Although poverty in India remains disproportionately rural at the aggregate level, urban poverty is growing in importance. Efforts to address urban poverty should note its spatial distribution. This paper shows that the incidence of poverty in India’s small towns is markedly higher than in large metropolitan areas. It is also in small and medium-sized towns that a large majority of the urban poor reside. Moreover, access to key services and institutions in small towns lags behind the larger cities. Agglomeration externalities are found to arise at the level of individual towns and cities and likely provide part of the explanation of the city-size poverty relationship, but inequalities in infrastructure access and proximity to a dominant metropolitan area also play a role. Efforts to combat poverty in India’s small towns may also contribute to rural poverty reduction. A small but growing literature points to a causal link from urban to rural poverty reduction. Evidence suggests that the association is stronger if the urban center is a small town than if it is a large city. There is thus an instrumental case for special attention to small towns in urban poverty reduction efforts, alongside the strong intrinsic interest in such a focus.