Wednesday, November 13, 2024

India’s Upcoming Flight Of Growth To Be Fuelled By Tier 2 & Tier 3 Cities

By Staff Correspondent

Data & Graph Credits: Alvarez & Marsal

Over the past three decades, the Indian economy has grown in an impressive manner. India’s gross domestic product was ranked 11th overall in the world a decade ago. Even as it was recovering from the effects of COVID-19 in 2022, India’s GDP grew by 6.8%, passing the United Kingdom to become the world’s fifth-largest economy. India is anticipated to maintain its rapid economic growth in the future, with the IMF projecting that the country’s GDP per capita will increase at a healthy 7.9% annual growth rate between 2022 and 2027.

The Indian aviation industry is anticipated to have a significant impact over the following ten years. The sector is predicted to have a 6.1x employment multiplier and a 3.25x output multiplier. This suggests that every 100 rupees of aviation-related output generates 325 rupees worth of demand for the economy as a whole, and that every 100 jobs in aviation result in 610 jobs. The main changes in the Indian airport industry over the past ten years are covered in this essay, along with the trends that are expected to have an impact on it in the upcoming ten years.

An Unprecedented Surge In Air Traffic Witnessed By India

There is significant room for growth in the sector when comparing India’s per capita air travel to that of several developed and developing economies. According to the FICCI, India’s air traffic will reach 960 million by 2033, nearly tripling that of 2020. There is no doubt that the Indian aviation industry will undergo a transformation in the upcoming years, one that will necessitate modernizing the current enabling infrastructure.

In order to support this transformation, the Indian Civil Aviation Ministry has launched and announced a number of programs. By 2025, the government hopes to have 220 airports across the nation, up from the current 140, in order to support the expanding airport industry. Since 2014, the nation has already seen the construction of 66 new airports. India currently has 16 major airports, also known as airports with annual passenger traffic of more than 3.5 million. As the government plans to build four new greenfield airports and upgrade 26 brownfield airports to major airport status, this number is anticipated to rise to 45.

The National Civil Aviation Policy (NACO), 2016, also includes a number of initiatives to promote private sector participation. These include programs like the Regional Connectivity Scheme – UDAN, Krishi UDAN.

Role Of Tier 2 & Tier 3 Cities

India’s population, wealth, and overall economic activity have historically remained concentrated in a small number of cities and clusters. In 20211, the top 10 cities contributed to about 40% of India’s GDP. But a look at some of the new trends shows that this focus is gradually changing. Growing middle class populations, infrastructure improvements, an increase in Tier 2 and Tier 3 city populations, and rising income levels have begun to shift this concentration. This shift has been furthered by the quick adoption of technology and the widespread use of the internet.

64% of e-commerce customers in 2016 lived in Tier 1 cities and metro areas. Tier 2+ cities housed only 35% of e-commerce customers. The proportion of e-commerce customers from Tier 2+ cities had increased to 53% by 2020. A rise in demand from Tier 2 and Tier 3 cities has also been observed in the automotive sector. Tier 1 cities’ percentage of India’s total number of registered motor vehicles fell from 15% in 2014 to 13% in 2019. Comparatively to 2015, Tier 1 cities made up only 8% of all net additions in 2019. Mercedes-Benz and Audi, two German luxury automakers, are already focusing on Tier 2 and Tier 3 cities to increase their sales. 25 small cities have been chosen by Mercedes to help them grow their markets and network. According to a market study, used car demand has increased in these cities as well. Another noteworthy development is in the residential real estate market, where Tier 2 and Tier 3 cities’ demand is rapidly catching up to that of Tier 1 cities. For instance, the residential real estate markets in Surat and Vadodara were worth INR 30,000 crore and INR 26,000 crore, respectively (for the fiscal year 18 to FY 22). In comparison, the residential real estate market in Kolkata was estimated to be worth INR 38,000 crore during the same time period. The aviation sector is expected to follow a similar trend as this shift continues.

Concentration Of Air Traffic In Tier 1 Cities

India’s growing middle class and expanding working population have clearly increased the country’s air traffic. However, just as wealth and development have historically been concentrated in the top 10 to 15 airports in the nation, so has air traffic. The top 15 airports in the nation handled 82% of all domestic air traffic in FY 19, just before the pandemic. 63% of all air traffic was concentrated in just the top six metro areas. When it comes to international travel, the top six metro areas historically account for more than 75% of all air travel.

There is a strain on the current infrastructure, particularly in metro areas, as a result of the fast rate of air traffic growth and the fact that it is still concentrated in Tier 1 cities. Both large and small airports have been struggling with the problems of growing congestion and a lack of slots. Major airports have reportedly been using between 85% and 120% of their handling capacity. IGI Airport in Delhi, India’s busiest airport, has undergone numerous rounds of expansion, and a new round is currently in progress.

A Shift To Tier 2 & Tier 3 cities

While Tier 1 and metro areas have historically seen the majority of air traffic, there has been a slight diversification over the past eight to nine years. The top six metro areas’ overall air traffic share in India has decreased from 69% in FY 13 to 63% in FY 21, with smaller airports taking up an increasing percentage of the total each year. However, the top 10 cities continue to receive the majority of international traffic, which in FY 19 and FY 21 accounted for nearly 80% of all international traffic. This diversification is consistent with the pattern seen in developed markets like the U.S. and Europe, where only about 30 to 35 percent of traffic is typically accounted for by the top 10 airports.

The growing number of smaller airports in the nation serves as further evidence of the growing prominence of these airports. A demand of one to five million passengers per year (MPPA) was met by 29 airports in the nation in FY 20, an increase from 17 airports in FY 13. In a similar vein, during the same time period, there increased from one to six the number of airports that handle five to ten MPPA.

The Indian Ministry of Civil Aviation has recognized the urgent need to expand and modernize the nation’s aviation network, particularly in Tier 2+ cities, so this shift toward Tier 2 and Tier 3 is likely to continue.

In addition to expanding its Regional Connectivity Scheme – UDAN to 1,000 routes and 100 airports, the government aims to operationalize 100 additional airports in the upcoming five years. The ministry is working to create an ecosystem that will support the expansion of Indian carriers by assisting them in growing their current fleets and creating a welcoming environment for cargo operations in India.

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