Clusters Development in India a Tool for Sustainable Growth of Micro and Small Enterprises

By Sanjeev Chawla
Deputy Director, Office of Development Commissioner (MSME), New Delhi

New Delhi, March 23, 2011 (Washington Bangla Radio / PIB-India) Clusters are regional agglomerations of Micro and Small Enterprises including other stakeholders, having common challenges, common bottlenecks, common opportunities, common developmental agenda, in a specific area of business activity, related to each other through knowledge & other economic linkages. The Ministry of Micro, Small and Medium Enterprises (MSME), has adopted the cluster development approach as a key strategy for enhancing the productivity and competitiveness as well as capacity building of Micro and Small Enterprises (MSEs) and their collectives in the country. The cluster development initiatives have evolved over a period of time and are now being implemented under “Micro and Small Enterprises – Cluster Development Programme” (MSE-CDP) scheme.

The MSME sector has been recognized as the engine for growth in India. As per statistics compiled by International Monetary Fund (IMF), the Gross Domestic Product [based on purchasing-power-parity (PPP)] of India is 3,862.009 billion (Current international) dollars in 2010. The Indian MSME sector contributes 8% of the country’s GDP, 45% of the manufactured output and 40% of its exports. The MSMEs provide employment to about 60 million persons through 26 million enterprises. Therefore, at 8% contribution in the GDP, the contribution of MSME sector is 308.96 billion dollars. Keeping in view the huge contribution of the sector and its growth rate which is higher than the overall industrial growth rate, there is a need to complement the efforts of the sector by policy support, advisory and extension services including setting up of specialized knowledge and innovation based institutions in collaboration with private sector.

The intent of the cluster development programme is that a critical mass of Micro and Small Enterprises (MSEs) join hands under the umbrella of a formal entity called cluster led by a group of beneficiaries (Special Purpose Vehicle) and pursue various programmes for training, exposure, business development, advisory, advocacy, setting up Common Facility Centres (Common Design Centres, Testing Facilities, Training Centres, Processing Centers for critical operations, R&D Centres, Common Raw Material Banks, Effluent Treatment Plants, etc.), infrastructure development for the benefit of all the units of the cluster. Cluster related policy, support and developmental interventions have a significant impact on the functioning of local industrial milieu and as well as on macro level.

The Micro and Small units are generally not in a position to install costly machinery for their critical operations, accept large orders, or infuse large capital due to their limited capital base and limited domain expertise. However, collectively through cluster development approach, the micro and small enterprises can attain the desired goal of being competitive in the present global scenario. The Cluster Development approach has proved to be a successful tool and played an important role in enhancing the competitiveness of the MSE sector in India. Apart from the benefits of deployment of resources and economy of scales, the cluster development approach helps in weaving the fabric of networking, cooperation and togetherness in the industry, and thus enabling the industry to achieve competitiveness in the long run. Cluster Development Approach is the answer of the Micro and Small Enterprises to the large scale sector of the country and the world. Cluster development approach should be part of the business strategy. This approach is the need of the hour and is relevant to the requirements of Micro and Small Enterprises. Upgradation of MSE sector also benefit the large scale sector by supplying good quality products at competitive rates to the bigger/mother units.

In the recent past, the cluster approach has been made an integral part in most of the new schemes being pursued by the Ministry of MSME like Design Clinic Scheme, Lean Manufacturing Scheme, Intellectual Property Rights Scheme under National Manufacturing Competitiveness Programme (NMCP). These schemes have assimilated the benefits of Cluster Development approach right from their design to the implementation. The cluster development approach has provided a unique platform to the policy makers, facilitators, donors, Business Development Service (BDS) providers to interact with the industry and to deliver their products in a cost effective and efficient manner.

Under MSE-CDP, financial assistance is provided for preparation of Diagnostic Study Report with a maximum grant of Rs 2.50 lakh, 75% of the sanctioned amount of the maximum project cost of Rs 25.00 lakh per cluster [90% for NE & Hill States, Clusters with more than 50% (a) micro/ village (b) women owned (c) SC/ST units] for Soft Interventions like training, exposure, technology upgradation, brand equity, business development, etc, upto Rs.5.00 lakh for preparation of Detailed Project Report (DPR), 70% of the cost of project of maximum Rs 15.00 crore for Common Facility Centre [90% for NE & Hill States, Clusters with more than 50% (a) micro/ village (b) women owned (c) SC/ST units], 60% of the cost of project of Rs 10.00 crore, excluding cost of land for Infrastructure Development [80% for NE & Hill States, industrial areas/ estates with more than 50% (a) micro (b) women owned (c) SC/ST units].

The confidence building and trust building are two main pillars of building up cluster development initiatives. The initial apprehensions amongst the cluster actors about hijacking of the ideas and business opportunities get attenuated over a period of time with the confidence and trust building measures which must be integral part of the cluster development. In the present scenario of knowledge based economy, formation of consortia, self help groups, dynamic associations may yield benefits for perusing issue-based strategic interventions in the industrial clusters.

The cluster development approach and philosophy should take the industry into the realms of competitiveness. This is the only tool available to the micro and small enterprises to take on the onslaught of competitive marketing strategy of large scale sector. Keeping in view the importance and relevance of the cluster development methodology, a lot of departments and Ministries have launched various formats of cluster development programs. Though most of the programmes are sector specific, the MSE-CDP scheme addresses all the sectors of MSE clusters across the country. Nonetheless, there is a need to synchronize/ dovetail the interventions/schemes of various ministries/departments, private sector agencies, international/ multilateral agencies for synergizing the efforts and to achieve visible impact. The various schemes can be complemented to support the efforts and thus achieve multiplied tangible results.

It is very much desirable that MSEs and their collectives understand and assimilate the philosophy of togetherness, shed their apprehensions to become competitive through cluster development approach. The bargaining power of small scale units for bulk purchase of raw material, accepting large orders, sharing of surplus facilities, participating in common facility centres are possible only through the collective approach.

Proactive involvement of state government and associations is very much warranted for enhanced success of the clustering efforts. Provisioning of land for setting up of demonstration centers/ common facility centers are is one of the major issues and needs to be resolved by state governments. These associations should become champions of the cluster development approach and facilitate the SMEs in achieving the tested benefits of the cluster approach. There is a lot of scope and opportunities for interventions in innovation- based knowledge clusters as per regional/ local dynamics of economic of the enterprise development and sustainability.

After launching of the cluster mode schemes, the Ministry of Micro, Small and Medium Enterprises, has undertaken cluster development initiatives (diagnostic studies, soft interventions and common facility centers) in more than 470 clusters across 28 states and one UT (Delhi) in the country, under MSE-CDP scheme. Moreover, 124 proposals (including 29 for upgradation of existing industrial estates) have been for taken up for infrastructure development in various industrial estates/ industrial areas. 10972 plots have been allotted to small and tiny units in these projects. 37555 employment generation has been achieved.

The achievements of the Cluster Development initiatives can be explained by taking specific examples. Six Handmade Safety Match Clusters (Virudhunagar, Sattur, Kovilpatti Kalugumalai, Srivilliputtur and Gudiyatham) in Tamil Nadu were developed under MSE-CDP in the last year. These are artisan type clusters with about 2000 plus handmade safety match manufacturing units in each growth centre with employment to about 2.5 lakh people - both direct and indirect. These artisan clusters were unable to withstand the competition emerged from the mechanized players. With the active cooperation and support from Government of Tamil Nadu, 6 consortia were constituted by groups of likeminded entrepreneurs; each group having 25 to 35 members. The cluster mechanism evolved has created a synergy among safety match clusters under community movement to scale up their operation. The highlights of safety match clusters are: Started creating employment opportunities in the hinterland; Six consortia created a Common Brand in the name of United Match; Launching a common web-site; Created a Common Raw material Bank with the support of Tamilnadu Government with a cost advantage of 25%; Backward integration; R & D for manufacturing of sulfur free match and Common processing method and uniform quality.

In another cluster development initiative for Brass and German Silver Utensils Cluster (500 micro units), Pareb, Patna, remarkable results have been achieved after soft interventions and setting up of a common facility center. Turnover of the cluster has increased to almost three times from Rs 23.50 crore in 2004-05 to Rs 69 crore in 2008-09. Energy cost for scrap melting has been reduced substantially. The employment in the cluster has increased from 4000 to 5000 in the post intervention period.

The guidelines of the MSE-CDP were revised in February 2010 with enhanced funding and simplification of procedures. With increasing awareness among various stakeholders including State Governments, the scheme is poised for a big leap in the near future. In the next financial year, 60 clusters will be undertaken for soft interventions including diagnostic study. 12 new infrastructure development and 8 new Common Facility center project will also be covered, apart from continuing support to the ongoing projects. (PIB Features)