Explained: How Big Tech Companies Are Now Expanding Into India's Smaller Cities

Indian engineer B Ramachandran now prefers living in the smaller cities than the major tech hubs of Bengaluru and Chennai.

After the pandemic, the 47-year-old moved to Madurai, a temple town in Tamil Nadu. He has no plans to leave his hometown, saying the chance to live with his ageing mother while working for New York-based technology services firm Genpact is a "blessing".

IT companies are now expanding into smaller cities, in part to tap on workers like Ramachandran, and to capitalise on cheaper land costs, rents and wages.

Some are already finding it easier to hire staff in tier 2 cities, in contrast to before the pandemic when workers largely went from smaller cities into the country's major IT hubs for jobs.

"The HR and I used to drive down to Bengaluru and Chennai to interview experienced talent and convince them to move to Madurai," said Selvaganesh M.P, founder of IT firm SMI which was bought by mid-cap IT company Happiest Minds in 2023.

"This is no longer needed as the equation has changed after COVID-19."

US-based Cognizant and India's Tata Consultancy Services, Infosys, HCLTech and Wipro, are moving into smaller cities due to cost efficiency, government incentives and availability of talent.

HCLTech has two offices in Madurai with 6,700 employees. It had originally aimed for 5,000 staff by 2025, which it exceeded, as a result of pandemic-induced demand. It also expanded its workforce in tier 2 locations such as Nagpur in Maharashtra, Vijayawada in Andhra Pradesh and Lucknow in Uttar Pradesh since the pandemic.

Industry watchers say the trend to smaller cities helps companies reduce attrition and cut costs at a time when the $254 billion Indian IT sector is grappling with weak sales growth amid global economic uncertainty.

Employee salaries are 25%-30% lower and real estate rentals are around 50% cheaper than in established tech hubs, according to a report by Deloitte and industry body Nasscom.

BEYOND METROPOLITAN CITIES

Cognizant is trying to exit a major Chennai facility as part of its plan to cut real estate costs by $100 million by 2025, even as it opened an office in Bhubaneswar, in Odisha.

Tech Mahindra is running an initiative called "Nxt.Towns" to win talent in tier 2 cities, while Wipro is encouraging employees to relocate to its offices in smaller cities through "Project Lavender".

Wipro is offering employees twice the usual referral bonus for directing people to vacancies in Kochi in Kerala, and Visakhapatnam city in Andhra Pradesh, according to emails seen by Reuters. It declined comment specifically on this development.

However, Wipro said it was making continuous investments in tier 2 and tier 3 cities and had set up offices in multiple emerging cities such as Ahmedabad, Bhubaneshwar and Guwahati to tap into talent and scale operations.

Cognizant did not comment, citing a silent period ahead of its quarterly results. Tata Consultancy and Infosys did not respond to emails seeking comment. The trend by firms to decentralise has hurt demand for office space. The tech sector's share in India's top seven markets fell to 20.9% in 2023, its lowest in more than a decade, JLL data showed.

"The IT services sector has really struggled to get people back in offices," said Anshul Jain, India and Southeast Asia managing director at Cushman & Wakefield.

The change also comes as state governments offer stamp duty concessions, land benefits, subsidised power and other incentives to bring jobs to smaller cities.

And as jobs shift to these cities, so will consumption.

"What we're seeing is improving lifestyles in secondary cities, whether it's retail, entertainment, F&B services," Jain said, adding that tech hiring "certainly creates a spur in the economy".

"So, the IT industry's multiplier effects that we've seen in tier 1 could be seen in tier 2, if the experiment is successful."

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