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Urban India Set to Drive 70% of GDP by FY26

Dun & Bradstreet report highlights urban areas, especially Tier-II and Tier-III cities, as key growth engines for the economy.
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Surya
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Urban India Drives Economic Growth
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1. Urbanisation and Economic Contribution

India’s urban areas are becoming increasingly central to national economic growth. According to Dun & Bradstreet, urban centres are projected to contribute 70% of GDP by 2025–26, up from 45% in the 1990s. This rapid urbanisation reflects broader structural shifts, including the migration of population towards cities in search of employment, education, and better living standards. Urban growth is concentrated not only in megacities but increasingly in Tier-II and Tier-III cities, indicating a diffusion of economic activity beyond traditional metropolitan hubs.

The urban population is expected to reach 600 million by 2036, representing 40% of India’s total population, up from 31% in 2011. Such demographic transitions have direct implications for urban governance, resource allocation, and infrastructure planning. Ignoring these trends could strain city resources, worsen inequalities, and constrain sustainable development.

Urbanisation drives productivity and economic scale, but without strategic planning, it can exacerbate congestion, housing shortages, and service delivery gaps, undermining both growth and governance.

Key Statistics:

  • Urban contribution to GDP: 70% by 2025–26
  • Urban population: 40% by 2036
  • Number of urban local bodies: 4,958 in 2025, up 8.56% from 2016

2. Role of Tier-II and Tier-III Cities

Tier-II and Tier-III cities, classified as Class Y, are emerging as significant alternatives for investment, particularly for establishing global capability centres. These cities are poised to generate employment and attract capital, helping decentralise urban growth from megacities. The Union Budget 2026–27 allocated ₹5,000 crore over five years per city economic region to support the development of such cities and temple towns, signalling the government’s policy emphasis on inclusive urban growth.

Focusing on smaller urban centres ensures more balanced regional development. Ignoring their potential could lead to uneven growth and overburden major metros.

Policy Highlight:

  • Budgetary allocation: ₹5,000 crore per city economic region
  • Emphasis: Tier-II, Tier-III cities and temple towns

3. City Performance and Vitality

The City Vitality Index (CVI) ranks cities based on economic size, growth momentum, and overall vitality. Among metropolitan cities, Ahmedabad ranks first in growth, followed by Bengaluru and Delhi, while Pune leads in Udyam registrations (620,000), reflecting entrepreneurial dynamism.

Non-metropolitan cities show varying patterns:

  • North 24 Parganas: 2nd in size, 115th in growth
  • Thane: 1st in size, 290th in growth
  • Muzaffarpur: 45th in size, 24th in growth

This divergence indicates that large-scale cities may face economic saturation, whereas smaller cities with high growth ranks represent emerging opportunities.

Identifying cities that combine growth momentum with manageable size can guide investment and urban planning, ensuring that infrastructure and services expand in sync with economic activity.

Key Observations:

  • Udyam registrations indicate MSME activity and entrepreneurial potential
  • High size but low growth → nearing economic saturation
  • High growth but low size → “rising stars” of urban economy

4. Implications for Governance and Urban Policy

The urbanisation trajectory demands a proactive approach to city planning, infrastructure development, and investment promotion. Failing to prioritise emerging cities could concentrate opportunities in metros, exacerbating congestion, environmental stress, and regional inequality. Simultaneously, Tier-II and Tier-III cities require targeted incentives, capacity building, and investment in physical and digital infrastructure to realise their full potential.

Urban policy must balance expansion with sustainability, or risk creating under-served cities and strained metropolitan centres, which could undermine economic efficiency and social welfare.

Governance Implications:

  • Need for decentralised planning for Tier-II/III cities
  • Infrastructure, housing, and transport must match growth projections
  • MSME promotion through Udyam registrations supports local employment

5. Cross-linkages with Economy and Development

Urban growth is closely linked to investment, exports, and job creation, connecting GS3 topics like infrastructure, economic development, and MSMEs with GS2 issues of urban governance and planning. City vitality affects regional economic balance, influencing fiscal devolution, local governance capacity, and public service delivery.

Integrating economic and urban policies ensures that growth is sustainable and inclusive, enhancing the efficiency of government spending and the impact of development programs.

6. Conclusion and Forward-Looking Perspective

India’s urban transformation presents both opportunities and challenges. Strategic investment in emerging cities, coupled with careful monitoring of city vitality, can drive balanced economic growth, improve regional equity, and strengthen governance. Long-term urban planning, fiscal support, and infrastructure development will be crucial to harness urbanisation for inclusive development outcomes.

"Cities are the engines of economic growth, but only if they are managed with foresight and planning." — World Bank

Quick Q&A

Everything you need to know

City Vitality Index (CVI): The CVI is a data-driven framework that ranks cities based on economic size, growth momentum, and overall vitality. It helps policymakers, investors, and urban planners identify cities that are performing well economically and those that are emerging as new growth hubs.

Assessment Criteria:

  • Economic size: Measures the population, land area, and the scale of economic activities.
  • Growth momentum: Evaluates the speed at which a city's economy is expanding, including factors like new business registrations and employment generation.
  • Overall vitality: Captures a combination of quality-of-life indicators, infrastructure development, and investment attractiveness.

Significance: For example, Ahmedabad ranked first among metropolitan cities in growth, while Pune, although first in size, ranked fifth in growth. This shows that the CVI captures not just the scale but the dynamism of urban development.

Importance of Tier-II and Tier-III Cities: These cities are emerging as critical nodes for economic expansion beyond the traditional metros. With rapid urbanisation, they offer alternative locations for investment, especially in sectors like IT, manufacturing, and global capability centres (GCCs).

Economic Implications:

  • Boost to employment generation by hosting micro, small, and medium enterprises (MSMEs).
  • Decongestion of metropolitan cities and better distribution of population and resources.
  • Enhanced regional economic balance, reducing urban-rural disparities.

Example: The Union Budget 2026–27 allocated ₹5,000 crore over five years for developing Tier-II and Tier-III cities. Cities like Thane and Jaipur are emerging as investment-friendly hubs with increasing Udyam registrations, demonstrating the economic potential of these smaller cities.

Impact on Urban Planning: Rapid urbanisation increases the demand for housing, transport, water supply, sanitation, and energy infrastructure. Cities must plan for sustainable expansion while managing environmental and social challenges.

Infrastructure Challenges:

  • Transportation: Need for efficient public transport systems to reduce congestion.
  • Housing: Affordable housing projects are required to accommodate the growing urban population.
  • Utilities and Services: Water, power, and waste management infrastructure must scale in line with population growth.

Example: Cities like Pune, which is large in size but slower in growth, need targeted interventions to maintain livability, while fast-growing emerging cities like Muzaffarpur require rapid infrastructure development to support their economic momentum.

Factors Behind Growth and Size Discrepancy: The variation arises due to differences in economic opportunities, population density, industrial base, and local governance efficiency.

Key Reasons:

  • Economic saturation: Large cities like Pune may have a high size rank but lower growth rank due to reaching limits in certain economic sectors.
  • Emerging potential: Smaller cities like Muzaffarpur show high growth despite lower size because of new investments, business registrations, and increasing employment opportunities.
  • Policy support: Targeted funding and infrastructure projects can accelerate growth, as seen with Tier-II and Tier-III cities receiving Union Budget allocations.

Implications: Policymakers need to balance investments between saturated metros and rapidly expanding smaller cities to ensure balanced urban development.

Examples of Emerging Cities: According to the CVI report, North 24 Parganas, Thane, Jaipur, and Muzaffarpur are among the major emerging cities. These cities are attracting investment, improving infrastructure, and expanding employment opportunities.

Economic Potential:

  • Thane: Highest number of Udyam registrations among emerging cities at 430,000, showing entrepreneurial dynamism.
  • Muzaffarpur: Ranked 45th in size but 24th in growth, indicating rapid economic expansion.
  • North 24 Parganas: Strong size but slower growth, highlighting the need for policy interventions to accelerate development.

Significance: These examples show how targeted investment, infrastructure development, and policy support can transform emerging cities into new economic hubs, contributing to national GDP growth.

Positive Implications: Urbanisation drives economic growth, employment generation, and improved access to services. It allows for concentrated investments in infrastructure, better resource utilisation, and global competitiveness.

Challenges:

  • Social disparities: Rapid urbanisation can exacerbate inequalities between rich and poor urban residents.
  • Environmental pressure: Increased pollution, water stress, and waste management challenges may arise.
  • Infrastructure strain: Cities may face congestion, inadequate housing, and pressure on public utilities.

Way Forward: Balanced urban development requires strengthening governance, investing in smaller cities, and integrating sustainable planning. For example, the Union Budget allocation for Tier-II and Tier-III cities shows proactive policy support to reduce the burden on metropolitan cities while promoting inclusive growth.

Case Study – Pune: Pune ranked first in size based on population and land mass but was fifth in growth and overall ranking. This contrast indicates that while Pune has a large economic base, its growth momentum is slower compared to emerging cities.

Policy Implications:

  • Need for targeted interventions to sustain growth and avoid economic stagnation.
  • Focus on innovation, technology, and skill development to create new economic opportunities.
  • Balanced infrastructure development to maintain livability and attract further investment.

Broader Lessons: The Pune example highlights the importance of not only measuring city size but also growth potential. Policymakers must identify cities with high growth momentum and support them through financial allocations, infrastructure development, and urban governance reforms to ensure balanced regional development.

Attribution

Original content sources and authors

AM
Auhona Mukherjee
BS
Business Standard
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