Beyond the Metros: How India’s Next AI Revolution Is Taking Root in Smaller Cities
For years, the Indian startup story was synonymous with Bengaluru, Delhi NCR, and Mumbai. The narrative was simple: if you wanted to build a technology company, you went to a metro. But a fundamental shift is underway, and it was a central theme at the ET AI Product Awards 2026. Experts at the event emphasized that the next wave of AI innovation is expected to emerge not from the traditional hubs, but from Tier-2 and Tier-3 cities. This signals a move from a metro-centric model toward a truly distributed innovation landscape, driven by localized solutions and a new economic logic.
A New Category for a New Reality
The ET AI Product Awards themselves reflect this changing reality. For 2026, the awards introduced the AI in Bharat & Inclusive Innovation category, designed specifically to recognize AI products that are solving real problems with accessibility, regional language support, and practical business applications for India’s next set of users. This category acknowledges that India’s next AI success story “may not begin in another metro,” but where the market has only just started paying attention. The awards are structured across Startup, SME, and Enterprise tracks, ensuring that innovation at every scale is evaluated in the right context.
This shift is not just a theoretical possibility; it is already happening. Out of India’s roughly 200,000 DPIIT-recognized startups, more than 48% have sprouted from Tier-2 and Tier-3 cities. Cities like Jaipur, Lucknow, Indore, Coimbatore, and Bhubaneswar are no longer peripheral players but central engines of growth, driven by a powerful combination of lower operational costs, supportive government policies, and a growing pool of skilled talent.
The Drivers: Talent, Policy, and Cost
The migration of innovation to smaller cities is being fueled by several powerful tailwinds.
Democratizing Talent and Infrastructure
A key driver is the geographical diversification of talent and infrastructure. The government’s IndiaAI Mission is actively establishing AI Data Labs in cities like Gorakhpur, Lucknow, Shimla, and Patna, ensuring that technological development is spread across the country rather than concentrated in a few areas. This creates a fertile ground for startups and fosters inclusive growth.
This is complemented by a growing trend of reverse migration, where skilled professionals are moving back to their hometowns seeking a better quality of life and lower costs. Companies are tapping into this talent pool; finance minister Nirmala Sitharaman noted that while India was adding one Global Capability Centre (GCC) every week in 2024, it is now establishing one every day, with many of these new centres located in emerging cities.
State Governments as Catalysts
State-level policies have been instrumental in this transformation. The Rajasthan government’s iStart program provides matching funds up to ₹25 lakh under the BHAMASHAH Techno Fund, contributing to Jaipur recording over 5,000 new company incorporations in 2025. Uttar Pradesh’s StartInUP policy offers sustenance allowances and seed funding, helping Lucknow become a fast-growing North Indian startup hub with nearly 1,800 active startups. Similarly, Odisha’s Startup Policy 2022, Kerala Startup Mission, and the Chandigarh Startup Policy 2025 are all creating localized ecosystems that encourage entrepreneurship and attract investment.
Economics and Sustainability
The economic advantage of Tier-2 cities is becoming increasingly stark, particularly for capital-intensive AI infrastructure. Experts point out that AI infrastructure economics are “fundamentally breaking in metro cities” like Bengaluru due to high land costs and power constraints. In contrast, Tier-2 cities like Mysuru offer significantly lower land costs, more stable power availability, and a more practical ability to integrate renewable energy, potentially achieving 30-50% lower total cost of ownership for data centers. This distributed, hub-and-spoke model of infrastructure is seen as key to building a sustainable and resilient AI future for India.
This is not just anecdotal. According to Indeed’s latest AI Jobs Tracker, around one in four employers now see Tier-2 and -3 cities as emerging AI hiring hubs, with companies becoming more flexible about hiring for roles related to data operations and AI implementation outside of metros. Founders in the region are also building initiatives like “homecoming” programs to attract talent back, creating a virtuous cycle of growth in cities like Mangaluru and Udupi, which are increasingly being seen as serious alternatives for deep-tech and AI work.
By tapping into regional strengths, India is not just creating a more inclusive AI landscape, but also a more resilient and globally competitive one. The future of India’s AI economy is being built not just in a few megacities, but across a distributed network of smaller, specialized hubs.
