BRIEF OF KERALA CLUSTER

A Brief Account of SME Cluster Development in Kerala

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Abstract

Development of Industrial Clusters is a project of UNIDO, based on Italian experience, started in 1995 for the growth of SMEs all over the world with emphasis to developing countries.  Government of India adopted the Cluster Development Programme in 1996.  Cluster Development activity has been made a pivotal area for Industrial Development of UNIDO.  About 400 SME Clusters have been identified and developmental activities are in progress.

Government of Kerala included Cluster Development as part of its Industrial Policy in 2003. Industries Department of Govt. of Kerala is taking initiative for identification and development of Clusters through the District Industries Centres (DICs).  About 75 SME Clusters have been identified and they are at different stages of development. Central Government agencies like Coir Board, SISI, and NGOs like Federation of Industrial Clusters etc. are also taking initiative in Cluster Development.

But the Cluster Development activity in Kerala is yet to attain a remarkable success level.

Introduction

An Industrial Cluster can be defined as a sectoral and geographical concentration of enterprises, especially Small & Medium Enterprises (SMEs), which have common opportunities and face similar threats. It is a formation of several homo/heterogeneous units in the same line of industry in the same geographic area and functioning as competitors or complementers by being in different levels of integration.

UNIDO Initiative for Cluster Development

UNIDO adopted the Cluster development project for the economic growth of developing countries in the year 1995.  Since then several Developing Countries have adopted UNIDO Cluster development programmes. It was started by UNIDO with the objective to strengthen the competitive advantage of under-achieving SSE clusters. The Programme drew lessons from the experience of successful clusters and implemented them through technical cooperation projects in various developing countries. The strategy adopted was to identify the collective competitive advantage of particular clusters, and to build up local capabilities to realise it by supporting the broadest spectrum of cluster actors, such as SSE owners, producers’ associations, BDS providers, local policy makers, etc. (Clara, Russo, and Gulati, 2000)

Italian Experience

UNIDO adopted the Cluster development Programmes from the Italian Experience.  The fast post World War II economic growth of Italy can be attributed to the growth of SMEs. It was due to the formation of district-based numerous industrial clusters and their collective efforts for division of labour, technological development, common marketing and increased economies of scale.

The literature on the so-called Italian industrial districts describes SSE clusters that have reached high levels of growth and leadership in profitable niches of world markets (e.g. leather goods, textile, jewellery, ceramic tiles, and spectacle frames). Similar accounts exist from other developed countries such as Germany, and increasingly from low-income countries. (Clara, Russo, and Gulati, 2000)

In the Italian Scenario:

•         Only SMEs are included

•         Individuality is maintained

•         Existence of High level of Specialisation

•         High level of Inter-cooperation

•         Low level of dependency

•         Hence, the suitable term is “Coopetition”

This leads to high degree of specialisation and division of process as follows:

•         Production processes are divided into distinct phases

•         Separate firms are responsible for different phases

•         Specialized small firms divide up the labour process

•         Group together/regroup, depending on market requirements

•         And this model allows flexibility and short response times

Cluster Development Initiative: Government of India

Government of India adopted Cluster Development Project of UNIDO and started propagating it in 1996 itself. 

Since 1996, India is one of the countries where this innovative programme is being implemented in cooperation with the Development Commissioner (SSI) and thanks to financial support from the Government of Italy and the Swiss Agency for Development and Cooperation. The aim of the UNIDO Cluster Development Programme in India is to enhance the performance and efficiency of clusters of micro, small, and medium scale enterprises (MSMEs) to achieve sustainable development by providing targeted assistance to groups of local firms and associated institutions. This entails the implementation of pilot cluster support initiatives as well as assistance to national and state level programmes of cluster restructuring.

SME clusters have existed in India for several decades with some 350 urban and 2000 rural and artisanal ones. Although they constitute 60 per cent of India's manufactured exports, most clusters have not been efficient economic performers. Yet, recognizing their economic potential, the Government has decided to promote cluster development as one of the main pillars of its Small Enterprises Development Policy. One of the early Cluster Development Project was Jaipur Hand Block & Silk Screen Printers on cloth.  Now there are about 400 Industrial Clusters identified for development. The Cluster Development activities are coordinated by the Development Commissioner, Ministry of Small Scale Industries.  (UNIDO. Cluster Development Programme-INDIA,)

The Government of India has formulated specific guidelines for the Small and has circulated the same by circular No.TM/UND/2005 dated 14-3-06.  The Circular provides specific directions on aspects such as Implementing Agencies, Selection of Clusters, Illustrative Steps in Cluster Development Programmes, roles of Cluster Development Executives, Cost of Project and Government of India Contribution, Linkages with Business Development Services, Formats for Proposals, distribution of Funds, Monitoring and Evaluation etc.

A significant point in the guidelines is the rate of Contribution of Government of India to Common Facilities Centres.  It varies as 70%/50%/30% according to the nature and period of the revenue generation of the CFCs. (Kaushal, 2006)

Role of EDII in Cluster Development in India

EDII has been a nodal agency in the Cluster Development Activity of Government of India by setting up the “International Centre for Cluster Competitiveness and Growth” and providing leadership for the Cluster Development Programme in India.

EDI's, background, experiences and accomplishments in various clusters, across the nation, made the Office of the Development Commissioner, Small Scale Industries, (DCSSI) Govt. of India set up the International Centre for Cluster Competitiveness and Growth (IC³G) at the Institute. EDI's experience, resources, expertise and network is effectively marshalled to ensure that the Centre serves as a repository of knowledge, information and strategic plans. (EDII. International Centre for Cluster Competitiveness and Growth)

Industrial Scenario of Kerala

Kerala is an industrially backward state when compared to many other states of the country.  The main causes for the backwardness are attributed to political, social, and geographic reasons.

The Initiative of Government of Kerala in Cluster Development

Initial Efforts towards Cluster Development

The initial survey conducted for the preparation of Tenth Five Year Plan Document revealed the need for adopting Cluster Development Programme in Kerala.  The programme was approved with the sanctioning of Rs.105lakhs towards initial fund.

The Clusters Identified in the initial Survey of Industries Department

Source: K-BIP. Cluster Tidings-May-2003

In the beginning two officials of the Dept. of Industries were sent to the Entrepreneurship Development Institute of India, Ahmedabad, for training under CDP to interact among cluster members cluster actors, and cluster players.  After training they started their work during the year 2001 at Ernakulam and Kottayam districts to develop the Clusters in the rubber sector.  As the financial institutions failed to interpret the concept of cluster in the right sense the project could not make any waves in the industrial sector. 

Govt. of India had nominated SISI Trichur as the nodal agency for development of Rubber Cluster at Kottayam. But due to lack of infrastructure availability, the task was assigned to DIC, Kottayam.  With the constant effort of the CDA,  the Cluster members, and other officials of Industries Department, the consortium named as Natural Rubber and Fibre Product Manufacturing Consortium P. Ltd. (NRFPMC) was formed by the middle of 2003, which is claimed to be the first professionally and legally constituted consortium in India. (K-BIP, 2004)  

Cluster Development becomes part of  Industrial Policy 2003

Government of Kerala adopted Cluster Development as an important postulate of the Industrial Policy of the year 2003.  Since then several steps have been taken at the apex level of the Government for Cluster Development.   Industrial Policy-2003  had stated that sector specific clusters of industrial units would be promoted with the assistance of financial institutions and skill development facilitated through common facility centres and training institutions. A system of decentralized production and centralized marketing, centralized designing and centralized quality control was to be implemented in this sector. New Tool rooms, Testing Centres and Sub-contracting Exchanges to facilitate buyer seller interaction were also to be set up in the State. (Government of Kerala, 2003-)

Government of Kerala thus proposed to set up Clusters in different sectors to bring entrepreneurs who were engaged in manufacturing similar products and belonging to the same locality and to provide them common facilities. This was expected to reduce the relative isolation of the SMEs and strengthen the linkages among all the actors of the assisted Cluster thereby co-ordinating their actions and pooling their resources for a common development goal. Some of the activities planned included setting up of Common Facility Service Centres (CFSCs), common brand building for export markets, common purchasing practices, mutual guarantee for each others, financial obligations etc. 

In order to establish the areas where Government interventions are required, Diagnostic studies for each Cluster was to be conducted with special emphasis on assessing limitations in terms of quality, facilities for testing and research, technical knowledge, information channels, organisation skills, market linkages and export potential. Based on the results of the Diagnostic study, a detailed action plan for Cluster development would be charted out and implemented.(Industries Department Government of Kerala)

Intensive training was given in 2003 to more than 100 officials of the Industries Department, in association with UNIDO, and with the help of EDI Experts, to act as Cluster Development Agents (CDAs).

The role of District Industries Centres of Kerala in Cluster Development 
As per the Kerala Government’s  Industries Policy, the role of DICs would be to act as the Key Resource Group for the initiative. DICs shall

• Offer critical intervention services at all stages of the programme,
• Act as a mentor to the CDAs,
• Coordinate  the cluster development efforts
• Suggest  mid-course corrections,
• Organise  refresher and interaction programmes for the CDAs, 
• Liaison  with the major players in the programme, including national and international level agencies

The DICs are responsible for most of the Cluster Development Activities in the State.  But the Coir Cluster of Alleppey District was organised through the Coir Board. 

Sectors identified for Cluster Development in Kerala

Sl. no	District	Sector
1.	Thiruvanthapuram	Cane products, Wood Industry, Handicraft, Silk fabric
2	Kollam	Food, Pencil, Wood
3.	Pathanamthitta	General Engineering, Food products
4.	Alappuzha	Bell metal, Stone products
5.	Kottayam	Rubber, Apparel, Food, Leather ,Toy
6	Idukki	Garments, Herbal medicines, Bamboo
7.	Ernakulam	Plywood, Fruit processing, Rice mill, Rubber, Plastic, wood, sweets, Electrical &Electronics, Mineral water, Printing, Garments
8.	Thrissur	Diamond, Wood, Screw pine, pottery, Tiles, re-threading machinery, Note Book
9.	Palakkad	Bell metal, Food, Agricultural implements, Bamboo
10.	Malappuram	Garments, Rubber, Wood, General Engineering, Food
11.	Kozhikode	PVC Foot wear, Food (Halwa, Banana Chips), Jewellery, General Engg, Plywood
12.	Wayanad	Food, Garments, Bamboo
13.	Kannur	Coir mattress, Garments, Printing, Plywood, Handloom
14.	Kasaragod	Pottery, Screw Pine, Garments

Source: Department of Industries, Government of Kerala

The Kerala State Financial Support to Clusters

Margin Money Loans: The Kerala Government offers upto 20% of the Capital of the Common Corporate Entity (SPV) subject to a maximum of Rs.5 lakhs as Margin Money Loan towards the seed capital of the SPV.  In addition to this, a Margin Money Loan equivalent to the shares held by the individual member SSI units upto a maximum of Rs.2.5lakhs is also offered.  The General Managers of DICs have the power to sanction the MMLs (Cluster Development Programme, Government of Kerala)

Grant for participation in national and international Trade Fairs and Exhibitions, study tours, field visits etc:  The grant will be limited to 50% of the actual expenditure subject to a maximum of 50,000/- per cluster per year

Grant for training programme on effective business counseling in Industrial clusters:     This will be entrusted with professional agencies of repute in this field, like Entrepreneurship Development Institute of India Ahmedabad or such Institutions which have international reputation. Total grant eligible for all activities will be limited to 2.00 Lakhs per cluster

The Pioneer Clusters under CDP in Kerala

Changanacherry Rubber Cluster: This is the pioneer Cluster of Kerala and claimed as the professionally formed first cluster in India

Kottayam Leather Cluster: There are 185 SSI units engaged in leather/rexine goods manufactures with 10 crores turnover.

Kalady Rice Mills Cluster: About 60 modern rice mills functioning in and around Kalady, Ernakulam District have formed the Kalady Rice Millers Consortium

Edappally Tread Rubber Cluster: The SPV is  Millennium Tread Rubber Consortium P. Ltd

Cane & Bamboo Cluster:  The SPV is Travancore Cane Bamboo P. Ltd.

Perumbavoor:  Plywood Cluster

Thrisoor: Diamond Cluster

Kannur: Handloom & Garments Cluster

Malappuram: Rubber Cluster

Kozhikkode:   Halva Cluster

The Role of other Governmental Agencies in CDP of Kerala

K-BIP:

Kerala Bureau of Industrial Promotion (K-BIP) was constituted under the Industries Department during the year 1991 as an autonomous body of the State Government.

K-BIP takes an active role in cluster development by taking a support role to DICs and organising cluster development programmes.

Coir Board

Coir Board with the guidance of Directorate of Industries took   initiative in developing the Coir Cluster of Alleppey District. 22 CDAs were trained from Coir Board by K-BIP.  

SISI,  Trichur

SISI, Kerala Region has also been taking some initiative in Cluster Development activities of Kerala.

Role of NGOs in CDP of Kerala

Federation of Industrial Clusters of Kerala

Federation of Industrial Clusters is an initiative of some of the Clusters identified early.  It is a registered society where SPVs of different clusters are the members. FICK is engaged in providing a common platform for different clusters of Kerala. It jointly takes efforts for the development of   all Clusters by providing technical advice and helping to get the benefits of cluster formation.

Federation of Kottayam Rubber Industry Associations

This was formed under the leadership of the Changanacherry Rubber and Plastic Small Industries Association.  Five Rubber based associations come under the apex body and organise different developmental activities like common brand named “Kottayam Rubber “etc.

Kottappuram Integrated Development Society, Trissur District: This NGO is giving support to 150 SHGs in Thrissur  engaged  in the manufacture of Screw Pine products.

Kuttanad Vikasana Samithi, Alleppey District:  This Cluster gives leadership in Paddy Cluster of Kutttanad and promotes a common brand of paddy products as “KARSHAKA”

Gandhi Smaraka Grama Seva Kendram, Allappey: Gives leadership to the clusters for Rice and Rice Products

Government Efforts for Marketing of SME Products

B2Bs 2004 & 2005:  The Government of Kerala organised its first Business-to-Business Meet in 2004 and the second B2B Meet in September 2005.  These B2B meets were meant to provide an opportunity for the buyers of renowned Kerala products to meet their sellers directly.  There were good participation of buyers from national and international profiles. The second B2B was focused for 8 SME Products.  The business outcome of these meets are being  analysed to find how good the efforts were.

Kerala Bamboo Fest 2005:   This was held in December, 2005 in Cochin.  This was meant to promote the products of Cane & Bamboo Cluster.  The Event was well attended to.

Cluster Outturn Expo 2006:  This programme was organised exclusively for Cluster Products.  Several Clusters participated in the event.  But the participation by the buyers was not quite satisfactory which was partly  due to the seasonal effect.

Interactions of Cluster Leaders and the Top Government Officials

Various Joint meetings between the Cluster Leaders and the Top Government Officials are being organised to study various problems faced by the Clusters and  try to arrive at solutions in the meetings itself.  Some of the meetings have been attended by the Industries Ministers also.

Observations

• Government of Kerala is determined in bringing out industrial development and growth in the MSME sector through Cluster Development.
• The Government of India through DC (SSI) and SISI Kerala region is giving good support to the Cluster Development Programmes in Kerala
• EDII have been instrumental in training and guidance for the CDPs in Kerala
• The Industries Department, Government of Kerala through the DICs have been enthusiastic in identification motivation and development of Clusters.
• Governmental Agencies like K-BIP, Coir Board, etc. have been giving support and leadership in CDP
• The various Industrial Clusters have identified the opportunities revealed by the Cluster Development Programmes, and volunteered to involve in CDPs
• Some of the identified Industrial Clusters are functioning well. 
• Some Clusters are in various levels of development. 
• Some Clusters have not come up to  the expected level of achievement

Cluster Development Programme is new for Kerala.  It will be too early to arrive at a final evaluation of the results.

Conclusion

There is a new enthusiasm that the Cluster Development has given in the SME environment of Kerala.  But the attainment of the Cluster Development Goals is not easy.  In some cases trust building is slow due to a long history of isolation and unhealthy competition.  There can be other situations also that may defeat the purpose. The following extract is appropriate in this context:

“However, only a handful of MSME clusters in the world are truly performing. The largest number of MSME clusters are actually "underachievers" and the advantages described …. actually fail to emerge.” (UNIDO—Cluster Development Programme—INDIA)

Therefore a more fact-based and realistic approach is called for from the Government, Cluster Developing Agencies and the Cluster Leaders for consistent and long-lasting results.

Limitations of this Study

A detailed field study for the purpose of evaluation of effectiveness of implementation of Cluster Development Programme could not be completed.

Scope for further Studies

The Cluster Development Activity is a new phase in the Industrial Development history of Kerala.  It is started with great hopes involving vast amount of  resources of the government and private sector.  A detailed study into the success of Cluster Development Activity in Kerala is, therefore,  highly imperative.

References

EDII. International Centre for Cluster Competitiveness and Growth (IC³G),

from http://www.ediindia.org/Programme package 2006 2007

Dagnino & Padulla. Coopetition Strategy—A New Kind of Interfirm Dynamics for Value Creation Paper presented at EURAM-The Europian Academy of Management, 2^nd Annual Conference-9-11 May 2002

Clara, Russo, and Gulati,. Italian Experience and Possible Lessons for Emerging Countries, NOMISMA, March 1997, A UNIDO Publication  

Industrial Policy 2003-Government of Kerala, Department of Industries Government of Kerala http://www.keralaindustry.org/cluster_devlop.html

Fabio Russo, Manama. Development of Clusters and Networks of SMEs, the UNIDO Programme, 10-12 Jun 2002

Industries Department Government of Kerala Cluster Development Programme, http://www.resourcekerala.org/cluster/Schemes

K-BIP. Kerala Cluster—The Beginning, Cluster Tidings, May 2004, page 4

K-BIP. Evolution of Cluster Development Agents, Cluster Tidings, May 2004, page 2

K-BIP. Cluster Tidings—Kerala News Letter: Published by K-BIP Issues No.1 to 8

Kaushal. DC9SSI) Office Memorandum No. TM/UND/2005 dated 14-3-2006