Micro, small and medium enterprises (MSME) sector has been recognised as an engine of growth all over the world. The sector is characterised by low investment requirement, operational flexibility, location wise mobility, and import substitution. In India, the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 is the first single comprehensive legislation covering all the three segments. In accordance with the Act, these enterprises are classified in two:- (i) manufacturing enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the first schedule to the Industries (Development and regulation) Act, 1951. These are defined in terms of  investment in plant and machinery; (ii) service enterprises engaged in providing or rendering of services and are defined in terms of investment in equipment.

India has a vibrant micro and small enterprise sector that plays an important role in sustaining the economic growth, by contributing around 39 per cent to the manufacturing output and 34 per cent to the exports in 2004-05. It is the second largest employer of human resources after agriculture, providing employment to around 29.5 million people (2005-06) in the rural and urban areas of the country. Their significance in terms of fostering new entrepreneurship is well-recognized. This is because, most entrepreneurs start their business from a small unit which provides them an opportunity to harness their skills and talents, to experiment, to innovate and transform their ideas into goods and services and finally nurture it into a larger unit.

Over the years, the small scale sector in India has progressed from the production of simple consumer goods to the manufacture of many sophisticated and precision products like electronics control systems, micro wave components, electro medical equipments, etc. The process of economic liberalisation and market reforms has further exposed these enterprises to increasing levels of domestic and global competition. The formidable challenges so generated for them has led to a novel approach of cluster development for the sector. As a result, private and public sector institutions, both at the Central and State levels are increasingly undertaking cluster development initiatives.

Clusters are defined as sectoral and geographical concentration of enterprises, particularly, small and medium enterprises, faced with common opportunities and threats which give rise to external economies; favour the emergence of specialized technical, administrative and financial services; create a conducive ground for the development of inter-firm cooperation to promote local production, innovation and collective learning. Clustering and networking has helped the small and medium enterprises in boosting their competitiveness. India has over 400 SME clusters and about 2000 artisan clusters.

It is estimated that these clusters contribute 60 per cent of the manufactured exports from India. Almost the entire gems and jewellery exports are from the clusters of Surat and Mumbai. Some of the small scale enterprise clusters are so big that they account for 90 per cent of India's total production output in selected products. For example, the clusters of Chennai, Agra and Kolkata are well known for leather and leather products.

The Government has been encouraging and supporting the sector through policies for infrastructural support, technology upgradation, preferential access to credit, reservation of products for exclusive manufacture in the sector, preferential purchase policy, etc. It has been offering packages of schemes and incentives through its specialized institutions in the form of assistance in obtaining finance; help in marketing; technical guidance; training and technology upgradation, etc.

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