Feasible Cluster Development Model: Perspective for Development of Micro and Small Enterprises in India

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

New Delhi, May 10, 2011 (Washington Bangla Radio / PIB-India) As far as competitiveness of products of Indian Micro and Small Enterprises vis-à-vis cheaper imported products is concerned, strong clusters based on common viewpoint and common work-plan may be the practical solution.  Cluster development initiatives give rise to external economies like specialized suppliers of raw material, components and machinery, sector specific skills, etc., favours the emergence of specialized technical, administrative and financial services, creates a conducive ground for development of inter-firm cooperation and specialization as well as cooperation among public and private institutions for collective production, innovation and learning.

Micro and Small enterprises constitute major segment on Indian industry. They are observed to follow the co-optive behaviour in terms of cooperating on some fronts such as establishing common facility centres, common branding and marketing, etc. and simultaneously competing with each other in terms of open market sales, hiring of workforce, information sharing, etc. A cluster has to be visualized as possessing both hardware and software. The social capital (or software) which can be described as a complex sum total of various relationships that exist among different stakeholders of the cluster. Social capital as software governs what and how different cluster actors will cooperate with each other or compete with each other. The effective results of hardware installation and implementation can only be achieved through rich social capital in the cluster. The Cluster Development Agent may play a critical role in creating social capital in the clusters.

Every cluster is unique in terms of its given set of problems, dynamics of stakeholders, implementing agencies, social capital, product life cycle, etc. artisan cluster have different characteristics than manufacturing cluster or service sector clusters. No specific model can be suggested for all the clusters. To know the problems inhibiting the growth of the cluster, the most important tool is to conduct a diagnostic study. Diagnostic Study Report (DSR) is very important document and the study should be conducted with special attention. The Study should focus on enhanced competitiveness, technology improvement, adoption of best manufacturing practices, marketing of products, employment generation, quality improvement, environment compliance, etc. There has to be direct linkages between the problems highlighted in the report and the measures suggested for improvement. The problems and issues of the clusters vary depending upon the size of the cluster, level of trust building, product lifecycle, vibrancy of the association, presence of developmental institutions, policy environment, socio-economic milieu, etc. It would be worthwhile to understand the classification and emerging issues confronting the cluster development. The clusters may be classified in a number of ways which include:
·     Number of Units: The clusters may be classified as small clusters or large clusters depending upon the number of units.
·     Size of units: Micro or Small or Medium units cluster as per definitions prescribed in MSED Act 2006.
·     Sector of products: Food, Plastics, Chemicals, etc
·     Service Sector Cluster or Manufacturing cluster or Artisanal cluster depending upon nature of activities in the cluster
·     Vertical Cluster or horizontal cluster depending upon value chain and integration with other units in the cluster
·     Value addition (High value additions or Less value addition)
·     Clusters may also be classified as exporting clusters or non-exporting clusters.
·     Based on entrepreneurs: Women or Men or SC or ST or Minorities cluster.

Though so many clusters evolved and existed in the country since ages, the Abid Hussain Committee (An Expert Committee on small enterprises) report (1997) drew attention of the policy makers to industrial clusters. The Study Group on Development of Small Scale Enterprises under the Chairmanship of Dr. S.P. Gupta, Member, Planning Commission also emphasized on promotion of clusters through policy initiatives and fiscal support. The Ministry of MSME launched cluster mode programme ‘Integrated Technology Upgradation and Management Programme (UPTECH)’ in 1998, renamed it as Small Industries Cluster Development Programme (SICDP) in 2003 making it more comprehensive by including setting up of common facility centres, and further renamed as Micro and Small Enterprises – Cluster Development Programme (MSE-CDP) in October 2007. Keeping in view the importance of cluster development initiatives, various ministries and departments of Government of India and state governments have launched cluster development programmes for the benefit of micro and small enterprises. Separate budget provisions have been made in various ministries and state governments like Gujarat, Kerala, UP, etc.

Emerging Issues

The implementation of the cluster is the collective effort of the cluster actors, state governments, stakeholders, donors, policy makers, etc.  There always have been some issues which slow down the implementation of cluster development initiatives. Some of the emerging issues include:

Inordinate delay in forming SPVs: Most of the cluster development initiatives are implemented by Special Purpose Vehicles (SPVs). An SPV could be a company under Section 25 of Company Act 1956, a Trust or a Society (registered under Indian Societies Act 1860). It has been observed that group(s) of SMEs take a very long time in forming SPVs. The delay may be because of leadership issues, bitter competition amongst themselves, lack of consensus on scope of cluster development initiatives, etc. The remedial measures in this regard is to sensitize the concerned group on the benefits of cluster development programmes, trust building, conflict resolution by the cluster development agents or the implementing agencies.

Delay in Allocation of Land and Building: In most of the cluster development initiatives, the land and building is not supported by the Government of India funds. Land and building have to be provided / arranged by the SPV or concerned State Government. Land is a scarce commodity and generally not available easily. Moreover, the cost of land is increasing day by day. Thus, there is a lot of delay in setting up of common facility centres etc. because of delay in availability of land and building.

Non-Availability of BDS Providers: There is an acute shortage of the domain experts (Business Development Service Providers) particularly in the field of consortium formation, brand building, marketing, low cost automation, etc. The shortage in context of SME sector is also because of the lack of capability to pay the high fees / charges for the appropriate experts.

Inefficient Associations: Micro unit or artisanal unit clusters generally do not have formal collective bodies for furtherance of their concerns. Artisans are generally busy in their day to day work as all the processes are to be accomplished by them and thus cannot spare time for collective activities. The remedial measures for this problem have been incorporated in most of the cluster development initiatives by way of strengthening/ capacity building of associations so that they can take up collective programmes for the benefit of the clusters.

Scope of Cluster Development Initiatives: The problems of the clusters can be broadly categorised in two categories. The first category deals with the regulatory and fiscal issues like taxation, inspector raj, environment compliance, etc. The second category deals with the functional aspects relating to technology, quality control, management of the unit, brand building, marketing, etc. The second category can be taken care of by the cluster development initiatives. However, the entrepreneurs are more concerned about regulatory and infrastructural initiatives which are beyond the scope of cluster development initiatives. 

Lack of Coordinated Approach: Cluster development initiatives give the desired results only when pursued and implemented in a missionary mode. The casual approach by some of the associations, lack of coordinated approach, multiplicity of programmes and agencies, wrong selection of cluster development executives are some of the factors which inhibit the performance of the cluster development programme.

Lack of Reporting and Documentation: Most of the associations/SPVs/ implementing agencies are not reporting the progress of the initiatives. Lack of feedback and documentation create hindrances in improving the programme.

Less Cross-Cluster Lessons: Various agencies are implementing cluster development initiatives. Some agencies have already implemented the initiatives in more than one similar product cluster. There is low level of intra-cluster experience sharing at the level of clusters and also at policy makers’ level. The lessons learned should be made available to the relevant clusters for corrective measures in advance.

Performance Indicators

It is much more important to devise the method of monitoring the performance of cluster development initiatives. The objectives of the cluster development should be clearly stated in tangible and as well as intangible terms. The performance indicators should be debated with the cluster actors, various stakeholders and be finalized before starting the cluster development initiatives. The monitoring may be scheduled to be carried out at regular intervals of six months or one year, by internal team or by an independent agency. The more important issue is to take corrective action during the implementation of the cluster development initiatives based upon the lessons learnt and on the basis of monitoring and feedback from the cluster actors. Graphical presentation of the progress on various parameters may be a handy evaluation tool for cluster development initiatives. Professional agencies should be encouraged/ supported and engaged for continuous monitoring, providing feedback for revising the action plan right from the first year onwards during the interventions. A constant dialogue with end users is very much necessary for effective monitoring.  A reference list of performance indicators, which should be reported before, during and after the interventions, is given below:


·     No. of units: (1) Registered (2) Unregistered
·     Turnover of the cluster
·     Export of the Cluster
·     Employment in the cluster
·     Trained manpower in the cluster
·     Investment in plant and machinery in the cluster
·     New/ innovative products by the cluster
·     No. of units having ISO/CE/ISI / 5S/ 6 sigma certification
·     No. of units having IPR registration
·     Quality perception of the products of the cluster
·     Rejection rate of production of most of the units
·     Productivity of units
·     Participation by units in International Trade Fairs
·     Diversification/ New Machinery/ technological upgradation by cluster units
·     Website/e- marketing (number of units)
·     Number of Active Associations: Meetings in a year; Newsletter; Common Website; Others
·     Common initiatives like common procurement, common marketing, common consultants, consortium for brand equity, Common effluent treatment plant, CFC etc.

Vision of Cluster

The cluster actors need to visualize their success path, build a vision and then draw an action plan towards achievement of targets based on vision statement. Understanding the fundamentals of cluster competition is a critical precursor to identifying interventions. An appropriate validated plan needs to be necessarily evolved for each product mix in a cluster or the supply chain along lines of vision.

Feasible Model for Cluster Development

The feasible model for cluster development may adopt a multi pronged approach as follows:

Develop Cadre of CDAs: The availability and presence of dedicated Cluster Development Agents (CDAs) in cluster to steer the programme of cluster implementation is vital to the development of the cluster. CDA is the harbinger of change in the cluster. She/he needs to be proactive, dedicated, aware of the problems of the cluster, preferably from the cluster and professionally qualified in cluster development methodology.  The district level institutions or Panchayati Raj institutions may be involved in this process because of their presence in the field and linkages with industries.

Develop Cadre of BDS Providers:  Integrated Strategic Business Development Service Providers (BDS) who will help in developing the basic arithmetic as also facilitate employment of hardware development plan are very vital for the success of the cluster development initiatives. They may also help evolve and support networking or consortia of small enterprises on various fronts for common purchasing, common marketing, branding, quality improvement, lobbying, setting up of common facility centres, accounts, etc. The policy makers and other stakeholders may be required to contribute for development for BDS providers in the initial phase in the underperforming clusters.

Evolve Certain Fiscal Incentives. The cluster development initiatives are required to be given some push by the government, associations and other developmental intuitions.  The Top-down approach can be utilized for fiscal support for activities like creating awareness, social capital, capacity building, establishing common facility centres, etc.

Entrepreneurship development training programmes may be organized. This will help in creation of additional enterprises which would be required with the growth of cluster.

Promoting and setting up of mutual credit guarantee schemes in various clusters. The credit is the most important requirement for units in any cluster. Funds are required for technological upgradation and also for working capital to meet the larger orders, which may be feasible with cluster development initiatives. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme which is operated by SIDBI for providing collateral-free loans should be encouraged. Preferential loans should be provided for MSE units by financial institutions.

The clusters should be supported for international benchmarking studies of competitive approach to expose the cluster actors to higher value addition items. The bitter competition amongst the cluster actors may also be reduced if they start catering to overseas markets.

Setting up of information hub in the clusters. Lack of information of supplier clusters, equipment and processing technology information changes etc. severely affects the performance of the cluster. This activity may be taken up by BDS providers of some initial support by stakeholders. Special awareness programmes on Government of India and other relevant schemes should be organized in the clusters, particularly for MSEs.

Handholding Support: Some professional project management service provider to guide the MSEs for formulation the proposals should be encouraged. This is particularly important in the clusters where most of the units are of micro nature and associations are not active.