Industrial Clusters in Tamil Nadu | Tamil Nadu State PSC (TNPSC): Preparation - TNPSC (Tamil Nadu) PDF Download

 Page 1


       I ntroduction
Generally, “any human activity which is 
engaged in the conversion of raw materials into 
readily usable materials is called an industry”.  
Industrialisation refers to the process of using 
modern techniques of production to produce 
goods that are required by both consumers and 
other producers on a large scale. In this chapter 
we will learn the nature of industrialisation of 
Tamil Nadu, importance of industrial clusters, 
how industrial clusters have developed in Tamil 
Nadu and the role of government initiatives in 
promoting industries.
   I m portance of  
I ndustrialisation
To understand importance of industries, 
we need to understand why the share of 
agriculture in an economy's income and 
employment decreases with development. 
First, demand for food remains constant with 
regard to income. Therefore, as an economy 
grows and incomes increase, consumers tend 
to spend a lesser share of their income on 
products from the agricultural sector. 
Second, even the food that is consumed is 
subject to more transformation. Food products 
are taken over longer distances, processed and 
branded. This also requires that food products 
have to be preserved. As a result, the prices that 
farmers get tend to be much less compared to 
the prices at which consumers buy.
Third, there are limits to the ability 
of agriculture to absorb labour due to the 
declining marginal productivity of land. Wages 
too cannot therefore increase and as a result 
poverty levels may remain high, especially 
when more and more people continue to rely 
on agriculture for their livelihood.
Due to all these factors, there is a need 
for an economy’s production and employment 
base to diversify away from agriculture.
What benefits does 
industrialisation bring to an 
econom y?
As stated earlier, it is essential to produce 
inputs to other producers in an economy. Even 
agriculture requires inputs from industry 
such as fertilisers and tractors to increase 
productivity. 
I n d u s t r i a l Cl u s t e r s 
in Tam il Nadu
Unit - 5
27_Economics_Unit_5_EM.indd   328 27_Economics_Unit_5_EM.indd   328 21-12-2022   15:51:16 21-12-2022   15:51:16
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Page 2


       I ntroduction
Generally, “any human activity which is 
engaged in the conversion of raw materials into 
readily usable materials is called an industry”.  
Industrialisation refers to the process of using 
modern techniques of production to produce 
goods that are required by both consumers and 
other producers on a large scale. In this chapter 
we will learn the nature of industrialisation of 
Tamil Nadu, importance of industrial clusters, 
how industrial clusters have developed in Tamil 
Nadu and the role of government initiatives in 
promoting industries.
   I m portance of  
I ndustrialisation
To understand importance of industries, 
we need to understand why the share of 
agriculture in an economy's income and 
employment decreases with development. 
First, demand for food remains constant with 
regard to income. Therefore, as an economy 
grows and incomes increase, consumers tend 
to spend a lesser share of their income on 
products from the agricultural sector. 
Second, even the food that is consumed is 
subject to more transformation. Food products 
are taken over longer distances, processed and 
branded. This also requires that food products 
have to be preserved. As a result, the prices that 
farmers get tend to be much less compared to 
the prices at which consumers buy.
Third, there are limits to the ability 
of agriculture to absorb labour due to the 
declining marginal productivity of land. Wages 
too cannot therefore increase and as a result 
poverty levels may remain high, especially 
when more and more people continue to rely 
on agriculture for their livelihood.
Due to all these factors, there is a need 
for an economy’s production and employment 
base to diversify away from agriculture.
What benefits does 
industrialisation bring to an 
econom y?
As stated earlier, it is essential to produce 
inputs to other producers in an economy. Even 
agriculture requires inputs from industry 
such as fertilisers and tractors to increase 
productivity. 
I n d u s t r i a l Cl u s t e r s 
in Tam il Nadu
Unit - 5
27_Economics_Unit_5_EM.indd   328 27_Economics_Unit_5_EM.indd   328 21-12-2022   15:51:16 21-12-2022   15:51:16
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(d) Size: Firms may be large, small or 
medium based on their volume of output, sales 
or employment or on the basis of the amount 
of investments made. There are also micro or 
tiny enterprises that are smaller than even small 
firms.
The small sector is seen as important for 
two reasons. One, it is believed to generate 
more employment than the large-scale sector, 
which is likely to use more advanced and 
automated technologies and therefore may 
not generate enough employment. Second, the 
small scale sector allows for a larger number of 
entrepreneurs to emerge from less privileged 
backgrounds. 
Based on experiences of industrialisation 
in different parts of the world, it is believed 
that when small firms specialising in one sector 
are geographically concentrated in specific 
locations, and linked to one another through 
production and learning, they tend to be equally 
if not more efficient than large scale enterprises. 
Such agglomerations of small firms are called 
industrial clusters. 
 I ndustrial Clusters
Industrial clusters are groups of firms in 
a defined geographic area that share common 
markets, technologies and skill requirements. 
The advantages of industrial clusters or districts 
was first observed by the famous economist 
Alfred Marshall in the 1920s when he  tried 
to understand the working of clusters of small 
firms in the metal-working and textile regions 
in England.  While the notion of an ‘industrial 
district’ was developed by Marshall, it was only 
after the success of small firms in Italy in the 
1980s that it became popular. Policy-makers 
in developing countries like India began to 
promote them actively as they realized that there 
several such small firm clusters in the country. 
The following are the chief characteristics 
of a successful cluster.
	 ? geographical proximity of small and 
medium enterprises (SMEs)
Second, a market exists for both producers 
and consumer goods. Even services like 
banking, transport and trade are dependent on 
production of industrial goods. 
Third, by using modern methods of 
production, industries contribute to better 
productivity and hence lower cost of production 
of all goods produced. It therefore helps people 
to buy goods at a cheaper rate and help create 
demand for more products.
Fourth, through such expansion of 
production, industrialisation helps to absorb 
the labour force coming out of agriculture. 
Employment generation is therefore an 
important objective of industrialisation. 
Fifth, a related advantage of 
industrialisation is therefore technological 
change. Through use of modern techniques, 
industrialisation contributes to learning of such 
methods and their improvement. As a result 
labour productivity, ie, output per unit of labour 
input increases, which can help workers earn 
higher wages.  
Sixth, expanding incomes lead to more 
demand for goods and services. 
 Types of I ndustries
Industries can be classified on the basis of 
(a) Users: If the output is consumed by 
the final consumer, it is called a consumer 
goods sector. If the output is consumed by 
another producer, it is called a capital goods 
sector.  There are industries that produce raw 
materials for other industries such as cement 
and steel. Such industries are called basic 
goods industries.
(b) Type of Inputs Used: Industries are 
also classified based on the kind of raw material 
used such as agro-processing, textiles sector, 
rubber products, leather goods, etc.
(c) Ownership: Firms may be privately 
owned, publicly owned (by the government, 
central or state), jointly owned by the private 
and public sector, joint sector or cooperatively 
owned (cooperatives).
27_Economics_Unit_5_EM.indd   329 27_Economics_Unit_5_EM.indd   329 21-12-2022   15:51:16 21-12-2022   15:51:16
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Page 3


       I ntroduction
Generally, “any human activity which is 
engaged in the conversion of raw materials into 
readily usable materials is called an industry”.  
Industrialisation refers to the process of using 
modern techniques of production to produce 
goods that are required by both consumers and 
other producers on a large scale. In this chapter 
we will learn the nature of industrialisation of 
Tamil Nadu, importance of industrial clusters, 
how industrial clusters have developed in Tamil 
Nadu and the role of government initiatives in 
promoting industries.
   I m portance of  
I ndustrialisation
To understand importance of industries, 
we need to understand why the share of 
agriculture in an economy's income and 
employment decreases with development. 
First, demand for food remains constant with 
regard to income. Therefore, as an economy 
grows and incomes increase, consumers tend 
to spend a lesser share of their income on 
products from the agricultural sector. 
Second, even the food that is consumed is 
subject to more transformation. Food products 
are taken over longer distances, processed and 
branded. This also requires that food products 
have to be preserved. As a result, the prices that 
farmers get tend to be much less compared to 
the prices at which consumers buy.
Third, there are limits to the ability 
of agriculture to absorb labour due to the 
declining marginal productivity of land. Wages 
too cannot therefore increase and as a result 
poverty levels may remain high, especially 
when more and more people continue to rely 
on agriculture for their livelihood.
Due to all these factors, there is a need 
for an economy’s production and employment 
base to diversify away from agriculture.
What benefits does 
industrialisation bring to an 
econom y?
As stated earlier, it is essential to produce 
inputs to other producers in an economy. Even 
agriculture requires inputs from industry 
such as fertilisers and tractors to increase 
productivity. 
I n d u s t r i a l Cl u s t e r s 
in Tam il Nadu
Unit - 5
27_Economics_Unit_5_EM.indd   328 27_Economics_Unit_5_EM.indd   328 21-12-2022   15:51:16 21-12-2022   15:51:16
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(d) Size: Firms may be large, small or 
medium based on their volume of output, sales 
or employment or on the basis of the amount 
of investments made. There are also micro or 
tiny enterprises that are smaller than even small 
firms.
The small sector is seen as important for 
two reasons. One, it is believed to generate 
more employment than the large-scale sector, 
which is likely to use more advanced and 
automated technologies and therefore may 
not generate enough employment. Second, the 
small scale sector allows for a larger number of 
entrepreneurs to emerge from less privileged 
backgrounds. 
Based on experiences of industrialisation 
in different parts of the world, it is believed 
that when small firms specialising in one sector 
are geographically concentrated in specific 
locations, and linked to one another through 
production and learning, they tend to be equally 
if not more efficient than large scale enterprises. 
Such agglomerations of small firms are called 
industrial clusters. 
 I ndustrial Clusters
Industrial clusters are groups of firms in 
a defined geographic area that share common 
markets, technologies and skill requirements. 
The advantages of industrial clusters or districts 
was first observed by the famous economist 
Alfred Marshall in the 1920s when he  tried 
to understand the working of clusters of small 
firms in the metal-working and textile regions 
in England.  While the notion of an ‘industrial 
district’ was developed by Marshall, it was only 
after the success of small firms in Italy in the 
1980s that it became popular. Policy-makers 
in developing countries like India began to 
promote them actively as they realized that there 
several such small firm clusters in the country. 
The following are the chief characteristics 
of a successful cluster.
	 ? geographical proximity of small and 
medium enterprises (SMEs)
Second, a market exists for both producers 
and consumer goods. Even services like 
banking, transport and trade are dependent on 
production of industrial goods. 
Third, by using modern methods of 
production, industries contribute to better 
productivity and hence lower cost of production 
of all goods produced. It therefore helps people 
to buy goods at a cheaper rate and help create 
demand for more products.
Fourth, through such expansion of 
production, industrialisation helps to absorb 
the labour force coming out of agriculture. 
Employment generation is therefore an 
important objective of industrialisation. 
Fifth, a related advantage of 
industrialisation is therefore technological 
change. Through use of modern techniques, 
industrialisation contributes to learning of such 
methods and their improvement. As a result 
labour productivity, ie, output per unit of labour 
input increases, which can help workers earn 
higher wages.  
Sixth, expanding incomes lead to more 
demand for goods and services. 
 Types of I ndustries
Industries can be classified on the basis of 
(a) Users: If the output is consumed by 
the final consumer, it is called a consumer 
goods sector. If the output is consumed by 
another producer, it is called a capital goods 
sector.  There are industries that produce raw 
materials for other industries such as cement 
and steel. Such industries are called basic 
goods industries.
(b) Type of Inputs Used: Industries are 
also classified based on the kind of raw material 
used such as agro-processing, textiles sector, 
rubber products, leather goods, etc.
(c) Ownership: Firms may be privately 
owned, publicly owned (by the government, 
central or state), jointly owned by the private 
and public sector, joint sector or cooperatively 
owned (cooperatives).
27_Economics_Unit_5_EM.indd   329 27_Economics_Unit_5_EM.indd   329 21-12-2022   15:51:16 21-12-2022   15:51:16
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	 ? sectoral specialisation
	 ? close inter-firm collaboration
	 ? inter-firm competition based on 
innovation
	 ? a socio-cultural identity, which facilitates 
trust
	 ? multi-skilled workforce
	 ? active self-help organisations, and
	 ? supportive regional and municipal 
governments.
Firms are therefore expected to 
collaborate and compete with one another 
at the same time. By collaborating, they can 
expand their capacity and also learn from one 
another. Through competition, they are forced 
to become more efficient.
How Do Clusters Originate?
Clusters may arise due to many factors. 
Certain clusters evolve over a long time in 
history when artisans settle in one locality 
and evolve over centuries. Handloom weaving 
clusters are one examples of this development. 
Or else, in some sectors, when a large firm is 
established, a cluster of firms may emerge to 
take care of its input and service requirements. 
At times, governments may decide to encourage 
manufacturing using raw materials from a 
region, which may also lead to emergence of 
clusters.
   Historical Developm ent 
of I ndustrialisation in 
Tam il Nadu  
There is lot of evidence for presence of 
industrial activities such as textiles, ship-
building, iron and steel making and pottery 
in precolonial Tamil Nadu. Given the vast 
coastline, the region has been involved in trade 
with both South-East and West Asia for several 
centuries. Colonial policies also contributed to 
the decline of the handloom weaving industry 
due to competition from machine-made 
imports from England. But some industries 
also developed during the colonial period.
 I ndustrialisation in the Colonial 
Period
There are two sets of factors that have 
contributed to the process. The introduction 
of cotton cultivation in western and southern 
Tamil Nadu by the colonial government led to 
the emergence of a large-scale textile sector in 
these parts.
Second, increase in trade during this 
period led to industrial development around 
two of the most active ports in the region, 
Chennai and Tuticorin. Match factories too 
emerged during the colonial period in the 
Sivakasi region, which later on became a major 
centre for fireworks production and printing. 
Port-related activity too contributed to the 
growth of the region. Leather production was 
also taking place in Dindigul, Vellore and 
Ambur areas. 
In Western Tamil Nadu, the emergence 
of textiles industries also led to demand and 
starting of textile machinery industry in the 
region. This textile machinery industry in turn 
led to the rise of a number of small workshops 
for repair and producers of machinery 
components. Another major development 
in the western region is the introduction of 
electricity from hydro-electric power in 1930s. 
Availability of electricity allowed for use of 
oil engines for drawing ground water. This 
led to both expansion of agriculture as well as 
increase in demand for oil engines. In turn, it 
led to emergence of workshops for servicing 
engines and also for addressing the demand for 
spare parts. Foundries began to be set up and 
agricultural machinery began to be produced.
Post- I ndependence to early 1 9 9 0 s
Soon after independence, several large 
enterprises were set up by both the central and 
state governments in different segments such 
as the Integral Coach Factory in Chennai to 
make railway coaches and the Bharat Heavy 
Electricals Limited (BHEL) in Tiruchirapalli 
manufacture to boilers and turbines. BHEL 
in turn led to the emergence of an industrial 
cluster of several small firms catering to its 
27_Economics_Unit_5_EM.indd   330 27_Economics_Unit_5_EM.indd   330 21-12-2022   15:51:16 21-12-2022   15:51:16
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Page 4


       I ntroduction
Generally, “any human activity which is 
engaged in the conversion of raw materials into 
readily usable materials is called an industry”.  
Industrialisation refers to the process of using 
modern techniques of production to produce 
goods that are required by both consumers and 
other producers on a large scale. In this chapter 
we will learn the nature of industrialisation of 
Tamil Nadu, importance of industrial clusters, 
how industrial clusters have developed in Tamil 
Nadu and the role of government initiatives in 
promoting industries.
   I m portance of  
I ndustrialisation
To understand importance of industries, 
we need to understand why the share of 
agriculture in an economy's income and 
employment decreases with development. 
First, demand for food remains constant with 
regard to income. Therefore, as an economy 
grows and incomes increase, consumers tend 
to spend a lesser share of their income on 
products from the agricultural sector. 
Second, even the food that is consumed is 
subject to more transformation. Food products 
are taken over longer distances, processed and 
branded. This also requires that food products 
have to be preserved. As a result, the prices that 
farmers get tend to be much less compared to 
the prices at which consumers buy.
Third, there are limits to the ability 
of agriculture to absorb labour due to the 
declining marginal productivity of land. Wages 
too cannot therefore increase and as a result 
poverty levels may remain high, especially 
when more and more people continue to rely 
on agriculture for their livelihood.
Due to all these factors, there is a need 
for an economy’s production and employment 
base to diversify away from agriculture.
What benefits does 
industrialisation bring to an 
econom y?
As stated earlier, it is essential to produce 
inputs to other producers in an economy. Even 
agriculture requires inputs from industry 
such as fertilisers and tractors to increase 
productivity. 
I n d u s t r i a l Cl u s t e r s 
in Tam il Nadu
Unit - 5
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(d) Size: Firms may be large, small or 
medium based on their volume of output, sales 
or employment or on the basis of the amount 
of investments made. There are also micro or 
tiny enterprises that are smaller than even small 
firms.
The small sector is seen as important for 
two reasons. One, it is believed to generate 
more employment than the large-scale sector, 
which is likely to use more advanced and 
automated technologies and therefore may 
not generate enough employment. Second, the 
small scale sector allows for a larger number of 
entrepreneurs to emerge from less privileged 
backgrounds. 
Based on experiences of industrialisation 
in different parts of the world, it is believed 
that when small firms specialising in one sector 
are geographically concentrated in specific 
locations, and linked to one another through 
production and learning, they tend to be equally 
if not more efficient than large scale enterprises. 
Such agglomerations of small firms are called 
industrial clusters. 
 I ndustrial Clusters
Industrial clusters are groups of firms in 
a defined geographic area that share common 
markets, technologies and skill requirements. 
The advantages of industrial clusters or districts 
was first observed by the famous economist 
Alfred Marshall in the 1920s when he  tried 
to understand the working of clusters of small 
firms in the metal-working and textile regions 
in England.  While the notion of an ‘industrial 
district’ was developed by Marshall, it was only 
after the success of small firms in Italy in the 
1980s that it became popular. Policy-makers 
in developing countries like India began to 
promote them actively as they realized that there 
several such small firm clusters in the country. 
The following are the chief characteristics 
of a successful cluster.
	 ? geographical proximity of small and 
medium enterprises (SMEs)
Second, a market exists for both producers 
and consumer goods. Even services like 
banking, transport and trade are dependent on 
production of industrial goods. 
Third, by using modern methods of 
production, industries contribute to better 
productivity and hence lower cost of production 
of all goods produced. It therefore helps people 
to buy goods at a cheaper rate and help create 
demand for more products.
Fourth, through such expansion of 
production, industrialisation helps to absorb 
the labour force coming out of agriculture. 
Employment generation is therefore an 
important objective of industrialisation. 
Fifth, a related advantage of 
industrialisation is therefore technological 
change. Through use of modern techniques, 
industrialisation contributes to learning of such 
methods and their improvement. As a result 
labour productivity, ie, output per unit of labour 
input increases, which can help workers earn 
higher wages.  
Sixth, expanding incomes lead to more 
demand for goods and services. 
 Types of I ndustries
Industries can be classified on the basis of 
(a) Users: If the output is consumed by 
the final consumer, it is called a consumer 
goods sector. If the output is consumed by 
another producer, it is called a capital goods 
sector.  There are industries that produce raw 
materials for other industries such as cement 
and steel. Such industries are called basic 
goods industries.
(b) Type of Inputs Used: Industries are 
also classified based on the kind of raw material 
used such as agro-processing, textiles sector, 
rubber products, leather goods, etc.
(c) Ownership: Firms may be privately 
owned, publicly owned (by the government, 
central or state), jointly owned by the private 
and public sector, joint sector or cooperatively 
owned (cooperatives).
27_Economics_Unit_5_EM.indd   329 27_Economics_Unit_5_EM.indd   329 21-12-2022   15:51:16 21-12-2022   15:51:16
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	 ? sectoral specialisation
	 ? close inter-firm collaboration
	 ? inter-firm competition based on 
innovation
	 ? a socio-cultural identity, which facilitates 
trust
	 ? multi-skilled workforce
	 ? active self-help organisations, and
	 ? supportive regional and municipal 
governments.
Firms are therefore expected to 
collaborate and compete with one another 
at the same time. By collaborating, they can 
expand their capacity and also learn from one 
another. Through competition, they are forced 
to become more efficient.
How Do Clusters Originate?
Clusters may arise due to many factors. 
Certain clusters evolve over a long time in 
history when artisans settle in one locality 
and evolve over centuries. Handloom weaving 
clusters are one examples of this development. 
Or else, in some sectors, when a large firm is 
established, a cluster of firms may emerge to 
take care of its input and service requirements. 
At times, governments may decide to encourage 
manufacturing using raw materials from a 
region, which may also lead to emergence of 
clusters.
   Historical Developm ent 
of I ndustrialisation in 
Tam il Nadu  
There is lot of evidence for presence of 
industrial activities such as textiles, ship-
building, iron and steel making and pottery 
in precolonial Tamil Nadu. Given the vast 
coastline, the region has been involved in trade 
with both South-East and West Asia for several 
centuries. Colonial policies also contributed to 
the decline of the handloom weaving industry 
due to competition from machine-made 
imports from England. But some industries 
also developed during the colonial period.
 I ndustrialisation in the Colonial 
Period
There are two sets of factors that have 
contributed to the process. The introduction 
of cotton cultivation in western and southern 
Tamil Nadu by the colonial government led to 
the emergence of a large-scale textile sector in 
these parts.
Second, increase in trade during this 
period led to industrial development around 
two of the most active ports in the region, 
Chennai and Tuticorin. Match factories too 
emerged during the colonial period in the 
Sivakasi region, which later on became a major 
centre for fireworks production and printing. 
Port-related activity too contributed to the 
growth of the region. Leather production was 
also taking place in Dindigul, Vellore and 
Ambur areas. 
In Western Tamil Nadu, the emergence 
of textiles industries also led to demand and 
starting of textile machinery industry in the 
region. This textile machinery industry in turn 
led to the rise of a number of small workshops 
for repair and producers of machinery 
components. Another major development 
in the western region is the introduction of 
electricity from hydro-electric power in 1930s. 
Availability of electricity allowed for use of 
oil engines for drawing ground water. This 
led to both expansion of agriculture as well as 
increase in demand for oil engines. In turn, it 
led to emergence of workshops for servicing 
engines and also for addressing the demand for 
spare parts. Foundries began to be set up and 
agricultural machinery began to be produced.
Post- I ndependence to early 1 9 9 0 s
Soon after independence, several large 
enterprises were set up by both the central and 
state governments in different segments such 
as the Integral Coach Factory in Chennai to 
make railway coaches and the Bharat Heavy 
Electricals Limited (BHEL) in Tiruchirapalli 
manufacture to boilers and turbines. BHEL 
in turn led to the emergence of an industrial 
cluster of several small firms catering to its 
27_Economics_Unit_5_EM.indd   330 27_Economics_Unit_5_EM.indd   330 21-12-2022   15:51:16 21-12-2022   15:51:16
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Because of all these factors, Tamil Nadu 
at present has the largest number of factories 
among all states in India and also has the 
largest share of workforce employed in 
manufacturing.  Importantly, it is more labour 
intensive compared to other industrially 
advanced states like Maharashtra and Gujarat. 
The major industries are automobiles, auto-
components, light and heavy engineering, 
machinery, cotton, textiles, rubber, food 
products, transport equipment, chemicals, and 
leather and leather goods.  Unlike other states, 
the industries are spread across all regions of 
the state (there are 27 clusters in 13 districts) 
with many of them being export oriented as 
well. The state has a well-developed network of 
roads, rail, air and major ports.
    Major I ndustrial Clusters 
and Their Specialisation 
in Tam il Nadu 
Autom otive Clusters
Chennai is nicknamed as "The Detroit of 
Asia" because of its large auto industry base. 
Chennai is home to large number of auto 
assembly and component making firms. While 
there were a few domestic firms like TVS, TI 
Cycles, Ashok Leyland and Standard Motors 
earlier, in the post-reform period, several MNC 
firms like Hyundai, Ford, Daimler-Benz and 
Renault-Nissan have opened factories in the 
region. This in turn has attracted a number of 
component suppliers from foreign countries. 
Many local firms too cater to component 
production for all these firms.
Hosur is another auto cluster with firms like 
TVS and Ashok Leyland having their factories 
there. Coimbatore region is also developing into 
an auto component cluster. 
Truck and Bus Body Building 
I ndustry Clusters
The Namakkal-Tiruchengode belt in 
western Tamil Nadu is known for its truck body 
building industry. Karur is another major hub 
with more than 50 units. Many entrepreuners 
input requirements. Heavy Vehicles Factory 
was set up to manufacture tanks in Avadi on 
the outskirts of Chennai. Standard Motors too 
started manufacturing cars in Chennai. Ashok 
Motors (later Ashok Leyland) and Standard 
Motors together helped form an automobile 
cluster in the Chennai region. The Avadi 
industrial estate was established in the 1950s 
to support the small and medium companies 
supplying to the large firms in the region. 
More hydro-electric power projects in the state 
were also initiated to increase the spread of 
electrification. The government played a major 
role in all these processes. The Salem Steel Plant 
was set up in 1973 to produce stainless steel.
The 1970s and 1980s saw the setting up of 
emergence of powerloom weaving clusters in 
the Coimbatore region as well as expansion of 
cotton knitwear cluster in Tiruppur and home 
furnishings cluster in Karur. This period also saw 
more encouragement of the small and medium 
sector with setting up of industrial estates by the 
state government in different parts. The Hosur 
industrial cluster is a successful case of how 
such policy efforts to promote industrial estates 
helped to develop industries in a backward 
region.
 I n d u s t r i a l i s a t i o n i n  
Tam il Nadu – Liberalization 
Phase
The final phase of industrialisation is the 
post-reforms period since the early 1990s. The 
reforms made the state governments more 
responsible for resource mobilisation and they 
were forced to compete with each other to 
attract private investments for industrialisation. 
Incentives such as cheap land, tax concessions 
and subsidised but quality power were all 
offered to woo investors. Trade liberalisation 
and currency devaluation also helped open 
up export markets. This led to two major 
developments.
The important industries in the state that 
evolved over a much longer period include sugar, 
fertilizers, cement, agricultural implements, iron 
and steel, chemicals, transformers and paper.
27_Economics_Unit_5_EM.indd   331 27_Economics_Unit_5_EM.indd   331 21-12-2022   15:51:16 21-12-2022   15:51:16
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Page 5


       I ntroduction
Generally, “any human activity which is 
engaged in the conversion of raw materials into 
readily usable materials is called an industry”.  
Industrialisation refers to the process of using 
modern techniques of production to produce 
goods that are required by both consumers and 
other producers on a large scale. In this chapter 
we will learn the nature of industrialisation of 
Tamil Nadu, importance of industrial clusters, 
how industrial clusters have developed in Tamil 
Nadu and the role of government initiatives in 
promoting industries.
   I m portance of  
I ndustrialisation
To understand importance of industries, 
we need to understand why the share of 
agriculture in an economy's income and 
employment decreases with development. 
First, demand for food remains constant with 
regard to income. Therefore, as an economy 
grows and incomes increase, consumers tend 
to spend a lesser share of their income on 
products from the agricultural sector. 
Second, even the food that is consumed is 
subject to more transformation. Food products 
are taken over longer distances, processed and 
branded. This also requires that food products 
have to be preserved. As a result, the prices that 
farmers get tend to be much less compared to 
the prices at which consumers buy.
Third, there are limits to the ability 
of agriculture to absorb labour due to the 
declining marginal productivity of land. Wages 
too cannot therefore increase and as a result 
poverty levels may remain high, especially 
when more and more people continue to rely 
on agriculture for their livelihood.
Due to all these factors, there is a need 
for an economy’s production and employment 
base to diversify away from agriculture.
What benefits does 
industrialisation bring to an 
econom y?
As stated earlier, it is essential to produce 
inputs to other producers in an economy. Even 
agriculture requires inputs from industry 
such as fertilisers and tractors to increase 
productivity. 
I n d u s t r i a l Cl u s t e r s 
in Tam il Nadu
Unit - 5
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(d) Size: Firms may be large, small or 
medium based on their volume of output, sales 
or employment or on the basis of the amount 
of investments made. There are also micro or 
tiny enterprises that are smaller than even small 
firms.
The small sector is seen as important for 
two reasons. One, it is believed to generate 
more employment than the large-scale sector, 
which is likely to use more advanced and 
automated technologies and therefore may 
not generate enough employment. Second, the 
small scale sector allows for a larger number of 
entrepreneurs to emerge from less privileged 
backgrounds. 
Based on experiences of industrialisation 
in different parts of the world, it is believed 
that when small firms specialising in one sector 
are geographically concentrated in specific 
locations, and linked to one another through 
production and learning, they tend to be equally 
if not more efficient than large scale enterprises. 
Such agglomerations of small firms are called 
industrial clusters. 
 I ndustrial Clusters
Industrial clusters are groups of firms in 
a defined geographic area that share common 
markets, technologies and skill requirements. 
The advantages of industrial clusters or districts 
was first observed by the famous economist 
Alfred Marshall in the 1920s when he  tried 
to understand the working of clusters of small 
firms in the metal-working and textile regions 
in England.  While the notion of an ‘industrial 
district’ was developed by Marshall, it was only 
after the success of small firms in Italy in the 
1980s that it became popular. Policy-makers 
in developing countries like India began to 
promote them actively as they realized that there 
several such small firm clusters in the country. 
The following are the chief characteristics 
of a successful cluster.
	 ? geographical proximity of small and 
medium enterprises (SMEs)
Second, a market exists for both producers 
and consumer goods. Even services like 
banking, transport and trade are dependent on 
production of industrial goods. 
Third, by using modern methods of 
production, industries contribute to better 
productivity and hence lower cost of production 
of all goods produced. It therefore helps people 
to buy goods at a cheaper rate and help create 
demand for more products.
Fourth, through such expansion of 
production, industrialisation helps to absorb 
the labour force coming out of agriculture. 
Employment generation is therefore an 
important objective of industrialisation. 
Fifth, a related advantage of 
industrialisation is therefore technological 
change. Through use of modern techniques, 
industrialisation contributes to learning of such 
methods and their improvement. As a result 
labour productivity, ie, output per unit of labour 
input increases, which can help workers earn 
higher wages.  
Sixth, expanding incomes lead to more 
demand for goods and services. 
 Types of I ndustries
Industries can be classified on the basis of 
(a) Users: If the output is consumed by 
the final consumer, it is called a consumer 
goods sector. If the output is consumed by 
another producer, it is called a capital goods 
sector.  There are industries that produce raw 
materials for other industries such as cement 
and steel. Such industries are called basic 
goods industries.
(b) Type of Inputs Used: Industries are 
also classified based on the kind of raw material 
used such as agro-processing, textiles sector, 
rubber products, leather goods, etc.
(c) Ownership: Firms may be privately 
owned, publicly owned (by the government, 
central or state), jointly owned by the private 
and public sector, joint sector or cooperatively 
owned (cooperatives).
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	 ? sectoral specialisation
	 ? close inter-firm collaboration
	 ? inter-firm competition based on 
innovation
	 ? a socio-cultural identity, which facilitates 
trust
	 ? multi-skilled workforce
	 ? active self-help organisations, and
	 ? supportive regional and municipal 
governments.
Firms are therefore expected to 
collaborate and compete with one another 
at the same time. By collaborating, they can 
expand their capacity and also learn from one 
another. Through competition, they are forced 
to become more efficient.
How Do Clusters Originate?
Clusters may arise due to many factors. 
Certain clusters evolve over a long time in 
history when artisans settle in one locality 
and evolve over centuries. Handloom weaving 
clusters are one examples of this development. 
Or else, in some sectors, when a large firm is 
established, a cluster of firms may emerge to 
take care of its input and service requirements. 
At times, governments may decide to encourage 
manufacturing using raw materials from a 
region, which may also lead to emergence of 
clusters.
   Historical Developm ent 
of I ndustrialisation in 
Tam il Nadu  
There is lot of evidence for presence of 
industrial activities such as textiles, ship-
building, iron and steel making and pottery 
in precolonial Tamil Nadu. Given the vast 
coastline, the region has been involved in trade 
with both South-East and West Asia for several 
centuries. Colonial policies also contributed to 
the decline of the handloom weaving industry 
due to competition from machine-made 
imports from England. But some industries 
also developed during the colonial period.
 I ndustrialisation in the Colonial 
Period
There are two sets of factors that have 
contributed to the process. The introduction 
of cotton cultivation in western and southern 
Tamil Nadu by the colonial government led to 
the emergence of a large-scale textile sector in 
these parts.
Second, increase in trade during this 
period led to industrial development around 
two of the most active ports in the region, 
Chennai and Tuticorin. Match factories too 
emerged during the colonial period in the 
Sivakasi region, which later on became a major 
centre for fireworks production and printing. 
Port-related activity too contributed to the 
growth of the region. Leather production was 
also taking place in Dindigul, Vellore and 
Ambur areas. 
In Western Tamil Nadu, the emergence 
of textiles industries also led to demand and 
starting of textile machinery industry in the 
region. This textile machinery industry in turn 
led to the rise of a number of small workshops 
for repair and producers of machinery 
components. Another major development 
in the western region is the introduction of 
electricity from hydro-electric power in 1930s. 
Availability of electricity allowed for use of 
oil engines for drawing ground water. This 
led to both expansion of agriculture as well as 
increase in demand for oil engines. In turn, it 
led to emergence of workshops for servicing 
engines and also for addressing the demand for 
spare parts. Foundries began to be set up and 
agricultural machinery began to be produced.
Post- I ndependence to early 1 9 9 0 s
Soon after independence, several large 
enterprises were set up by both the central and 
state governments in different segments such 
as the Integral Coach Factory in Chennai to 
make railway coaches and the Bharat Heavy 
Electricals Limited (BHEL) in Tiruchirapalli 
manufacture to boilers and turbines. BHEL 
in turn led to the emergence of an industrial 
cluster of several small firms catering to its 
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Because of all these factors, Tamil Nadu 
at present has the largest number of factories 
among all states in India and also has the 
largest share of workforce employed in 
manufacturing.  Importantly, it is more labour 
intensive compared to other industrially 
advanced states like Maharashtra and Gujarat. 
The major industries are automobiles, auto-
components, light and heavy engineering, 
machinery, cotton, textiles, rubber, food 
products, transport equipment, chemicals, and 
leather and leather goods.  Unlike other states, 
the industries are spread across all regions of 
the state (there are 27 clusters in 13 districts) 
with many of them being export oriented as 
well. The state has a well-developed network of 
roads, rail, air and major ports.
    Major I ndustrial Clusters 
and Their Specialisation 
in Tam il Nadu 
Autom otive Clusters
Chennai is nicknamed as "The Detroit of 
Asia" because of its large auto industry base. 
Chennai is home to large number of auto 
assembly and component making firms. While 
there were a few domestic firms like TVS, TI 
Cycles, Ashok Leyland and Standard Motors 
earlier, in the post-reform period, several MNC 
firms like Hyundai, Ford, Daimler-Benz and 
Renault-Nissan have opened factories in the 
region. This in turn has attracted a number of 
component suppliers from foreign countries. 
Many local firms too cater to component 
production for all these firms.
Hosur is another auto cluster with firms like 
TVS and Ashok Leyland having their factories 
there. Coimbatore region is also developing into 
an auto component cluster. 
Truck and Bus Body Building 
I ndustry Clusters
The Namakkal-Tiruchengode belt in 
western Tamil Nadu is known for its truck body 
building industry. Karur is another major hub 
with more than 50 units. Many entrepreuners 
input requirements. Heavy Vehicles Factory 
was set up to manufacture tanks in Avadi on 
the outskirts of Chennai. Standard Motors too 
started manufacturing cars in Chennai. Ashok 
Motors (later Ashok Leyland) and Standard 
Motors together helped form an automobile 
cluster in the Chennai region. The Avadi 
industrial estate was established in the 1950s 
to support the small and medium companies 
supplying to the large firms in the region. 
More hydro-electric power projects in the state 
were also initiated to increase the spread of 
electrification. The government played a major 
role in all these processes. The Salem Steel Plant 
was set up in 1973 to produce stainless steel.
The 1970s and 1980s saw the setting up of 
emergence of powerloom weaving clusters in 
the Coimbatore region as well as expansion of 
cotton knitwear cluster in Tiruppur and home 
furnishings cluster in Karur. This period also saw 
more encouragement of the small and medium 
sector with setting up of industrial estates by the 
state government in different parts. The Hosur 
industrial cluster is a successful case of how 
such policy efforts to promote industrial estates 
helped to develop industries in a backward 
region.
 I n d u s t r i a l i s a t i o n i n  
Tam il Nadu – Liberalization 
Phase
The final phase of industrialisation is the 
post-reforms period since the early 1990s. The 
reforms made the state governments more 
responsible for resource mobilisation and they 
were forced to compete with each other to 
attract private investments for industrialisation. 
Incentives such as cheap land, tax concessions 
and subsidised but quality power were all 
offered to woo investors. Trade liberalisation 
and currency devaluation also helped open 
up export markets. This led to two major 
developments.
The important industries in the state that 
evolved over a much longer period include sugar, 
fertilizers, cement, agricultural implements, iron 
and steel, chemicals, transformers and paper.
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It accounts for nearly 80% of the country's 
cotton knitwear exports and generates 
employment in the range of over three lakh 
people since the late 1980s. It is also a major 
producer for the domestic market. Because of 
its success in the global market, it is seen as 
one of the most dynamic clusters in the Global 
South. While initially most firms were run by 
local entrepreneurs, at present, some of the 
leading garment exporters in India have set up 
factories here.1
were previous employees in 
a big firm involved in body 
building who came out to set 
up their own units.
Textile Clusters
Tamil Nadu is home to the largest 
textiles sector in the country. Because of the 
development of cotton textile industry since 
the colonial period, Coimbatore often referred 
as the "Manchester of South India". At present, 
most of the spinning mills have moved around 
the Coimbatore city. Tamil Nadu is the biggest 
producer of cotton yarn in the country.
Powerloom is however more widespread 
with Erode and Salem region too having a 
large number of power loom units.
Tiruppur is famous for clustering of a large 
number of firms producing cotton knitwear.  
iruvallur
Chennai
Kanchipuram
Salem
Namakkal
Erode
Karur
ruchirappalli
Virudunagar
Madurai
Coimbatore
Vellore
E W
N
S
Not to Scale
Tiruppur
(Sivakasi)
(Hosur)
Automotive
Industrial Clusters in Tamil Nadu
Automotive, Electronics & IT
Leather
Silk Sarees
Automotive & Electronics
Steel & Powerloom
Powerloom & Turmeric
Transportation & Poultry
Cement
Knitwear & Readymade Garments
Boilers & Turbines
Coach-building, Powerlooms
Textile & IT
Leather
Fireworks, Matches & Printing
Ariyalur
Krishnagiri
Textile Industry
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