The Next Urban Frontier: Twenty Cities to Watch

The Next Urban Frontier: Twenty Cities to Watch

Eight megacities - Mumbai, Delhi, Kolkata, Chennai, Bangalore, Hyderabad, Ahmedabad and Pune garner the lion's share of attention as India's consumption centres. These are the country's largest population centres (all have populations above five million); and for the most - but not entire - part they are the largest markets in terms of household income and total consumption expenditure.

Beyond these 'usual suspects', what is the next set of emerging cities? Based on the latest NCAER National Survey of Household Income and Expenditure (NSHIE), a new report by Dr Rajesh Shukla, NCAER and Roopa Rushothaman, FCR identifies two sets of key cities:


▪	Boomtowns stand out because of their potential to be the next set of large-population cities with relatively high expenditure per household. In terms of total consumer markets these are the emerging cities that are quickly moving up the ranks as the largest markets following the megacities. This group of cities has younger populations and has posted the fastest growth in disposable income since 2000. Cities in this group include Surat, Kanpur, Jaipur, Lucknow, Nagpur, Bhopal and Coimbatore.

▪	Niche Cities are somewhat smaller in terms of overall population but still hit well above their weight in spending per household. Household expenditure in these cities is nearly the same as that found in megacities, and niche cities have the highest spending propensity of our three city groups. Faridabad, Amritsar, Ludhiana, Chandigarh and Jalandhar best represent niche cities.

These twenty cities together account for 10% of India's population, but generate 31% of disposable income and 21% of total spending. More than half (55%) of total urban income is generated by these twenty cities while megacities alone account for 45% of urban expenditure Boomtowns and niche cities today may be much smaller in terms of their income and spending weights, but they are growing rapidly.

The Report highlights some of the most interesting spending, savings and demographic patterns found in these transforming cities. The data give comfort that certain trends are de eloping as expected; however other more counterintuitive trends may change our approach to a uniform 'urban India'.

Sectors heavily geared towards demographics - consumer durables, financial services, FMCG and apparel - may follow typical patterns where the boomtowns will be the next big pockets, and there is some early evidence of this in the household data. At the same time, more specialised consumer markets such as luxury goods, big-ticket durables, entertainment services and housing may find further inroads in niche cities.

In other words - using traditional terminology of boomtowns as Tier II and niche cities as Tier III - some sectors should look to Tier III first. Although niche cities may not appear as large as the premier tier of cities on the surface, consumption patterns may evolve more quickly, creating deeper addressable markets.

A Spapshot of Our Twenty Cities
2007-08 Estimates	Population (mn)	Average household income (p.a. in 2004-05 Rs.)	Average household expenditure (p.a. in 2004-05 Rs.)
Mumbia Delhi Kolkata Chennai Bangalore Hyderabad Ahmedabad Pune	20.3 15.5 13.8 6.9 6.6 5.7 4.8 5.1	459,457 408,237 287,199 337,059 300,678 273,353 317,856 210,458	201,140 205,028 174,951 155,286 164,923 149,251 134,479 126,918
Megacities	78.6	354,090	176,977
Surat Kanpur Jaipur Lucknow Nagpur Bhopal Coimbatore	4.0 2.7 3.4 2.6 2.5 2.8 1.7	431,206 159,761 300,374 280,393 308,625 165,210 219,846	190,591 118,567 167,540 152,948 182,871 128,836 152,050
Boomtowns	19.8	283,071	159,407
Faridabad Amritsar Ludhiana Chandigarh Jalandhar	2.1 1.9 1.5 1.1 1.1	252,558 267,056 273,211 484,775 296,651	164,457 164,540 134,187 212,805 229,335
Nichie cities	7.7	304,265	174,287
All cities	106.1	338,508	173,718

Highlights

As of this year, half of the world's population live in urban areas. While this figure is currently much lower for India, on conservative estimates 45% of India's population will be urban by 2050. This means that 379 mn people will be added to urban spaces over the next 40 years - more than the entire population of the US today. India could account for a fifth of the increase in the world's urban population through 2050 - more than any other country.

Thankfully, the country is in a pivotal position to prepare for oncoming demographic change. However, we need more information about how the process of urbanization is evolving on the ground. By tracking and understanding more fully the diversity among already established cities, we can better address the urbanization process ahead.

As a first step, the report identifies 20 key cities and group them into three broad buckets: Megacities, which are the largest cities in terms of population and overall consumer markets; Boomtowns, which stand out as the next set of big-population cities with high expenditure per household; and Niche cities, which are smaller in terms of overall population but still hit well above their weight in spending per household.

These twenty cities together account for 10% of India's population, but generate 31% of disposable income. Household income growth for these cities is estimated at 11.2% y-o-y between 2005-08 decelerating gradually to average 10.1 % through 2016.

Income / Income Distribution

Household income levels for Mumbai and Delhi (as well as Chandigarh and Surat) in 2007-08 have crossed the Rs. 4 lakh mark. This makes income per capita in Across the twenty cities, 70% of car owners are middle class. The middle class makes up more than 60% of ownership in the following: computers, ACs, washing machines and microwave ovens. The aspirant group (with incomes between $3 000 and $6,000) edges out the middle class in ownership share of TVs; DVD players; refrigerators; mobiles; and motorcycles.

The same income group may have different ownership profiles across cities. In general, the low income and aspirant categories weigh more heavily in overall asset ownership within boom towns. For example, aspirants make up over a third of total car owners in boom towns against 14% and 10% in megacities and niche cities respectively.

Consumer Markets and Financial Services

These twenty cities fueled just under $100 bn of consumption expenditure in 2007-08, with food spending accounting for over a third of total spending. However, there is significant diversity in spending patterns across cities. Coimbatore households devote a sharply lower share of their consumer basket to food spend (and a higher share to healthcare), while Mumbai allocates the least of all our cities to education and recreation.

Surat is a standout. Surat has nearly the population of megacity; it is the youngest city in the entire group (with over 64% of the population below the age of 30); and the city's household income growth tops our urban universe by a comfortable margin. After adjusting for cost of living differences, Surat emerges as the leader in household income levels. The city is already a larger consumer market than Ahmedabad and Pune.

These twenty cities will become increasingly important for financial services: surplus income rates here are nearly double the all-India figure. Surplus income rates are highest in megacities, with Delhi and Mumbai together accounting for a fifth of all-India surplus income. As much as 29% of niche households prefer to keep surplus income at home.

Boomtowns - not megacities - have the highest penetration of life insurance and loans outstanding. Although niche cities have the highest penetration rates across most durable assets, they are significantly under-penetrated when it comes to financial services such as loans, life insurance and credit cards.

Conclusion

These cities will be key to track as centres of economic development over the coming decades. The study shows that while urban growth patterns are more diverse than we conventionally acknowledge, the transformation in income and ownership patterns across all our cities is occurring even more rapidly than expected - more importantly planned for.

Preparing for changes in urban demand will be a key challenge for both policymaking and corporate strategy. Given where it's headed with respect to urbanization, India simply cannot afford urban development to languish. On the policy front, we need to place urban development - particularly infrastructure - squarely alongside the rural priorities, recognising in part that both are interdependent.

On the corporate front, we need to challenge the approach to a uniform 'urban' India. Boomtowns and niche cities today may be much smaller in terms of their income and spending weights, but they are growing rapidly. Many of the cities that have registered the fastest economic growth - along with the highest asset and financial penetration - over the last five years have been within the boomtowns and niche cities, not the typical megacities.

Sectors heavily geared towards demographics - consumer durables, financial services, FMCG and apparel - may follow typical patterns where the boomtowns will be the next big pockets. At the same time, more specialised consumer markets such as luxury goods, big-ticket durables, entertainment services and housing may fine further inroads in niche cities. Although niche cities may not appear as large on the surface, consumption patterns may evolve more quickly, creating deeper addressable markets.