Creating competitive edge
through industrial clusters
India has several strong
clusters, which can be made
globally competitive
Textiles, gems and jewellery,
chemicals, engineering
goods, agricultural and
leather products account for
83 per cent of the clusters
in the country and together
constitute 88 per cent of
India’s exports
Industrial clusters are indispensable to rapid economic
development; eight steps can improve the competitiveness
of clusters in India
R egional economies thrive when they encourage the growth of industrial clusters,
which are high concentrations of specific industries and interdependent firms.
This conforms to the established theory of comparative advantage that no nation—and
certainly no region—can be outstanding at producing everything and, consequently,
it is best to attract industries that will gain natural comparative advantages by locating
in the region.
Clusters are self-perpetuating—till a substitute region or product displaces the
competitive advantages. They grow through manufacturing competitiveness, which is
gained through the shared facilities and common infrastructure such as labour pools,
repair shops and waste management plants. The shared facilities decrease overheads
and also reduce entry barriers. Clusters also encourage the formation of associations
and other forums for knowledge sharing, networking and collective bargaining.
The associations fuel entrepreneurs by facilitating technology transfer, capital
formation, and business development.
The knowledge base in clusters is rarely documented and is not easily accessible
outside the cluster, although it is adequately disseminated within it. This results in
constructive competition and constant improvement in manufacturing practices.
Industries harnessing the region’s competitive advantages and the facilities offered
by the clusters, become globally competitive and ultimately the entire economy
grows exponentially.
The US and Europe have designed programmes to leverage this phenomenon.
Focusing on cluster-led development for a comparatively longer period, the US has
an edge over European countries (Table 1).
Most successful clusters have benefited from interventions such as institutional
support, tax breaks and fiscal incentives, stable policy, and infrastructure support
from the government. India has several strong clusters, which can be made globally
competitive with such support.
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India’s clusters are strong but not

globally competitive
Industrial clusters are spread across India but predominate in the north and west,
with these regions accounting for 67 per cent of total cluster locations and
80 per cent of all clusters in the country (Table 2). Strengths have been established
in textiles, gems and jewellery, chemicals, engineering goods, agricultural and leather
products, which account for 83 per cent of the clusters in the country and together
constitute 88 per cent of India’s exports.

However, though strong, India’s industrial clusters are not globally competitive.
This is true even for the more established clusters. A case in point is textiles and
clothing, which have been contributing about 27-30 per cent of India’s export trade.

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Despite the existence of clusters in Tirupur, Ludhiana, Jaipur and other centres,
India’s share of world garment exports is just about 3 per cent compared to China’s
18.5 per cent and Italy’s 6.7 per cent.

Strengthening industrial clusters in India

Combining international precedents with insights gained from studies on cluster
competitiveness and representations of industry associations, CRISIL Infrastructure
Advisory has identified eight regional and country-level interventions to help
strengthen India’s clusters. These correspond to the main inputs needed to ensure
cluster competitiveness (see Chart: Creating competitive clusters).

Create centres of excellence to improve clusters’ performance

Centres of excellence can focus on developing products, identifying new
technologies, providing information support and increasing productivity within the
clusters. The National Institutes of Fashion Technology (NIFT), Central Glass and
Ceramics Research Institute, Central Leather Research Institute and Footwear Design
and Development Centres are good examples. However, these institutions need to
be integrated with existing clusters. For instance, a link between clusters in Tirupur
and Ludhiana and NIFT is needed to provide manufacturers with innovative designs.
Similar institutions for research in jewellery cutting and polishing and advanced
engineering goods need to be established, preferably by industry associations.

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Centralise cluster development responsibility in a nodal agency

Barring research centres, all organisations and outfits supporting industrial
development need to be integrated into a single body. As a case in point, more than
five organisations provide assistance for upgrading technology including NSIC, SIDO,
SISIs and RTCs,1 apart from the sector-focused institutions. Similarly, over eight
organisations provide technical training. Such multiplicity leads to a lack of focus and
accountability. All services offered such as training, market information, technology
and entrepreneurship, should be concentrated near the cluster. The nodal agencies
should also be one-stop service centres that provide information on government
resources and support services, and assistance in meeting regulatory requirements.

Strengthen cluster associations

Ideally, cluster associations should help deliver government incentives. For this they
need to rise above political concerns and prepare a vision to promote cluster
development. Currently, a lack of resources prevents cluster associations from taking
this larger view. The government can resolve this issue by investing some resources,
along with cluster-based companies.

Protect intellectual property rights and ensure a level playing field

To encourage innovation in clusters, intellectual property rights should be protected,
particularly through stringent penalties for violators. This will ensure that clusters
thrive through innovation and competitive factor inputs, rather than unfair trade
practices and lop-sided financial subsidies. To create a level playing field, the central
government can also stipulate the maximum financial incentives that any state can
offer; adherence to these limits should be a precondition for access to the Industrial
Cluster Development Scheme and other Government of India programmes.

Encourage mentoring through non-financial incentives

Mentoring through non-financial incentives can rapidly upgrade capabilities and
manufacturing practices. To stimulate mentoring, the central government could credit
the exports of a local firm under a mentoring programme to the export obligation of
the mentor. This will particularly benefit clusters that cater to large companies such
as those of auto ancillary makers supplying auto manufacturers.

Encourage collaboration between academics and the industry

To help build the capabilities needed in the marketplace, industries should support
technical and vocational institutes in such areas as curriculum development.
School-to-work apprenticeship programmes that offer students the chance to gain
job skills should also be developed, and these apprenticeship programmes should be
extended to displaced workers from declining industries. This would help migrate the
workforce from one industry to another within the cluster.

1
NSIC: National Small Industries Corporation; SIDO: Small Industries Development Organisation;
SISI: Small Industries Service Institutes; RTC: Regional Testing Centres.

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European markets have
recognised the
competitiveness of Indian
textile clusters and are keen
to invest in the country.
Concerted efforts can result
in substantial investments
in textile clusters in Gujarat,
Tamil Nadu and Rajasthan
Remove infrastructure bottlenecks
Constraints to development in the form of a lack of or poorly functioning
infrastructure can be removed by increasing transport capacity connecting principal
trading nations, and by according special status to export cargo. The infrastructure
supporting manufacturing in clusters also needs to be upgraded. For this, the
mandate of state industrial development corporations can be extended from just
creating the infrastructure to operating and maintaining it to the desired standards.
Catalyse investment by targeting specific investor communities
Investment promotion strategies that target specific investor communities will be
effective in bringing in the resources needed. For instance, the European markets
have recognised the competitiveness of Indian textile clusters and are keen to invest
in the country. Concerted efforts by the Government of India can result in substantial
investments in textile clusters in Gujarat, Tamil Nadu and Rajasthan.
Performance measures will maximise impact
The interventions described above should reverse India’s dropping share in exports.
Monitoring export trends would be an effective measure of how well interventions
are succeeding. Those found to be less effective can be customised to ensure
maximum impact on the target clusters.
INTERNATIONAL BEST PRACTICE
Most of the world’s successful clusters owe their beginnings to chance.
Nevertheless, it has always been favourable policymaking and government
support that have propelled rapid growth and consolidation.
For instance, Malaysia’s wood-based cluster accounts for 4.3 per cent of
Malaysia’s exports in value terms, and employs 3.6 per cent of the national
workforce. It supports an industry accounting for 3.4 per cent (in 2001) of the
nation’s GDP—an increase from 0.6 per cent in 1987, which means a CAGR of
13 per cent. The chemicals cluster in the Netherlands provides direct
employment to 80,000 workers and has attracted 25 per cent of the total
investments in the country. In Singapore, the life sciences industry—which is
active in manufacturing and developing research-based products for the
global market—contributed S$ 6.3 billion (in 1999) to manufacturing output,
a value addition nine times that of the country’s average manufacturing
value-added output.
Some targeted interventions used internationally are as follows:
Creating institutions for cluster development
Malaysia established a National Timber Certification Council to certify wood
products as eco-sensitive and ensure that appropriate forest management
guidelines are followed in the cluster. National forest and land councils were
established to judiciously allocate land among the competing requirements of
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agriculture, mining and forestry. A forest research institute was also created
to focus on product development and undertake research for improving raw
material quality.

In Singapore, the government promoted over 14 research institutions in life

sciences, to ensure a development edge for the country. A drug discovery
system based on American and European standards was also set up to certify
that products developed in Singapore were fit for human consumption.

Catalysing human resource development

In Malaysia, industries receive incentives for manpower training; in the
Netherlands counselling on career options in the chemical sector starts at the
school level. Besides, industry associations in the Netherlands develop specific
courses to build necessary skills and provide scholarships to encourage students
to undertake these courses. Labour policy, coupled with tax-breaks, is widely
used by governments. A permanent work force is not compulsory in the
Netherlands—in the country’s chemicals cluster, almost 42 per cent of the work
force at individual companies is in either temporary or part-time positions. It is
the cluster on the whole that provides continuous employment. Singapore even
attracts foreign talent for its clusters through income-tax breaks.

Encouraging entrepreneurship through financial incentives

Financial incentives in the form of tax breaks and duty exemption on specific
imports have been successfully employed by Malaysia. These financial
incentives, coupled with a ban on the export of timber logs, ensured rapid
growth in value; downstream industries were added to its wood products
cluster. Singapore has set up incubation centres, and venture capital and
angel funds to encourage entrepreneurship in its clusters.

Promoting a favourable environment through policy

To signal stability in policy, the Government of Netherlands has frozen
environmental rules for a 20-year period, ensuring that investments in
chemical industries are not subject to environment policy risks.

Enabling rapid growth through proactive infrastructure development

Proactive infrastructure development has ensured rapid growth in the number
of units within clusters. Netherlands has the most comprehensive
infrastructure within its sea limits for supporting chemical industries, and the
petroleum havens it has created are a global benchmark in infrastructure
service provision.

Ramnath N. Iyer
Head, CRISIL Infrastructure Advisory

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