CLUSTER FINANCING

Definition of Cluster in the Indian Context

Clusters can be defined as Sectoral and geographical concentration of enterprises, in particular Small
and Medium Enterprises (SME), faced with common opportunities and threats which can:
a. Give rise to external economies (e.g. specialized suppliers of raw materials, components and
machinery; sector specific skills etc.);
b. Favour the emergence of specialized technical, administrative and financial services;
c. Create a conducive ground for the development of inter-firm cooperation and
specialization as well as of cooperation among public and private local institutions to
promote local production, innovation and collective learning.

Importance of Clusters in the Indian Context

With a contribution of 40% to the country's industrial output and 35% to direct exports, the Small and
Medium Industry (SME) sector has achieved significant milestones for the industrial development of
India. Within this sector, an important role is played by the numerous clusters that have been in
existence for decades and sometimes even for centuries. India has the richest diversity of clusters. The
clusters are categorized as:
 Artisanal Clusters
 Industrial Clusters

The products covered by artisanal clusters include textile, handlooms, handicrafts, woodcrafts, metal and
stone crafts, jewellery, leather, pottery & clay, etc. The industrial clusters include processed food, rice
milling, readymade garments, terry towel, wet grinder, engineering, machine tools, handtools, foundry,
brass parts, rubber and pharmaceuticals cluster.

There are more than 6500 industrial, artisan and micro enterprise clusters2. These clusters represent the
socio economic heritage of India, where some towns or villages are known for a specific product for
decades and centuries. It is estimated that these clusters contribute 60% of the manufactured exports
from India. The clusters in India are estimated to have a significantly high share in employment
generation.

Cluster Development Initiatives in India

Several institutions in India have taken up Cluster Projects besides various government initiatives. They
have been involved in promoting Small-Scale and Cottage Industries, and Regional Cluster
Development by removing policy impediments; financial support; technology, skills and quality
upgrading; market support and improving links between small and large firms. Some of the institutions
working in this area are:

Central Government
 SICDP Cell, Development Commissioner (SSI), Ministry of Small Scale Industries
 National Small Industrial Corporation Ltd (NSIC)
 Development Commissioner (Handicrafts), Ministry of Textiles
 Department of Science & Technology, Ministry of Science & Technology
 Textiles Committee of India, Ministry of Textiles
 Khadi and Village Industries Commission (KVIC)
 Coir Board
National Support Institutions
 Small Industries Development Bank of India (SIDBI) Technology Upgradation Programme
 State Bank of India (SBI) UPTECH Programme
 National Bank for Agriculture & Rural Development (NABARD)

International Agencies
 UNIDO
 MSME
 WASME

SOME SME CLUSTERS COVERED BY EXISTING

SIDBI BRANCHES
Sr. Branch No.of SSI Product
No. Offices clusters
1 Hyderabad 5 Ceiling Fan, Electronic Goods, Pharmaceuticals- Bulk Drugs,
Hand Pump sets & Foundry
2 Patna 1 Brass and German Utensils
3 Delhi 19 Stainless Steel Utensils & Cutlery, Chemicals, Electrical
Engineering Equipment, Electronic Goods, Food Products, Leather
Products, Mechanical Engineering Equipment, Packaging
Material, Paper Products, Plastic Products, Wire Drawing, Metal
Fabrication, Furniture, Electro Plating, Auto Components,
Hosiery, Readymade Garments, Sanitary Fittings
4 Ahmedabad 17 Pharmaceuticals, Dyes & Intermediates, Moulded Plastic Products,
Readymade Garments, Textile Machinery Parts, Diamond
Processing, Machine Tools, Castings & Forging, Steel Utensils,
Wood Product & Furniture, Paper Products, Leather Footwear,
Washing Powder & Soap, Marble Slabs, Power Driven Pumps,
Electronic Goods, Auto Parts
5 Surat 4 Diamond Processing, Powerloom, Wood Product & Furniture,
Textile Machinery

Most of the clusters in India have similar characteristics and obstacles faced by them. To study the
nature and issues of various clusters in India, we will go through the conditions of Jalandhar and nearby
areas forming a cluster which is world-wide famous for high quality sports goods and other related
goods.

Sports goods industry of Jalandhar

Jalandhar acquired importance during the Mughal period. Twelve Muslim bastis (clusters of houses)
came into existence including Basti Danishmanda, Basti Guzan and Basti Nau, which are now dominant
centres of the sports goods industry. Basti Nau has one of the biggest sports goods markets as well.

Industrial production of sports goods began on a small scale during the late forties. Over the years, the
sports goods industry has grown at an impressive rate and of late Indian sports goods are also exported
to different countries. Rough estimates suggest that today Jalandhar has more than one hundred major
industries and about 20,000 small-scale industries with a most conservative estimate of an annual
turnover of approximately Rs 450 crores.

In Jalandhar, about 60 per cent of the sports goods that are manufactured comprise of different kinds of
inflatable balls. Besides inflatable balls, the other sports goods that are largely manufactured are
badminton racquets and shuttle cocks, cricket bats and balls, different kinds of gloves and protective
equipment.

In Jalandhar, three kinds of establishments are usually found:

i. Big establishments: These are generally geared to exports besides catering to the domestic
market.
ii. Small establishments: These usually manufacture sports goods for the domestic market. Both the
big establishments as well as the small establishments are registered either under the Factories
Act, 1948, or under the Shops and Establishment Act of the state of Punjab.
iii. The unregistered units: These are found particularly in the urban pockets of Jalandhar. These
units are mostly small home-based units which are usually run by the family members, but at
times with the help of a couple of hired employees. These units do not have a direct access to
market. It has been seen that many a times when the big establishments - especially exporters -
are not able to cope with large orders from their foreign clients, distribute a share of the
production to these small unregistered, home- based units.

Main issues and challenges faced by the Indian clusters are:

 Lack of skilled manpower

 Competition from other states/clusters/country
 Taxes and octroi levied by the government
 Fluctuating/increasing prices of raw materials
 Arranging finance of working capital
 Adequate power supply
 Lack of technology know how
 Inadequate knowledge sharing / upgradation
 Red tapism and bureaucracy
 Opposition by locals

D&B-SBI SME Cluster Series 2009 – Jalandhar draws insights from various SMEs operating in the
three sectors, with the objective of providing an update on the present status and structure of the
Jalandhar cluster in terms of key industries. It also highlights the strategies and attributes of the SMEs
operating in these industries, discusses the existing and future technology scenario with regards to the
Jalandhar Cluster and comments on the future growth prospects of the cluster.

Jalandhar SME Cluster: An inter-industry comparison

Parameters Sports Goods Rubber Goods Leather

Revenue 26% of companies with 44% of the companies with 40% of the companies with
classification of revenue between Rs 10 revenue between Rs 10 mn revenue between Rs 10 mn
surveyed companies mn to Rs 50 mn to Rs 50 mn to 100 mn
Types of machines • 57% Semi Automatic • 74% Semi Automatic • • 55% Semi Automatic •
 • 31% Manual • 7% Manual • 4% 15% Manual • 5%
used
12% Automatic Automatic Automatic
Average Capacity 60% (Among the 63% (Among the surveyed 80% (Among the surveyed
Utilisation surveyed companies) companies) companies)
Top 2 drivers for • Increasing productivity • • Vendor’s demand •
• Increasing productivity
technology Bringing in efficiency & Bringing in efficiency &
• Vendor’s demand
upgradation streamlining production streamlining production
Top 2 hindrances in
• Power Cut • Costly • Power cut • Costly • Power cut • Government
technology
Technology technology policies and regulation
upgradation
Major obstacles
• Collateral requirement •
faced in applying for Collateral requirement Access to long term loans
Paper work
loans
Main driver for
Meeting working capital Meeting working capital Meeting working capital
availing loans in
requirements requirements requirements
future
Top 2 issues and • Inadequate power supply
• Inadequate power • Inadequate power supply
challenges faced in • Lack of government
supply • Taxes & octroi • Taxes & octroi
the cluster incentives
Growth prospects Between 11% to 20% or Between 11% to 20% or Between 11% to 20% or
over the next five above 20% over the next above 20% over the next 2 above 20% over the next 2
years 2 years years years

Finance Arrangement and Uses by Clusters

D&B has conducted a survey to understand the mode of finance and the fund requirement of different
clusters operating in India. The survey also tried to find the difficulties that companies faced while
availing loans. According to the survey results, around 41% SMEs found loan availability to be
moderately difficult and 32% felt that loan availability was easy. Further, banks were found to be the
primary source for the SMEs’ credit requirements in the survey. In fact, when these some clusters faced
a credit crunch in recent times, banks supported them and helped them restructure their then-existent
term-loans. The nationalized banks are the most preferred choice in terms of sources of funds; 89% of
the surveyed companies chose to go to these banks for their finance needs. Moreover, 83% companies
were satisfied with the services provided by their existing banks.
 Credit Usage Analysis (% )

30 27 28 26
23
25 21
18 18
20 14 Last 3 years
15 10
7 Next 3 years
10
5 2 2 2 2
0

Diversification
Maintenance
Expansion
requirements

Machinery

raw materials

Others
Meeting WC

Purchase

Purchase of
Business

Machinery

Source: Survey results

Note: The percentage of credit requirements are calculated on cumulative basis

In the last three years, 45% of the SMEs availed loans but in the next three years, 53% SMEs plan to
take loans, revealed the survey. In the last three years, these SMEs availed loans mostly for their
working capital requirements (27%) as apart from meeting their working capital requirements, they also
had to ensure sufficient cash flow for their short-term debt and operational expenses. In the next three
years, majority of the survey companies plan to seek loans for meeting their working capital
requirements and for business expansion.

Interest rates and time taken for loan approval continues to be major hindrances for companies operating
in the cluster.
Obstacles while applying for loans

Access to short-term loans 1.59

Paperwork 1.61

Access to long-term loans 1.67

Collateral requirements 1.83

Time taken for approval of loan 2.09

Interest rates 2.16

0 0.5 1 1.5 2 2.5

Source: Survey results

Note: 1 denotes “not an obstacle at all” and 2.5 denotes “major obstacle”

Conclusion
The experience of Indian clusters shows that knowledge and information sharing are mostly informal
(and that too within narrow caste groups). Formal component which caters to strong linkages of
academics with industries is missing, which on the contrary is a strong feature of German and Italian
models of innovation. As a result, in the Indian case, information acquisition regarding the latest
developments in a particular field is wanting. Work sharing is not seen in the clusters, as it is a fight for
the same customer and in the same market. And as most of the clusters are created for production related
issues such as, procurement of raw material, maintenance and corrective actions, the marketing related
issues are seldom dealt with. The marketing related issues are the real differentiators between a
multinational company and the SMEs entrepreneurs.

With the creation of clusters, the SME entrepreneur can compete with the multinational companies on
the issues of quality and other production aspects. But when it comes to capturing the market, the
multinational companies (MNCs) are far ahead of the small-scale entrepreneurs. With the marketing
muscle the multinational companies take away the market share from the small-scale entrepreneurs.
Thus, these clusters do not really serve the wider purpose as they do in Italy and Germany, i.e. Indian
clusters are not united to meet common marketing challenges (except in Gems and Jewelry). This is one
of the reasons of success in the case of Italian model where every thing from raw material to marketing
is taken care of by the consortia. The creation and use of specific data bases from production to
marketing lacks in the Indian situation.

Units are connected/dependent on each other through several areas of activities such as:
a) manufacturing/production requirements for example supply chain (component makers and
assemblers), common testing facilities etc. b) collective buying and selling e.g. raw material
procurement, common marketing etc. c) knowledge generation, sourcing (from outside the cluster), and
sharing take place within the cluster. It is observed that the ‘industrial cluster’ has in addition to
enterprise units, units that perform the role of establishing linkages including those related to
knowledge. For example in Germany, Aachen Technical University is a unit within the cluster for
knowledge generation and sharing; and in Gujarat, the
Rajkot Engineering Association in case of Diesel Engine Cluster or the CGCRI unit in case of Ceramic
Industrial Cluster also perform this function of knowledge sourcing and sharing. In the Italian case, the
Consortia and the Science and Technology Parks perform this role.

It is concluded out that for a cluster to be successful, out of all the activities as mentioned above,
knowledge sharing through linkages and networking is central to technological change and innovation
and to be competitive in the market. However, networking for formal and constant sharing of new
knowledge and skills is very poor and cannot bring in required innovations, hence cannot survive
competition for a long time.

Exploitation of all knowledge resources including international, national and local (to capture the tacit
dimension), through networking with the help of information technologies has been recognized as the
prime factor for integrating local knowledge with globally available for attaining competitive edge. In
India, although academia industry linkages have begun to emerge in various clusters, but India needs
further large scale commitment and action on the lines of Consortia and conglomeration of SMEs in the
form of clusters as in Italy and strong linkages between the academia and the enterprises in Germany.

The UNIDO studies reveal that policy intervention for SMEs can be particularly effective when it is
based on the “Triple C” which stands for Customer oriented (forces the firms to tackle their key
problems of competitiveness), Collective (as this decreases the transaction costs and helps generate
relationships for mutual learning) and Cumulative (as this increases the capacity to upgrade and become
less dependent on support from outside). This can be extended to an additional C, that of Context-based.
It is very essential for policies to be designed in milieu of the business and cultural context prevailing in
a cluster. This study found instances that in the process of aiming ambitious goals for the cluster
development, projects often failed to take into cognizance the operating environment.