While energy is an indispensable input in every sector of an economy, it is crucial for the industrial sector, which accounts for almost half of the total energy used around the globe (Ross, 1997). This is true even in the case of Indian industrial sector (Reddy and Balachandra, 2003), which has a large number of Small Scale Industry (SSI) units apart from medium-and large-scale industries. As per the prevailing definition in India, Small Scale Industry is an industrial unit with original investment in plant and machinery up to Rs. 10 mn. SSI, with a lion's share in total industrial establishments, is of strategic importance in Indian economy due to its contribution to GDP, employment generation, exports and production. In 2002-03, the SSI sector comprised 3.57 million units, generated Rs. 7420.21 bn worth of production and employed nearly 20 million people. The exports by this sector stood at Rs. 697.97 bn in 2000-01 (MoF and CA, 2003). The SSI sector has a diversified and prominent presence in Indian economy by producing over 7500 products and accounts for about 40% of industrial production and close to 7% of GDP (DCSSI, 2003).

A significant feature of SSIs in India is that they have clustered naturally and spontaneously in different regions of the country (Expert Committee, 1997). In fact over 400 small industry clusters and about 2000 artisan clusters exist in India (UNIDO, 2001). Many of these small industry clusters are energy intensive as well. Though individual SSI units may not consume large amounts of energy and cause severe pollution, collectively, their energy needs and associated environmental pollution in such clusters cannot be ignored. Improving energy efficiency is necessary for the survival and growth of these clusters because higher energy efficiency not only improves their competitiveness through cost reduction but also minimizes the adverse environmental consequences.