The recent protests at Jantar Mantar reflected a deeper problem than the immediate NEET paper leak controversy: Youth unemployment. A large share of unemployed Indians are young and educated, while underemployment remains widespread. With AI-driven disruption threatening existing jobs, India needs strong job creation engines, and the MSME sector is one of the best candidates.
The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026, can help by addressing delayed payments, easing dispute resolution, and reducing some compliance burdens. But more needs to be done. India’s 63 million MSMEs employ more than 320 million people, contribute about 31 per cent of GDP, 35 per cent of manufacturing output, and 49 per cent of exports. Yet the sector remains largely informal, fragmented, and concentrated in low-value activities. Smaller firms still face major obstacles, especially limited access to affordable credit and the burden of GST, labour, environmental, and tax compliance.
The US and China did not create industrial strength by supporting isolated firms one by one; instead, they built clusters — dense ecosystems where suppliers, labour, research institutions, and capital are located close together and reinforce one another. The US experience shows how universities can anchor clusters. In North Carolina’s Research Triangle, institutions such as Duke, UNC-Chapel Hill, and NC State helped build biotechnology and pharmaceutical ecosystems by connecting research with industry. China’s Guangdong region, especially Shenzhen, shows how industrial zones with land, tax incentives, and infrastructure can create thick supplier networks, allowing firms to design, fabricate, and prototype quickly. China’s “Little Giant” programme also supports technically strong small firms in narrow niches through financing, tax support, and R&D assistance.
Clusters create knowledge spillovers. Technical know-how spreads quickly through worker mobility, informal interaction, and shared service providers. This kind of tacit knowledge is hard to transfer over distance. Clusters also attract and retain talent. A single isolated MSME struggles to hire specialised workers, but a cluster of many firms creates a real labour market and makes the location more attractive to skilled people. Third, clusters lower fixed costs by sharing infrastructure such as testing labs, effluent-treatment plants, cold storage, design centres, and logistics hubs. These facilities are often too expensive for one small firm, but affordable when shared across many firms.
India already has cluster-based initiatives such as the MSME Cluster Development Programme and PM MITRA textile parks. However, many of these still function more like infrastructure grants than true ecosystem builders. The following policies may help. First, India should move from generic industrial estates to specialised clusters. Instead of mixing unrelated businesses in the same park, resources should be concentrated in deeper, sector-specific hubs such as auto components in Pune, pharmaceuticals in Hyderabad, and electronics in Sriperumbudur. Second, India should create its own version of the Little Giant programme. Rather than treating all MSMEs the same, policy should identify “hidden champions” already performing well in specialised fields like precision castings, speciality chemicals, or defence components. These firms could then receive dedicated credit lines, faster patent processing, R&D support, and priority procurement.
Third, financing should be addressed at the cluster level. The MSME credit gap is large, but banks still assess firms individually. Cluster-based lending, which evaluates shared collateral, buyer-supplier ties, and collective performance, can reduce information asymmetry and lower risk. The Tiruppur textile cluster offers a useful model that could be expanded through SIDBI and cluster-focused NBFCs. Fourth, universities must be brought to the centre of the MSME ecosystem. In India, top universities often remain disconnected from nearby industry. In contrast, Chinese and US cluster models rely on universities as suppliers of talent, applied research, lab infrastructure, and innovation. In short, India’s MSME strategy should shift from isolated support to ecosystem-building. Strong clusters, better finance, and closer university-industry links can help MSMEs become engines of jobs, productivity, and exports.
The authors are professors and co-founders, Economic Policy Centre, Mahindra University
India already has cluster-based initiatives such as the MSME Cluster Development Programme and PM MITRA textile parks. However, many of these still function more like infrastructure grants than true ecosystem builders. 
Share
