The Next Billion-Dollar Cooling Market: How India's Smaller Cities Are Reshaping HVAC Demand
For decades, India's air conditioning market was largely concentrated in metropolitan centres such as Delhi, Mumbai, Bengaluru, and Chennai. The next wave of HVAC demand is coming from smaller cities, where rising incomes, rapid urbanisation, and intensifying heat are making air conditioning a household necessity, rather than a luxury. As these markets mature, India’s Tier 2 and Tier 3 cities are set to become the country’s next billion-dollar cooling opportunity. BRG estimates that India’s air conditioner market is expected to grow at a CAGR of 10.7% in volume terms through 2030, driven by rising income, expanding infrastructure and commercial construction.
India is still one of the world's underpenetrated cooling markets despite its tropical climate. According to the Bureau of Energy Efficiency (BEE), only around 10% of Indian households owned an air conditioner in 2022. In comparison, the International Energy Agency (IEA) estimated that nearly 79% of households in China owned at least one air conditioner in 2025. This stark contrast underscores the substantial untapped potential for future growth in India's residential cooling market.
At the same time, infrastructure investments are changing the picture of India’s commercial air conditioning market. Government expenditure on infrastructure has increased from ₹2.63 lakh crore (~US$27.5 billion) in FY2018 to ₹11.21 lakh crore (~US$117.2 billion) in the FY2026 Budget Estimates. More than 4,220 industrial parks have been mapped under the India Industrial Land Bank, alongside plans for 20 new industrial smart cities. These projects are supporting the growth of the commercial air conditioning market in India.
Smaller Cities Become the New Growth Engine
Manufacturers have already noticed the shift in sales patterns. Blue Star has indicated that nearly two-thirds of its room air-conditioner sales now originate from smaller cities and towns, highlighting how demand is expanding beyond India's largest metropolitan areas. These emerging urban centres are benefiting from rising disposable incomes, improved electricity access, expanding retail networks and increasing aspirations for modern living.
Growth in tier 2 and tier 3 cities is being driven overwhelmingly by first-time buyers, indicating that the market remains in an expansion phase. Households that have traditionally relied on ceiling fans and water coolers are increasingly upgrading to air conditioners, reflecting the rising household purchasing power and the expansion of the middle-class income group in the country. According to the India Brand Equity Foundation (IBEF), India's per capita disposable income is projected to increase from US$2.11 thousand in FY2019 to US$4.21 thousand by FY2029, reflecting sustained economic growth and strengthening consumer spending capacity.
Frequent and prolonged heatwaves, coupled with rising nighttime temperatures, are making traditional cooling methods such as ceiling fans and air coolers less effective during peak summer months. The IEA reports that India's electricity demand has become far more sensitive to temperature, with every additional 1°C increase in daily average temperature now adding more than 7 GW to peak electricity demand, compared with around 4 GW in 2019.
Urbanisation and Infrastructure Development
While RAC market in India is experiencing accelerated growth due to increased demand from tier 2 and tier 3 cities. The commercial HVAC market in India is increasing not only due to new infrastructure development in smaller cities but also because of the expansion of metropolitan regions. The commercial development of major metro cities, such as Delhi, Mumbai, Bengaluru, etc., is spreading into surrounding regions due to limited space. Delhi-NCR is a clear example: Gurugram has grown into North India's largest office market, surpassing 100 million sq. ft. of office stock in 2026, while Noida and Greater Noida continue to attract IT parks, mixed-use developments and logistics facilities. Mumbai's commercial growth is increasingly extending to Navi Mumbai and Thane, supported by the upcoming Navi Mumbai International Airport and major transport investments. Bengaluru's office market is expanding beyond the CBD towards Whitefield, North Bengaluru and Devanahalli, while Hyderabad continues to add office space in the Financial District and Kokapet.
At the same time, programmes such as PM Gati Shakti and the National Industrial Corridor Development Programme (NICDP) are supporting commercial development in tier 2 cities. These cities are now attracting manufacturers due to lower operating costs and improved infrastructure. For example, Indore is emerging as a key manufacturing and technology hub, supported by the Super Corridor, Indore Metro and the upcoming PM MITRA textile park. Meanwhile, Coimbatore, Lucknow and Bhubaneswar are attracting growing investments in engineering, IT, healthcare, education and commercial real estate.
Both expanding metropolitan regions and growing tier 2 cities are now driving commercial HVAC demand. As businesses continue to decentralise, industrial activities expand beyond metro cities, and investments in offices, hospitals, hotels, and manufacturing facilities increase, demand for commercial HVAC will remain strong.
Balancing Cooling Demand with Energy Efficiency
Household surveys conducted by the BEE show that while ceiling fans remain the dominant cooling appliance, particularly in rural households where they account for 48% of household electricity consumption, cooling preferences are steadily evolving. Rising incomes, improving living standards and greater affordability are encouraging households, especially in urban areas, to transition from fan-only cooling to air conditioners. Ensuring that this growth is sustainable will be a key energy challenge for India in the years ahead. The India Cooling Action Plan anticipates that the national demand for cooling is expected to rise eight times by 2037-38. Furthermore, projections indicate that residential air conditioning ownership is expected to reach around 65% by 2050 and 80% by 2070. Without major efficiency enhancements, the anticipated rise in electricity demand could put a substantial burden on generation capacity and distribution systems.
Fortunately, India is investing in both efficiency and the expansion of cooling access. The Bureau of Energy Efficiency's Standards and Labelling programme has accelerated the adoption of inverter air conditioners, whose market share has risen from less than 1% in 2015 to around 86% in 2024. Revised energy performance standards, combined with the Production-Linked Incentive (PLI) scheme, are strengthening domestic manufacturing capabilities while encouraging production of higher-efficiency components.
Conclusion
India's largest metropolitan regions no longer define its HVAC market. The country's next phase of HVAC growth will be shaped by smaller cities where economic development, urban expansion and rising living standards are converging.
For HVAC manufacturers and developers, the opportunity is no longer limited to India's largest metropolitan markets. Rising incomes, expanding infrastructure and the growing commercial footprint of emerging cities are creating opportunities for growth across both residential and commercial segments. At the same time, improving energy efficiency and increasing domestic manufacturing will remain essential to meeting future demand sustainably.
India's HVAC market is entering a new phase, driven by the combined forces of economic growth, urban expansion and changing consumer aspirations. As businesses and households increasingly look beyond traditional metros, the country's next wave of HVAC demand is expected to come from emerging cities that are steadily becoming India's new economic centres.
Author: Ishu Dhani
Source: BRG Research
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