India’s rebound from the Covid-induced economic setback will be led by its micro, small, and medium enterprises (MSMEs). Policymakers—particularly at the state level—must redouble efforts to create a supportive regulatory regime to unlock the promise of MSMEs. A well-crafted Cluster Development Policy can provide such an impetus. It will equip these enterprises to rise to the changing demands of the global and domestic markets and ensure sustainable recovery in the face of future economic shocks.

Clustering is a grouping of enterprises providing similar or related products and services. In India, MSME clusters have evolved naturally over time. However, in 2006, the Government of India (GoI) formulated the cluster development policy by subsuming all other existing policies to bring all clusters under its ambit. Since then, the number of such clusters has gradually increased. The renewed government focus on clusters is reflected in the MSME ministry's recently revised cluster development programme, which has expanded the focus on common facility centres (CFCs) and infrastructure development (IDs) projects. Also critical is the increased focus on technology centres as apex institutions to support cluster integration and skill development.

This suggests that if MSMEs are growth engines, clusters are the oiling mechanism that propels this engine forward. It allows small businesses to become more competitive by achieving economies of scale through the collectivization of resources which assists in increased productivity for cluster members. Such pooled resources and logistics support also enhance product innovation and skilled resources' availability. While the government recognizes the need to develop these clusters further and harness their full potential, there lie certain challenges in the current framework. To name a few:-

* The inability of the current policy to distinguish and target the manufacturing and service sectors separately basis their requirement.
* Absence of a suitable monitoring mechanism to ensure that the established clusters are operating at full capacity. Currently, the monitoring mechanism is limited to the complete construction of CFCs & IDs.
* More focus on hard interventions over soft interventions for cluster development and non-integration of clusters with key drivers like transportation services, network providers, and financial institutions as part of common facilities.
* Marginal groups are left outside the ambit of the cluster policy.

Whereas challenges like trust deficit between cluster players require local mediation, the remaining can be addressed through suitable policy interventions. Globally, clustering has proved to be an effective strategy in developing this sector and leveraging regional specializations for cluster formation. For example, in Brazil, there is a focus on cluster formation basis natural resource availability, whereas Italy focuses on regional specialization.

India has also adopted the strategy of capitalizing on local resources and regional specialization, as seen in the “One Station, One Product” scheme announced recently in Budget’2022. The scheme’s aim to promote one local product from each stop of the Indian Railways will provide an enabling ecosystem by creating a single platform for these products in terms of marketing and supply chain logistics. This scheme is in line with the “One District, One Product” scheme announced initially by the Uttar Pradesh government. It is essentially a mini-clustering initiative to deploy local resources and local employment for the development of the district. Through this scheme, the district can attract capital investments, subsidies, credit-linked grants, initial seed funding and get support for branding, marketing, and training. These government initiatives signal the rising acceptance that the clustering of these small firms helps realize gains not just for the sector but also for the entire geography.

These gains can become substantial through a slew of targeted policy interventions, primary of which is complete mapping of existing clusters. This will help identify the sick clusters for revival and also help decide regions for the promotion of induced and newer clusters. For small business clusters to thrive, two aspects are key:
* Increased production levels, and
* Quality of end products in line with international standards.

This will help the enterprises to successfully place their products and services in the global value chains, which can be made possible only through suitable monitoring, quality and benchmarking mechanisms. The central policy also needs to be complemented by an effective state policy as the states are more conversed with the nuances of the diversity in these small industries.

Strengthening our domestic industries will make India self-reliant and make the vision of an “Atma Nirbhar Bharat” come true. In this context, the spotlight on developing clusters for pioneering our small businesses gains further significance and relevance. With the required and renewed nudge of policy support, small business clusters will essentially leverage the collective might of these MSMEs.