Written by Amit Shah® • March 22, 2023 • 3 min read
In 2019, the Indian Prime Minister Narendra Modi had shared a vision to transform the country’s economy at a pace never witnessed before. He was hopeful that India would grow into a USD 5 trillion economy by 2025. Then came COVID 19. Lockdowns and public health concerns hit India as badly as they did all other leading world economies. Widescale disruptions in daily operations of businesses, hard-hit trade as well as logistics frameworks, and rapidly escalating healthcare expenditure put stress on the available financial resources of country and company alike. However, if recent reports are to be believed the growth targets are still achievable even if the timeline may be pushed by a couple of years.
As is the norm, the Indian stock markets will have a major role to play in the growth prospects of the country as foreign fund inflows, business sentiments, and currency valuations will be directly influenced by how the markets perform.
But for the stock market to thrive at a level capable of super-charging the economy, it can no longer just rely on investors from major Tier 1 urban areas and FIIs. It’s time for the rest of the country to participate. It’s time to tap the massive potential of India’s rural areas and small towns.
There are signs all-around of the sheer potential of this category and how the habits of investors are changing to become more mainstream. For instance, a Unicommerse report last year showed that online shopping had grown 53% in Tier 3 and lower towns, even pre-COVID. A Kearney report on the retail sector had many revealing insights, including that the share of “luxury retail” grew from only 9% in 2013 to 55-60% in 2018 in non-metro cities like Jaipur, Udaipur, and Chandigarh. The report further concludes that of late, this is the sector where disposable income, mobile internet, and the empowering ecosystem are all rising faster than the metros. The interesting thing is that this money is not stuck to traditional “investment” options like gold and land. An interesting report in the Economic Times recently showed that there was a surge in investors from non-metro cities looking to invest in stocks as well as dynamic new options like cryptocurrency. Investors from UP have grown by 60%, Odisha by 70%, Assam by 191%, Bihar by 85%, and MP by 80% in the last 12 months.
Here are 3 reasons why I believe Tier 2 and Tier 3 towns and cities in India could hold the key to unleashing a massive influx of investments into India’s much-needed market re-bound strategies post the pandemic. Here’s why there’s money in the system beyond the well-known agricultural sources.
For one, the Indian Prime Minister himself stated that nearly 44% of all startup-us in the country are from Tier 2 and Tier 3 cities in India. This is also a sign of the rising levels of high-skilled jobs here. Such jobs pay more and are more “sticky”. They directly contribute to creating a growing pool of people with relatively high monthly incomes with lower living expenses when compared to the Tier 1 metro regions. And this startup wave is spread over dozens of sectors such as retail, agriculture, hospitality, healthcare, finance, media, and entertainment, etc. These professionals have a different outlook and the cash to actualize that outlook.
You can’t but be impressed when you read of transformative stories like that of West Champaran district in Bihar. At the height of the pandemic, the area saw an influx of migrant workers forced to leave their jobs in faraway states and come home. The District Administration saw this as an opportunity. They converted unoccupied warehouses of the State Food Corporation into a startup zone. They provided loans and infrastructure to entrepreneurs and workers to set up their own units. Today the startup zone houses over 27 units, employs many workers and is doing crores of business domestically as well as in exports.
Clearly, it is not just startups, but Tier 2 and Tier 3 administrators and their respective state governments are also implementing numerous measures to raise the standard of living of its inhabitants. Some of them include better social and civic infrastructure, segregating dedicated economic zones and corridors, speed tracking clearance for business proposals, and improving access to basic amenities like drinking water, lower tariff power, and utilities. This is attracting entrepreneurs as well as native youth returning from all corners of the country to create and seek employment and settle in these cities.
The socio-cultural fabric is also undergoing a rapid evolution in Tier 2 and Tier 3 cities with more women and marginalized communities joining either the workforce or becoming entrepreneurs. This is unlocking tremendous potential energy. As these previously unrepresented communities create opportunities, become successful, and encourage others to dream, it’s creating a virtuous cycle of social and financial inclusion. That’s driving up the number and types of people having free fund flow capacity at their disposal.
These factors together create a vast pool of financially stable investors that can be targeted by financial institutions and independent financial advisors alike. Their aim should be to create supporting engagement models that encourage them to spend a part of their wealth in the markets in mutual funds and stock market investments. But winning their confidence requires something more than the traditional strategies adopted for wooing customers from Tier 1 locations. Here are some tips.
While it is true that people in Tier 2 and Tier 3 cities have the income to spare for investment, they may not have the appetite for scale of those in Tier 1 locations. Hence, to get them on board to invest in the markets, they need to be offered personalized options with relatively smaller tokens of investments. Monthly investment programs, split-investment programs in multiple debt and equity instruments and other smaller investment portfolios are likely to gain more attention from investors in these locations rather than huge lump sum investments.
The rising internet literacy and obsession for self-learning via freely available sources like YouTube videos and social media influencer lessons is one behavioural trait that can be tapped into by independent financial advisors to gain more access to investors from Tier 2 and Tier 3 cities. By building a sizeable online presence and regularly posting informative content in the form of videos, animations, or presentations on social media, it becomes easier for these IFAs to gain the trust of this new category of investors.
Millennials and Gen Z customers, even those from the smaller towns have an inherent affinity towards digital services. The sense today is that their first investments into the market are likely to be via a fintech app rather than through a physical hedge fund or stockbroker office. This is one of the key reasons why platforms like Zerodha handles the stock and mutual fund aspirations of over 3.4 million people in India. So, in Tier 2 and Tier 3 towns, partnering with fintech players can unlock a goldmine of opportunities to win new customer accounts.
India still has only 3.7 % of its 1 billion-plus population investing in the equity market. This figure will have to rise significantly if the nation has to achieve the 5 trillion dollar economy status in the coming years. Ensuring wider participation from investors in Tier 2 and Tier 3 cities and towns will be one of the major strategic initiatives that need a push to realize the goal.