A cluster is a sectoral and geographical concentration of enterprises, i.e. Micro, Small and Medium Enterprises, manufacturing same or related products facing common opportunities and threats."Sectoral and geographical" means physical presence of a number of enterprises at one place or within a small radius say 5 kms.  Examples may be Balanagar Fan Cluster, Hyderabad;Graphite Crucible Manufacturing Cluster, Rajahmundry;Granite Processing Cluster at Cheemakurti, Ongole etc.  The clusters can give rise to the emergence of specialised suppliers of raw materials, machinery and spares, human skills, product related services etc.  For example the Balanagar Fan Manufacturing Cluster has created a path for ancillary raw material and component manufacturing units in a big way.  The presence of the cluster gives way to create a conductive ground for the development of inter-firm co-operation and specialization as well as cooperation among public and private local institutions to further promote the sector.

Although the critical mass or number of enterprises required for effective intervention may vary from cluster to cluster, the number of manufacturing/ servicing enterprises in a cluster should not normally be less than 20.  The geographical bound may constitute a mohalla, village, block and a combination of villages or blocks and even a smaller district/UT easily administrable under the programme,may also qualify as a cluster.  Clusters, however, do not involve and complete industry or a sector.  Clusters must not be equated to an Industrial Park.

Essential Characteristics:

The essential characteristics of enterprises in a cluster are:

i) Commonality in the methods of production, quality control & testing, energy conservation, pollution control etc.
ii) Same level of technology and marketing strategy/practices.
iii) Presence of active channels for communication among the members of the cluster and
iv) Common challenges and opportunities.
The players involved in a cluster essentially include the firms that make up the cluster related products/services,private and public service providers, research and development establishments/institutions, entrepreneur groups, large enterprises, financial institutions & banks, NGOs, central/state/local governments and related bodies.
A person who conceptualises the overall development strategy for a cluster and initiates its implementation is a Cluster Development Agent (CDA)or Cluster Development Executive (CDE). He also acts as a liasioning officer between various cluster players/actors and target cluster. The CDA/CDE plays the most vital role in a Cluster Development Programme.
Advantages of a Cluster Approach:
At the individual firm level it helps to overcome disadvantages of economies of scale and weak capital base and enhance competitiveness by leveraging the advantages of flexible structure and faster decision making process. At the cluster level, as a whole, it facilitates to face market challenges, quicker dissemination of information, sharing of knowledge and best practices, better cost effectiveness due to distribution of common costs and wider public appropriation of benefits. The cluster approach provides an effective and dynamic path for inducing competitiveness by ensuring inter-firm cooperation through networking and trust. The geographic proximity of the enterprises with similarity of products, interventions can be made for a large number of units that leads to higher gains at a lower cost, which in turn helps in their sustainability. The cluster approach thus aims at a holistic development covering areas like infrastructure, common facility,testing, technology & skill upgradation, marketing, export promotion etc. This may be designed to cover industrial estates as well as natural clusters located at any place.
Process of Cluster Development:
The Ministry of Micro, Small and Medium Enterprises (MSME) has laid special emphasis on development of clusters in 1998 through a scheme know as Technology Upgradation & Management Programme (UPTECH). It was focussed mainly on technology. In August 2003 the scheme was renamed as Small Industry Cluster Development Programme (SICDP) adopting holistic approach of development of clusters comprising of marketing, exports, skill development, technology upgradation, setting up of common facility centers, testing, quality control etc.
The interventions implemented till March 2006 consisted mainly in "soft" areas with activities like diagnostic studies, trust building, capacity building, training & councelling, market development etc.  The hard interventions directed towards assistance in technology upgradation, testing, quality standardisation in the form of Common Facility Centers (CFCs) needed to be suitably incorporated.  Keeping this in view the SICDP guidelines were comprehensively revised in March 2006 making the Cluster Development Programme more broad based.  The Government of India's assistance under the scheme was enhanced upto Rs.8 crores to support "soft" as well as "hard" interventions including setting up of common facility centres.  Normally the hard interventions are made after a cluster achieved substantial maturity through a series of "soft" interventions.
Salient features of SICDP, now called MSE-CDP, are:
  • Diagnostic study - emphasis on all aspects for the overall development of cluster

  •  Forming Associations - trust building & developing identity

  • Workshops, Seminars, Awareness Campaigns, Training and Study visits

  • Common purchase at lower costs

  • Re-sourcing of better technology

  • Technology transfer through training/demonstrations

  • Apportion different aspects of production among units - leading to specialization

  • Setting up of Common Facility Center (CFC), Mini Tool Room,Testing Lab,   Design Center, Common Raw Material Bank

  • Common/complementary sales and branding

  • Easier Credit - use of Micro Finance/Credit Guarantee

  • Handholding support in general

Selection of Cluster(s):
Detailed study of the features of the clusters with due care and application are essential prerequisites for selection of a cluster of the right type. The criteria may vary to some extent depending on the type of clusters and the goals sought to be achieved through the cluster development initiatives. However, broadly, the following illustrative aspects should be kept in view:
  • Importance of the cluster(s) in terms of number of units, employment, production, exports etc

  • Existence of critical gaps in technology, product quality, common facilities, skill upgradation, availability of raw material, marketing support, etc.

  • Viability of the cluster

  • Vibrancy of local industry association and/or interest evinced by other institutions engaged in development, financing and MSME promotion in development of the cluster.

  • Social and environmental considerations like gender inequalities, poverty conditions, need for employment generation, pollution scenario etc

Cluster with sizeable presence of
(i) women entrepreneurs
(ii) entrepreneurs belonging to the disadvantaged section of the society like the SC, ST, Minorities etc. and
(iii) micro enterprises as such could be given preference, other things being equal,during selection of clusters under the programme.
Implementing Agencies:
In addition to the SPVs of cluster beneficiaries, institutions/agencies of the following categories will also act as implementing agencies:
  • State Govts. (DICs,other autonomous bodies); Central Governments (MSME-DIs etc.) or others (National and International Institutions / Society / NGO);

  • In case the implementing agency is not the State Government or its organization, the agency will also need to necessarily come through the State Government;

  • For select interventions, Business Development Service (BDS) providers can be engaged (for identifying technology gaps,developing markets and export linkages).