: The relatively lower business density allows business owners to carve out niches and stand out in their respective markets without rivalry from large corporations.
• Government Incentives: To encourage regional development, governments offer tax incentives and other benefits for businesses in smaller cities and rural areas.

The growing business activity in Tier 2 and Tier 3 cities underscores their increasing significance in driving economic progress, with MSMEs playing a pivotal role across key sectors. 

Their impact on manufacturing, exports, dairy, technology (IT services, software development, electronics, etc), and the service industry (retail, hospitality, logistics, healthcare, education, etc.) is clearly reflected in the sectoral contribution below: 

Source: Ministry of MSME

Additionally, business owners have also revolutionized other crucial sectors of agriculture and food processing. Innovative farming techniques like kisan drones, micro irrigation, etc, has turned many MSMEs into self-reliant entities. From organic produce to export-quality spices, these businesses cater to niche markets. Furthermore, the food processing industry creates packaged goods that cater to national and international markets. A significant portion of MSMEs’ contribution also includes increased sales of branded packaged food products in Tier-2 and Tier-3 cities. Like their urban counterparts, their’ sales for branded edible oils, rice, and wheat flour instead of unbranded products have shot up to 15% year over year due to an overall increase in demand. 

Resilience and Progress

The above-mentioned examples clearly showcase how Tier-2 and Tier-3 cities continue to emerge as hubs for MSMEs. To further increase their overall contribution, solutions like easy access to credit, skill development, improved supply chains, and adopting digital solutions with resilience would be fruitful. 

1. Skill Development and Training Programs
   MSMEs are actively upskilling through government programs like the Skill India Mission and industry-led initiatives from CII and FICCI. Beyond these, investing in online courses, in-house training, and collaborations with local institutes enhance expertise across functions. Adoption of digital tools and automation, fostering hands-on learning and mentorship within their networks to stay competitive and drive sustainable growth.
   
2. Creation of Local Markets and Supply Chains
   MSMEs in Tier 2 and 3 cities are driving regional economies by fostering local production and consumption. Initiatives like weekly farmers’ markets help farmers and small businesses sell directly to consumers, reducing logistics costs and increasing earnings. Additionally, for MSMEs in the creative field of handicrafts, regional bazaars and exhibitions offer a great opportunity to sell directly to consumers in multiple cities.
   
3. Enhanced Infrastructure 
   Tier 2 and 3 cities are witnessing rapid advancements in infrastructure, with enhanced transportation networks, upgraded utilities, and improved connectivity. These developments have streamlined supply chains, reducing costs and delivery times, and enabling MSMEs in these regions to compete more effectively. Furthermore, programs like the UDAN scheme that promotes regional air connectivity have further increased the appeal of these cities as hubs for growth and opportunity.
   
4. Access to Technology
   As of 2024, Tier-2 & Tier-3 cities had 30% more data consumption than metros. While the number of internet users in smaller cities and rural areas is growing at twice the rate of urban areas, 95.15% of villages have access to the internet. Digital accessibility, widespread smartphone adoption, and initiatives supporting MSMEs have enabled them to leverage e-commerce, digital marketing, and direct online sales.

Many small businesses can operate through their own websites, social media storefronts, and online marketplaces, reaching customers beyond their local markets. This shift has expanded their market reach, opened new revenue streams, and improved operational efficiency, allowing them to compete on a larger scale while building stronger customer engagement.

• 24% More Access to Microfinance
  Financial inclusion is a cornerstone of MSME growth, empowering them to access the resources necessary for starting, sustaining, and expanding their ventures. MSMEs in Tier 2 and Tier 3 benefit from this, and this was proven when the industry witnessed a loan disbursement growth of 24% in 2022. Securing loans from trusted financial institutions and NBFCs such as Protium would not just give them loans when they need them but also open the option of top-up loans if their repayment history is healthy. 

Building a Sustainable Future

As India’s second-largest employment generator, MSMEs across manufacturing, trade, and services sectors have added approximately 11 million jobs in the year ending September 2024, increasing total employment to 120.6 million from 109.6 million the previous year. The growth of these enterprises further creates additional opportunities in their hometowns, thereby curbing migration to overcrowded urban areas and preserving local cultures. 

The Way Forward: Sustainable Growth & Strategic Expansion

The growth of Tier 2 & 3 cities represents a powerful narrative of resilience, innovation, and resourcefulness. MSMEs in these regions can leverage this momentum gained through strategic planning and innovation. At the same time, exploring new-age solutions like solar energy, eco-friendly manufacturing, and digital transformation through EV infrastructure, agritech, and AI-driven automation can not only reduce costs and drive efficiency but also open more areas of business opportunities.